Suspect Held in Online Stock Market Fraud
The FBI arrested a young El Segundo man Thursday in the audacious stock market hoax that rocked Wall Street last week, sending shares of Emulex Corp. plummeting 62% and costing investors in the high-tech firm an estimated $50 million in losses.
Mark Simeon Jakob, 23, an El Camino Community College student and active stock trader, orchestrated the fraud to recoup severe losses suffered on trades he made in the Orange County company, and used his inside knowledge of how Internet financial news wires work to pull it off, authorities alleged Thursday.
The hoax--which involved a bogus report that Emulex would restate earnings, and that its chief executive had quit--allowed Jakob to not only wipe out his losses but to make an additional $186,000 in profit by buying near the stock’s low during the company’s roller coaster ride last Friday, officials said.
In all, authorities said, Jakob made $241,000 from the hoax, which raised concerns about the alarming speed and ease with which Wall Street can be manipulated in the fast-moving Internet Age.
Jakob was taken into custody without incident just after 6 a.m. Thursday, when a handful of FBI agents and a federal prosecutor showed up at his parents’ El Segundo house, where he lives.
“The amazing thing is that he thought he would get away with it,” said FBI Special Agent Richard B. Wade.
Jakob, who will be arraigned Sept. 18, was charged in a criminal complaint with one count each of securities fraud and wire fraud. He faces a maximum of 15 years in prison if convicted on both counts.
At a brief court appearance Thursday evening, a federal judge set bond for Jakob at $100,000 but ordered him to undergo a psychiatric evaluation before he can be released.
His arrest was hailed by officials at Emulex, a Costa Mesa firm that makes high-speed data-storage products.
“We believe this was an unprecedented act of electronic terrorism,” said Emulex Chief Executive Paul Folino. “The person who got hurt was really the small investor that reacted quickly.”
Folino estimated that with about 2.3 million shares changing hands last Friday before trading was halted, shareholders lost about $50 million on the bogus news.
Jakob’s alleged scam was certainly elaborate; he even traveled to and from Las Vegas where he stayed in two swank hotels to establish an alibi and make stock transactions online from a hotel computer, according to FBI affidavits and interviews.
But, authorities said, it wasn’t very sophisticated. And that allowed specially trained “cyber-agents” from the FBI to follow a trail of digital footprints that led them to Jakob, who they said e-mailed the phony news release to a news wire service.
What’s more, agents said, Jakob became a suspect almost immediately because he had such an obvious motive: He stood to lose as much as $97,000 based on his “short sale” of 3,000 Emulex shares in mid-August.
In a short sale, a trader borrows stock from a brokerage and sells the shares in the market--usually in a bet that the price will soon decline, allowing the trader to repay the loan with stock bought at a lower price.
Instead, Emulex’s stock price went up dramatically, leaving Jakob suffering mounting paper losses.
“He’s losing money, big, and he doesn’t like that,” said Special Agent James V. DeSarno, Jr., who heads FBI operations in Southern California. “He’s got to figure out a way to get out of that. So we’re looking at motive here.”
On the surface, Jakob would seem an unlikely agent of such “electronic terrorism.”
Neighbors said Jakob is one of five children in an immigrant family from Eastern Europe, who were often seen leaving their modest two-story home for religious services on Friday evenings.
At El Segundo High School, Jakob was a member of the Young Republicans. At El Camino college, he studied business and was a frequent visitor to the computer lab from where authorities said he sent the bogus news release.
Suspect Described as Active Investor
Jakob, in an America Online profile page, listed his hobbies as visiting Las Vegas, snowboarding, the beach, dancing and playing the stock market.
His personal quote on the page: “Let it ride!!!!”
Authorities said he appears to be fluent in the language of Wall Street--trading actively through an Internet account, and operating on “margin,” or making trades with borrowed money.
“He’s not your average 23-year-old college student,” said Valerie Caproni, regional director of the Securities and Exchange Commission’s Los Angeles office. She described Jakob as an active investor and frequent trader.
Jakob also learned the ways of Wall Street by working at Internet Wire, a firm that distributes company news releases and financial information over the Internet to other business Web sites.
Jakob, authorities said, was in the content production department, receiving news releases and formatting them so they could be posted on the Internet.
He quit Internet Wire a week before the hoax.
According to FBI affidavits and interviews with investigators, Jakob had sold 3,000 shares of Emulex short on Aug. 17 and 18, at prices between $72 and $92 a share.
So when the stock rose well past $100, Jakob stood to lose nearly $100,000 on his wrong-way bet.
It was then, authorities said, that Jakob hatched a plan to drive the price of the stock down so he could recover his losses.
According to the FBI, this is how Jakob perpetrated the hoax:
At 7:49 p.m. on Aug. 24, Jakob sent an e-mail to Internet Wire’s overnight staff, making it look like it had been written by “Ross Porter,” supposedly an employee of Emulex’s public relations firm. Authorities said Porter doesn’t exist.
“Porter” said he had an “extremely important” news release, and that he’d been told by the day-side staff to have the overnight desk post the release the next morning at 9:30 a.m. East Coast time.
“Porter” included the bogus news release in the message and in a separate attachment, and asked that it be posted on Internet Wire’s “business-earnings and technology hardware,” an obscure designation that only legitimate users of the system would know.
He also said it was the first news release “out of the 10-pack,” a term that Internet Wire employees would recognize as their own code for paying a bulk rate for 10 postings.
Jakob also used other terms that made Internet Wire employees feel safe in putting out the news release without checking its legitimacy.
“Basically, it was a form of social engineering,” a computer hacker term for hoodwinking people into thinking you’re someone you’re not, Wade said.
It worked.
Internet Wire employees posted the news release on the Internet Friday morning, believing its authenticity already had been verified.
The release said that Emulex’s accounting was under SEC investigation, that it would restate earnings to show a loss, and that its chief executive had quit.
Within moments, the news release was spread through other news outlets, and wreaked havoc on Emulex stock. It plunged as low as $43 from $113.06 on Thursday as panicked investors sold.
Shortly thereafter, an employee of Internet Wire got a phone call: Take the fraudulent news release off the wire. It wasn’t true.
By 10:30 a.m. trading in the stock was suspended on Nasdaq. Federal authorities immediately mobilized on both coasts.
In Los Angeles, the FBI dispatched teams of agents specially trained in ferreting out securities fraud, and others trained in cyber crime, or how to track down computer-savvy criminals who use the Internet to commit fraud.
Agents quickly traced the e-mail to a computer at the Library Media Technology Center at El Camino college in Torrance. The e-mail account had been set up to make it look as though it was from the public relations firm. That too had been created on an El Camino computer.
About the same time, other agents interviewed Internet Wire employees and learned that a man named Mark Jakob had left the company the Friday before, under good terms.
The agents were told Jakob talked often about trading stocks, and that he attended El Camino. He became the top suspect, but not the only suspect.
“We went down that path very hard,” Special Agent Ronald L. Iden said, “but not to the exclusion of others.”
While some agents tried to place Jakob at the computer center the evening that the e-mail was sent, others looked into the young man’s background, his financial history and his movements in recent weeks. They also asked the SEC for a record of all his stock transactions.
One agent found a copy of the fake news release in a computer file at the El Camino computer center.
Another found the list of users who had signed in that evening. Jakob’s name wasn’t on it. A computer room technician also said that Jakob was a frequent user but he didn’t recall seeing him that night.
But other witnesses did, identifying Jakob from a Department of Motor Vehicles photo of him that FBI agents circulated.
Working around the clock over the next five days, agents determined that Jakob was actively trading in the short window of time after the news release tanked Emulex’s stock and trading was halted.
During that window while the stock was free-falling, Jakob executed trades to cover his losses from the short-sale gamble, snapping up 3,000 shares at bargain prices.
From that, he made $54,696 in profit above and beyond his losses.
Those trades, FBI agents determined, were made from a computer at the business center at the Mandalay Bay hotel in Las Vegas. At the time, Jakob had a room at the Luxor hotel just down the street.
Minutes later, Jakob bought 3,500 more shares at about $51 a share, or $181,359 total.
Because the stock rebounded quickly when trading resumed--closing Friday at $105.75--Jakob immediately made a huge profit, the SEC said. He allegedly sold the shares Monday for $368,174, for a net profit of $186,815.
His total profit in the scam: about $241,000, the SEC said.
Agents waited until Wednesday night before determining they had enough evidence to arrest Jakob, cementing what they said is a solid case by finding an additional eyewitness who said he was in the computer room at the time the bogus release was sent.
A search warrant was obtained and agents showed up early Thursday to arrest him.
“All of these kinds of criminals believe they are smarter than the last guy who got caught,” said DeSarno, the FBI’s local chief. “This case really is a great example of some good old-fashioned detective work combined with our ability to use new technologies to catch them.”
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Internet-Based Stock Scam
According to the FBI and other authorities, this is how Mark Simeon Jakob perpetrated and profited from his alleged scam.
Aug. 17, 18: Jakob borrows 3,000 shares of Emulex and sells them at between $72 and $92 a share, a “short sale” that is a bet the stock price will decline. If the stock indeed falls below the sales price thereafter, the short seller makes a profit.
*
Aug. 18-24: Emulex stock shoots upward instead, settling at $113 a share by Aug. 24.
*
Aug. 24: From a computer lab at El Camino Community College, Jakob sends an e-mail to his former employer, Internet Wire, at 7:49 p.m. In it, he pretends to be a public relations spokesman for Emulex who has an “extremely important” news release that must be put on the Internet to financial news services in the morning.
*
Aug. 25, morning: Internet Wire puts out the phony news release, saying that Emulex is revising its last quarter’s profits to show a loss, that the SEC is investigating the company and that its chief executive has resigned. None of it is true. The news shakes Wall Street and the company’s stock plummets 62% before trading is suspended.
*
Aug. 25, morning: In a quick series of trades from Las Vegas, Jakob buys 3,000 shares of Emulex to cover his short-sale losses and makes $54,696 in profit. Then he buys 3,500 more shares for $181,359, all before trading is suspended.
*
Aug. 25, afternoon: The FBI already has identified Jakob as a prime suspect, based on tracking of the e-mail, interviews with people at Internet Wire and other gumshoe work.
*
Aug. 28: Jakob sells the 3,500 shares for $368,174 as the stock rebounds, making an additional profit of $186,815.
*
Aug. 31: FBI, armed with a court-approved search warrant, arrests Jakob at the El Segundo home he shares with his parents and seizes his computer and financial records.
*
Researched by JOSH MEYER / Los Angeles Times
Times staff writers Karen Alexander, Walter Hamilton, Karen Kaplan and correspondent Gina Piccalo contributed to this report.
* POLICING CYBERSPACE
Net fraud suspects are being caught faster than ever. C1
* ‘MASTERFUL’ RESPONSE
Emulex executives win praise for handling of crisis. C1
