Hoax release sends Emulex stock crashing 50% in an hour

Hoax release sends Emulex stock crashing 50% in an hour
REUTERS

AUG 26: Emulex Corp on Friday became the victim of one of the most far-reaching hoaxes to hit the US stock market, causing the data networking equipment maker's stock to plummet more than 50 per cent and triggering inquiries by the FBI and regulators.

A bogus press release, which appeared on web-based news dissemination service Internet Wire, said the company's chief executive had resigned and Emulex had been forced to restate 1998 and 1999 earnings, as well as revise the fourth quarter to a loss from a gain. The false release also said Emulex was under investigation by the Securities and Exchange Commission (SEC).

The hoax led to criticism of the Nasdaq stock market for failing to halt trading fast enough and calls for extra safeguards in the handling of corporate news. The speed and extent of the decline in the company's shares also showed how vulnerable companies have become to such hoaxes in the increasingly frenetic Internet-fuelled stock trading environment.

Los Angeles-based Internet Wire said in a statement that whoever had written the bogus release had posed as a public relations representative of Emulex.

"For reasons presently unknown, it appears the hoax was perpetrated by an individual (or individuals) who falsely represented himself or herself as a public relations agency representing Emulex," Internet Wire said in a statement. Emulex, alarmed that as much as $2.5 billion had been lopped off its market capitalisation, moved to issue a statement clearing the matter up.

"The negative statements in this fictitious press release are categorically false," Emulex president and chief executive Paul Folino said in the statement. The company said that the bogus release used the Emulex name and logo. The news was picked up by Bloomberg and Dow Jones News Wires, which use Internet Wire as a source of news.

Shares plunged, and were down 48-1/16 at 65 when they were halted for trade at about 10:30 am EDT (1430 GMT), an hour after the opening of Nasdaq trading. Trade resumed around 1:30 PM and the shares regained most of the losses, eventually closing down 7-5/16 at 105-3/4.

"We are working with the SEC and Nasdaq surveillance to investigate who is responsible for this, because they used our company logo and name, and made it look like an Emulex release," said Kirk Roller, Emulex senior vice president of sales and marketing.

The SEC declined to comment and Nasdaq officials were not immediately available for comment. A spokesman for the New York office of the Federal Bureau of Investigation said two FBI offices were looking into the matter. "The Los Angeles FBI office and the New York FBI office are taking a look at this," said New York-based FBI spokesman Joseph Valiquette.

The Chicago Board Options Exchange said it was investigating "unusual" trading activity in Emulex options. "The unusual trading has triggered an intense investigation," said a CBOE spokesman in response to an inquiry. The erroneous news was picked up in headlines and a story by Bloomberg and in headlines by Dow Jones Newswires, according to officials at both news companies.

Headlines are one line reports sent out to alert investors and traders of market-moving information, and are often written within seconds of when news is released.

"We looked at the Internet Wire press release and reported information from that release," said Dow Jones & Co spokeswoman Vickee Adams, who added that the Dow Jones headlines came after the halt of trade. "The reporter followed up with a phone call to the company...and we reported that the news was in fact a hoax."

"We've removed the earlier headlines from the wire," she added. Bloomberg spokeswoman Chris Taylor said the wire service was "evaluating Internet Wire as a source of information."

"We are concerned about always having our information being reliable," Taylor said. "We carry Business Wire, PR Newswire and Internet Wire as contributors and they are on the Bloomberg System. We get the releases from them, they are the ones that guarantee the contents of the press release."

Analysts said the hoax also hit the share prices of other data networking equipment companies QLogic Corp. and Brocade Communications Systems Inc.. QLogic closed down 5-13/16 at 103-7/8, after trading as low as 74 on Friday. Brocade closed down 6-7/17 at 211-7/8, after hitting a low of 206.

"If you were a long on either stock and jumped out on this supposed news you got murdered," said Bill Meehan, chief market analyst at Cantor Fitzgerald, who was referring to QLogic and Emulex. "A lot of people are going to take a big loss. I have no idea who it is but I'm sure the government will be very interested in it," he added.

The Nasdaq's slow response to halt trading called some to question Nasdaq's safeguards against such hoaxes. "If this happened on the New York Stock Exchange, there would still be an outcry," said Barry Hyman, market strategist for Ehrenkrantz, King, Nussbaum. Some observers said the rapid investor reaction before the hoax was exposed highlighted the risks of the New Economy.

"It's part of the infancy of the New Economy and the instantaneous ability to trade and get information - in return for that speed of news dissemination comes the risk of false information," said Scott Bleier, chief investment strategist at Prime Charter.