The Real Inside Traitor

If there’s a defining parable for these speed-and-greed times, the recent Emulex PR fiasco has to be a contender. Now that the smoke is clearing, a more gritty and global perspective emerges on just what happens when frenzied stock trading collides with shoddy online information dissemination. A low-level clerk and part-time junior college student was reportedly able to briefly strip a publicly owned company of $2.5 billion in value, pocket a quarter-million dollars for himself, and make monkeys of the most sophisticated news organizations in the world. Welcome to the Internet.

Thursday night, August 24
Just two days after we introduced ClickZ readers to the press release distribution services of Internet Wire, Mark Jakob walked over to the Technology Center at El Camino Community College, according to FBI reports. At 7:45 p.m. he allegedly used a newly opened Yahoo.com email account to ship a financial disclosure press release over to Internet Wire with orders to hold for release until 9:30 EST, the opening of trading on the following morning.

The release, which looked like it came from a PR firm representing Emulex, claimed the company was under SEC investigation, its CEO was resigning, and recent profits would be restated as losses.

Jakob’s supposed motivation? From his cubicle at Internet Wire, where he worked until a couple of weeks previously, he had been reportedly selling Emulex stock short, using his Datek Online account. (In a short sale, an investor sells stock he or she doesn’t own in anticipation of its drop in value.) Unless Emulex stock started to drop and fast he stood to lose a pile of money.

Only two people were on duty at Internet Wire the night of August 24. “Among the 120 or so releases arriving that night, there was nothing to flag this release,” said PR chief Amy Orebaugh. “It had the appropriate Emulex IR person listed as a contact, was well written, and looked like it had been approved by the day shift.”

Friday, August 25
At 6:30 a.m., PST, more than 10 hours after the phony disclosure arrived at the Internet Wire office, it was released as scheduled, unedited, and unchecked. The bogus press release was FTP’d over to the financial disclosure newswires and posted to the Internet Wire web site and on to general distribution.

In the meantime, over at Bloomberg News in New York, reporters were working at a white-hot pace to get breaking news onto their workstations before the market opened. Along with other disclosure media, they have a 15-minute exclusive shot at new releases courtesy of the commercial press release distribution services. Stock traders their primary customers make and lose fortunes by reacting to fast-breaking news before the general public gets wind of it.

According to Alex Berenson of The New York Times, financial news services are “the most hotly competitive place in journalism today.” With 950 reporters and 79 bureaus, Bloomberg competes with Dow Jones, Reuters, CBS MarketWatch, and CNBC, “along with newspaper Web sites… and even gossipy chat rooms” to break news. The company, according to The New York Times, has 144,000 workstations on the trading floors of worldwide exchanges. Annual subscription? $15,000.

At 10:13 a.m., Bloomberg News contributed to the unfolding debacle. Without contacting Emulex in California, Bloomberg rewrote the bogus release and put it out as a news story. In the opening minutes of the session, Emulex stock dropped from $113 to $103. Once the bad news was confirmed by Bloomberg, Emulex stock went into free fall. In the following 15 minutes before Nasdaq suspended trading in Emulex at the company’s request the stock dropped to $43 per share.

Thursday, August 31
One week after he allegedly walked down to the community college tech center, 23-year-old Mark Jakob was busted by the FBI. He apparently left a clear enough trail. Internet Wire knew him as an El Camino student who traded stocks online, heavily. His brokerage account revealed his recent short sales of Emulex stock. Reportedly, the FBI placed him at the El Camino tech center, identified the computer he used and found evidence the release had been on that machine.

It looks like the FBI got their man. But how innocent are the big players down the line?

Internet Wire distributed a phony press release without confirmation from an authorized company representative. They were apparently snookered by an insider. But if Mark Jakob wrote the fraudulent release, who published it? Like publishers do, BusinessWire, PRNewswire, and Internet Wire exercise some control over distribution of releases. And yet none of these major press release distribution services considers itself a publisher. Another service, Internet News Bureau, says it “assumes no responsibility for the accuracy of the press releases it distributes,” which at least removes any doubt about its reliability as a source.

Bloomberg News as well as Dow Jones and the others, however, are top-tier media staffed by professional journalists and held to a higher professional standard. In the interest of speed and greed, that standard was betrayed August 25.

There is an upside to this story. By revealing grotesque malfunctions in the twin engines of a democratic society a free press and free markets the Emulex Affair might result in healthy corrections. Given the sheer volume of high-stakes financial transactions, it’s not likely Emulex spells the end of this kind of market manipulation. (Web chat rooms are being used for the same purpose and are currently the target of a suit brought by San Diego’s Titan Corporation, a company on the New York Stock Exchange.) What does seem inevitable is the need for stability and trust will drive the creation of new security standards affecting financial press release disclosures. It’s a process already underway. Emulex points out weaknesses in the financial news services’ reliance on press wires. Sometimes, even these days, you just have to pick up the phone.