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Phony Press Release Causes Tech Stock’s Price To Crash

By Thomas S. Mulligan

An audacious hoax battered the stock of a high-tech Southern California company on Friday and sent shivers through Wall Street, where the markets seem increasingly vulnerable to dubious information being spread at Internet speed.

Shares of Emulex Corp. crashed as much as 62 percent after news services picked up a phony press release saying that the maker of data-storage equipment was under investigation by the Securities and Exchange Commission, that its fourth-quarter profit would be revised to a loss, and that its chief executive had resigned.

Trading in Emulex was halted by the NASDAQ Stock Market soon after the bogus release was published and the company quickly issued a blanket denial, but in the meantime more than 1 million shares changed hands, with many investors taking steep losses as they bailed out of the stock.

After trading was resumed, the stock recouped most of its losses but still closed down $7.31 at $105.75. At its lowest point, just before the trading halt, the price was down $70.06 to $43, wiping out $2.5 billion of total value.

The FBI, SEC and NASDAQ have launched investigations into the hoax, which appeared to have been concocted by people who wanted to profit on the stock’s tumble.

The Chicago Board Options Exchange said it, too, has launched a probe of “unusual” trading that occurred before the hoax. One way to profit on misfortune is through “put” options, which rise in value as the price of the underlying stock declines.

Volume of put options -- the right to sell Emulex shares at a set price -- tripled on Thursday from the three previous days. Options to sell 188,900 shares changed hands. That was the highest level since Aug. 8.

Experts said the options activity made it less likely that the hoax was carried out as a prank.

Friday’s was just the latest such hoax involving a prominent company in recent years. Other victims have included Lucent Technologies, and PairGain Technologies.

Although roiling the markets with false information is a ploy older than Wall Street, the speed and anonymity of the Internet makes such scams easier than ever to pull off and potentially more lucrative.

“Markets have always been vulnerable to fraud,” noted Georgetown University finance professor James Angell. “It’s just that computers allow the fraudsters to work faster and cheaper. In the old days, you’d have to work a lot harder to get the word out.”

Investors who sold shares because of the phony news release may be out of luck.

NASDAQ said it had no authority to cancel the trades, so investors would have to negotiate any settlements with their brokers.

However, representatives for several online brokerages said they would not unwind the deals.

“Those trades are going to stand,” said Mike Dunn, spokesman for Datek Online. “NASDAQ didn’t tell us to undo them, and there was a real market operating.”

A spokesman for DLJ Direct said trades done through that company also would stand.

The phony news release itself was a somewhat crude attempt to mimic the style of previous official statements by Emulex.

The cleverest thing about the hoax may have been the way the author got the bogus release before a wide audience.

The author convinced graveyard-shift production staffers of Internet Wire, which distributed the press release, that the statement came from Emulex public-relations representatives and already had been approved by Internet Wire higher-ups.

“Somebody who was very smart and sophisticated figured out our procedures, but we’ll close that loophole,” Internet Wire chief executive Michael Terpin said Friday night.

Six-year-old Internet Wire, based in Los Angeles, is a relative upstart among corporate-news distributors, compared with established rivals such as BusinessWire and PR Newswire. Terpin noted that other news services have previously been tricked by false releases.

“It was just our turn this time, I guess,” he said.

Internet Wire distributed the press release at 9:30 a.m. EDT Friday . It was soon picked up by such news services as Bloomberg and Dow Jones, whose headlines trumpeted the shocking news.

A Bloomberg spokeswoman said that before using material in a news release, the news service verifies that it comes from a bona fide distributor like Internet Wire but relies on the distributor to ensure that the releases themselves are authentic.