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September 28, 2000Go to . . . CCIPS Home Page || Justice Department Home Page
EMULEX HOAXER INDICTED FOR USING BOGUS PRESS RELEASE AND INTERNET SERVICE TO DRIVE DOWN PRICE OF STOCK
A federal grand jury in Los Angeles today indicted a Southern California man on charges that accuse him of fabricating a press release that led a publicly traded company to temporarily lose more than $2 billion in market value.
Mark Simeon Jakob, 23, of El Segundo, was named in an 11-count indictment for causing numerous investors to suffer millions of dollars in trading losses because of his distribution of a false press release. The grand jury accused Jakob of nine counts of securities fraud and two counts of wire fraud for allegedly causing Internet Wire, Inc. and other news agencies to publish a false news report about Emulex Corporation.
The indictment was announced this afternoon by United States Attorney Alejandro N. Mayorkas and FBI Assistant Director in Charge James V. DeSarno Jr.
Court documents in this case allege that Jakob engaged in a series of trades of Emulex stock, through which he realized approximately $240,000 in profits when the stock lost more than half its value on August 25 after false news was circulated via several business news organizations. The two wire fraud counts in the indictment allege that Jakob caused two transmissions of the bogus press release, one from Internet Wire in Marina Del Rey, California, to Bloomberg LP in New York, and one from Internet Wire to Comtex News Network in Alexandria, Virginia.
Jakob is a former employee of Internet Wire and until recently was a student at El Camino College, where the computer used to send the bogus press release was located.
The scheme outlined in the indictment targeted Emulex, which is based in Costa Mesa, California, and centered on a press release that was submitted to Internet Wire on August 24. The bogus press release, which purported to have been released by Emulex, claimed that 1) the company was under investigation by the Securities and Exchange Commission, 2) the company's chief executive officer was resigning, and 3) Emulex had revised its latest earnings report and was reporting a loss instead of a profit.
The false press release was distributed by Internet Wire on the morning of August 25, and a number of news organizations – including CBS Market Watch, Bloomberg and CNBC – reported the “news.” As a result of the inaccurate reports, the stock price of Emulex plummeted from more than $110 a share to approximately $43 a share in less than one hour. There was also a significant increase in the trading volume of Emulex stock, most of which was done by individual traders – many of whom experienced significant losses as they sold shares at prices significantly lower than the true value of the stock.
After discovering that the Emulex press release was false, NASDAQ officials halted trading in the stock. Trading was reopened later in the day after Emulex was able to publicize the fact that it was the victim of a bogus press release and that its earlier report of record earnings still stood. The Emulex stock regained much of its value by the end of the trading day – it went back up more than $105 a share – but the reputation of the company was harmed and the company was forced to devote significant resources to refute the false claims made about its future.
The indictment lists six individual victim-investors from across the United States who lost money trading in Emulex stock on August 25.
FBI agents and SEC investigators assigned to investigate the hoax against Emulex started with an examination of the e-mail sent to Internet Wire, which led to the discovery that the bogus press release was written on a computer located at El Camino College in Torrance and that the e-mail sent to Internet Wire came from a computer at El Camino. It was also quickly determined that the e-mail was sent via a free Yahoo! Inc. account that had been opened only minutes before the bogus press release was sent to Internet Wire.
The FBI and regulators with the SEC quickly identified Jakob as a suspect. Jakob worked at Internet Wire until August 18 and was known at the company as an El Camino student who frequently talked about trading stocks. While employed by Internet Wire, Jakob's responsibilities included receiving press releases from companies and preparing those press releases to be posted on the company's web site.
The SEC obtained records from the Datek Online online brokerage firm, which showed that an account in the name of Mark Jakob was used to trade Emulex stock for the five months preceding the hoax and that there had been a series of suspicious transactions involving the stock starting approximately one week prior to the hoax against Emulex. Specifically, the records showed that the account was used to execute “short sale” purchases for approximately 3,000 shares of Emulex. A short sale involves selling shares of stock that a trader does not own, usually in anticipation that the price of the stock will decline. After Emulex's stock dropped on August 25, Jakob covered his short sale position by buying 3,000 shares of Emulex and realizing nearly $55,000 in profits.
Jakob later purchased 3,500 shares of Emulex when the company's stock was selling at just over $50 a share. When he sold these 3,500 shares on Monday, August 28 after they had recovered most of their value, Jakob realized profits of $186,814.
An indictment contains allegations that a defendant has committed a crime. A defendant is presumed innocent until and unless proven guilty.
Each of the nine securities fraud charges in the indictment carry a statutory maximum penalty of 10 years in federal prison and a fine of $1 million. Both of the wire fraud counts have a maximum penalty of five years in prison and a $250,000 fine. Therefore, the maximum penalty under the law if Jakob is convicted on all counts is 100 years in federal prison and fine of $9.5 million, plus possible restitution to all of the victims.
On August 31, Jakob was arrested on the criminal charges and the SEC contemporaneously filed a civil complaint charging him with securities fraud. On the same day, a federal judge in Riverside issued an order freezing Jakob's assets, which included approximately $240,000 in profits that the SEC alleges he illegally obtained from his trading activities before and after the issuance of the false press release. On October 2, United States District Judge Virginia A. Phillips will consider an SEC motion to continue the freeze on Jakob's assets.
The criminal and civil cases against Jakob are the result of an investigation involving the Federal Bureau of Investigation, the Securities and Exchange Commission and the United States Attorney's Office.
CONTACT: Assistant United States Attorney Carl Moor
(213) 894-0340Assistant United States Attorney Pamela Johnston
(213) 894-2686###