FBI Arrests Man in Emulex Hoax Case

[William Knowles <wk () C4I ORG>]

http://dailynews.yahoo.com/h/nm/20000831/ts/emulex_arrest_dc_11.html

Thursday August 31 5:59 PM ET
by Timna Tanners and Dan Whitcomb

LOS ANGELES (Reuters) - A 23-year-old college student was arrested
Thursday and charged with staging one of the biggest financial hoaxes
ever on the Internet and pocketing almost $250,000 by issuing
fraudulent information on technology company Emulex Corp.

Officials of the U.S. Attorney's Office and the FBI named the man as
Los Angeles area resident Mark Jakob and said he was able to stage his
hoax last Friday by sending a false press release via e-mail to news
dissemination service Internet Wire Inc., where he had worked until a
week earlier.

They said Jakob had played the market in Emulex stock and stood to
lose almost $100,000 unless ``he created his own bad news about the
company.''

He did that by sending an e-mail to Internet Wire, pretending to be
from Emulex Corp. (NasdaqNM:EMLX - news), saying that the data
networking equipment company was under investigation by the Securities
and Exchange Commission and was about to restate its earnings. The
false release also claimed that the company's CEO had quit.

Internet Wire, believing the release genuine, then filed it where it
was picked up by several major financial news services, including
Bloomberg and Dow Jones. Reuters did not issue the release.

The false news of the firm's dire financial straits sent investors
into a panic, plunging Emulex's market capitalization

by $2.5 billion in a matter of minutes, cutting the stock price by
nearly half.

``(The Hoax) was apparently committed with the hope that the anonymity
afforded by the Internet would be the criminal's protection. We in law
enforcement know how to use the Internet too,'' said U.S. Attorney for
Los Angeles Alejandro Mayorkas.

He added that immediately after Emulex shares began to decline the FBI
and the SEC began tracing the e-mail traffic of Internet Wire.

They tracked the false release to a computer at the library of El
Camino Community College in Redondo Beach where Jakob had been seen
working late Thursday night, the time when the hoax was sent. After
determining that Jakob was a suspect, officials looked at trading in
Emulex stock and discovered he had made a series of suspicious trades.

Officials at Internet Wire, where Jakob had worked until Aug. 18, had
no immediate comment. Emulex said it was relieved and proud of the
police work that uncovered the hoax.

According to stock records, Jakob had apparently sold 3,000 shares of
Emulex two weeks ago in a ``short sale'' -- a transaction aimed at
enabling an investor to profit if the target stock price falls.

Jakob allegedly sold shares at prices of $72 and $92 per share, but
the price of Emulex stock rose to $100 after one week. Facing an
almost $100,000 loss, Jakob allegedly sent the false press release,
then after Emulex shares dropped sharply, he executed trades that
earned him a profit of $236,000 and wiped away his debt.

In a short sale, an investor borrows stock from an individual, then
sells the stock in hopes that it will fall in price. He then buys back
the shares and returns the lower priced stock to the lender, pocketing
the difference.

``He was shorting the stock and losing a lot of money, so (he)
apparently decided to make up the money by committing this fraud,''
Valerie Caproni, SEC regional director, told a news conference.

``He created his own bad news, caused the stock price to plummet and
was able to cover his short sales.''

The misinformation sent shares reeling from $113-1/16 to $65 before
they were halted on the Nasdaq. Emulex closed at $104-11/16 Thursday,
up $4-3/16.

The company's chief executive Paul Folino told the CNBC cable news
channel, ``I'm ecstatic about the way the federal authorities and the
FBI have handled this. I think it's a message to everybody. ... It's
very difficult for people to get away with this kind of crime.
Hopefully, it will reassure the markets when they invest (in small
high-tech companies like Emulex).''

Jakob was arrested at 7 a.m. PDT in the western Los Angeles suburb of
El Segundo and was charged with securities fraud for disseminating a
false press release. He could face up to 15 years in prison if
convicted.

The hoax prompted investigations by the Securities and Exchange
Commission, Nasdaq and the Chicago Board Options Exchange, along with
the FBI and the U.S. Attorney's Office in Los Angeles.

The apprehension of Jakob follows the arrest in March of a securities
day trader for allegedly posting a bogus press release on the Internet
about telecommunications giant Lucent Technologies Inc. (NYSE:LU -
news). That false report led to a 3.6 percent decline in the company's
stock.

In another cyber-sleuthing success this year, a 15-year-old known as
``Mafiaboy'' was arrested and charged in the February ''denial of
service'' attacks against major e-commerce Web sites, thanks to
cooperation between the FBI and Canadian law enforcement authorities.

Emulex chief financial officer Michael Rockenbach told Reuters the
incident ``raises the level of consciousness for everyone. We need to
look at what one can do to avoid these things. This is a double-edged
sword for the media because they have the obligation to disseminate
information but also the obligation to make sure it is accurate.''


*==============================================================*
"Communications without intelligence is noise;  Intelligence
without communications is irrelevant." Gen Alfred. M. Gray, USMC
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