August 31, 2000 3:10 PM PDT

23-year-old arrested in Emulex hoax

Federal law enforcement authorities today arrested a 23-year-old Southern California student in the stock manipulation case of technology company Emulex, which saw its stock plunge more than 50 percent last week as investors reacted to a fake news announcement.

Mark Simeon Jakob, a resident of El Segundo, Calif., and a student at El Camino Community College, is accused of wire fraud, acting with intent to defraud, participating in a scheme to defraud and securities fraud.

Jakob worked at Internet Wire, the corporate news service that distributed the faux press release, until Aug. 18. He was known to openly talk about trading stocks, authorities said.

According to U.S. Attorney Alejandro Mayorkas, Jakob sent an email from the library at El Camino Community College to Internet Wire with a phony Emulex press release that "reflected familiarity with the procedures used" by the service.

Mayorkas said Jakob had been a student at the college and had been seen using the computers the night the email was sent to Internet Wire.

Jakob, familiar with the inner workings of the news distribution service, allegedly posted the faux news on the business earnings, technology hardware and disclosure wires.

The fake release was allegedly sent via a free Yahoo Web-based email account that had been opened only minutes earlier.

Officials siezed a computer at the El Camino Community College technology center last night and determined that the faux press release had been sent from there.

Jakob was arrested at his home this morning. His first court appearance is scheduled for 3 p.m. PT this afternoon.

Authorities are seeking civil penalties as well as criminal securities fraud charges. They allege that Jakob made nearly $250,000 from short sales he made in conjunction with the press release posting.

"The suspect, we believe, realized about a quarter of a million dollars in profits from trades he made around the time of the fake press release," said Thom Mrozek, a spokesman for the U.S. attorney's office in Los Angeles.

Short selling for profit
Two weeks ago, Jakob allegedly borrowed 3,000 shares and sold them at a range of $72 to $92 per share, a process called "short selling." Investors who short a stock are betting that the price will fall and they can replace the borrowed shares at a lower price, pocketing the difference. However, Emulex shares kept climbing to more than $100 by last week, meaning Jakob was facing steep losses, according to authorities.

As the prices fell following news coverage of the fake press release, he allegedly covered his short position--meaning he bought shares to replace those he'd borrowed at a lower price--and yielded profits of about $50,000.

In addition, Jacob allegedly bought another 3,500 shares at $52 as Emulex tanked early Friday. Three days later, he sold the shares for a profit of $186,000.

The fake announcement indicated Emulex would restate its earnings--revising its profits lower--and said the company's chief executive would resign. Emulex said the information was false.

Emulex's case is one of the most widely watched cases of apparent stock manipulation in recent years. Authorities fear such cases may increase as the Internet plays a greater role in investing.

Emulex, which is based in Costa Mesa, Calif., and makes networking and fibre channel technology, lost about $2.5 billion in value Friday before the hoax was discovered. The FBI and other authorities quickly stepped in.

Emulex chief executive Paul Folino said in a TV interview with CNBC that he is "ecstatic" with how quickly authorities arrested a suspect, and he added that the arrest should reassure investors that the Internet, and investing in emerging technologies, is not particularly risky.

"Anyone who would use the Internet to commit a crime should understand one thing: Do not count on the anonymity of the Internet to serve as a shield for your illegal conduct," U.S. Attorney Alejandro Mayorkas said in a statement.

News.com's Scott Ard contributed to this report.

 

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