Emulex Hoax Brings 11-Count Indictment Against Investor, 23

A federal grand jury indicted Mark Simeon Jakob on Thursday on 11 criminal counts of securities and wire fraud, alleging that the 23-year-old committed one of the most audacious stock market hoaxes ever to make up for huge paper investment losses and to reap $241,724 in profits.

The grand jury said Jakob, of El Segundo, “knowingly and willfully” committed fraud when he created a fake news release about Costa Mesa high-tech firm Emulex Corp. and sent it out on the Internet, causing waves of bad publicity that sent Emulex shares plummeting 62% on Aug. 25.

Jakob used his inside knowledge of how Internet financial news wires work and his connections at one particular business wire to pull it off, the grand jury said.

During the stock’s nose dive from $113 to $43 in less than half an hour, investors panicked, unloaded their shares and lost an estimated $50 million before the hoax was discovered and the price of the stock recovered.

Jakob faces a maximum total of 100 years in federal prison if convicted on all counts, fines of $9.5 million and restitution to all of the victims. He is set to be arraigned and to enter a plea Oct. 10.

Jakob, who is free on bail, and his lawyers could not be reached for comment.

But investor Kenneth Buzzard of Collingswood, N.J., said of the indictment: “I think it’s great. People simply don’t understand how much damage was done with his information.”

Buzzard was one of six people identified in the indictment as having sold Emulex stock before the hoax was discovered.

He was perusing the Internet early that Friday when he read the bad news about Emulex.

“My heart stopped when I read it,” said Buzzard, an avid investor. “Never for an instant did I think it could be a complete lie.”

Buzzard immediately dumped 700 shares of the stock before it could drop too much. Others waited longer, and lost more.

Authorities said Thursday that some investors lost more than $300,000 by selling Emulex during its roller-coaster ride, but that most lost $5,000 to $15,000.

U.S. Atty. Alejandro N. Mayorkas said he hoped the indictment would have a deterrent effect.

“The swiftness of our response should send a message to everyone that we are committed to protecting the integrity of the marketplace,” Mayorkas said. “The sophistication of criminals is matched by the sophistication of law enforcement.”

The hoax raised concerns worldwide about the alarming speed and ease with which Wall Street can be manipulated in the fast-moving Internet age.

On Aug. 24, the grand jury charges, Jakob received a margin call from his online trading firm saying that he had to put more money in his account or it would start selling off shares to cover his losses.

The reason: Jakob had invested heavily in the short sale of Emulex stock, which means he had sold 3,000 shares that he had borrowed on margin from his broker on the bet that the share price would later go down and he would pocket the difference.

Instead, the stock price shot up dramatically, and Jakob faced $97,000 in losses--and in margin calls.

The same day, according to the indictment, Jakob concocted a fake press release specifically to drive down the stock price of Emulex, which makes high-speed data storage products.

The release said Emulex’s accounting was under SEC investigation, that it would restate earnings to show a loss and that its chief executive had quit.

After business hours, Jakob sent the fake release via e-mail from the computer library at El Camino Community College, where he had recently been a student.

Jakob sent the release to a company he had just quit named Internet Wire, which puts company press releases out on the Internet. He pretended to be a public relations representative of Emulex.

None of it was true. But the news release went out at the start of trading the next morning and was picked up by journalists at Internet news services and disseminated throughout the world in a flash.

The stock plunged immediately, and Jakob snapped up enough shares to cover his losses, authorities allege. Then, they say, he bought even more and ultimately made more than $241,000 in profits.

Because federal authorities were suspicious of him almost immediately, Jakob was able to withdraw only about $70,000 from his accounts. Authorities have since frozen those accounts, which contained more than $400,000.

Paul Folino, president of Emulex, said the company has recovered from the incident. In fact, the stock rose $8.31 a share, or 7%, to close Thursday at $129.50 in Nasdaq trading.

But many investors, Folino said, have not bounced back.

“During that incredible day, we fell $2.5 billion, and a lot of shareholders got hurt,” Folino said. “I hope they view this [indictment] as some sort of vindication.”