NEW YORK (CNNfn) - Investigators are trying to determine the source of a bogus press release that sent shares of Emulex on a wild ride Friday.|
Shares of Emulex, which makes electronic components that connect computer systems to network storage devices, fell more than 50 percent early Friday after a press release containing a series of damaging claims about the company was circulated over the Internet.
The fake release, distributed first through Internet Wire, a Web-based news dissemination service, said the company's chief executive had resigned and that Emulex had been forced to restate 1998 and 1999 earnings, as well as revise the fourth quarter to a loss from a gain.
It first appeared on the Internet Wire Web site at about 9:30 a.m. ET, and was picked up about half an hour later by several financial news services including Bloomberg, Dow Jones and CBS MarketWatch.
The sharp decline in Emulex shares prompted Nasdaq officials to halt trading until the company was able to issue a response denying that the purported press release came from Emulex.
"Someone has put out a fictitious press release," Kirk Roller, senior vice president at Emulex, told CNNfn Friday morning. "None of those things are accurate." [249K WAV or 249K AIFF]
A legitimate press release issued by Emulex Friday called the claims made in the fake release "categorically false."
When trading in Emulex resumed Friday afternoon, shares rocketed back to 130, erasing all of the earlier losses before settling back to close down 7-5/16 at 105-3/4, a 6.5 percent decline on the day.
A Nasdaq spokesman on Friday told CNNfn that Securities and Exchange Commission rules prohibit the exchange from nullifying trades that took place prior to the halt. However, investors may have some leeway to renegotiate the outcome of those trades with their brokers, he said.
In an interview with CNNfn Friday afternoon, Paul Folino, Emulex's president and chief executive, said the company is working with the SEC and the Federal Bureau of Investigation to trace the source of the false press release.
This incident is the latest hoax in which false information about a company was disseminated over the Internet disguised as the real thing. The fake Emulex release carried the company's logo and included a valid company contact name and telephone number.
Last year, shares of PairGain Technologies (PAIR: Research, Estimates) got a boost after a former employee posted a false news story mocked up to look as if it had been written by Bloomberg to several Internet message boards. The fake story said the company was poised to be acquired.
The authorities eventually tracked down that employee, who later pleaded guilty to securities fraud and was sentenced to five years probation.
Fraud of this nature is more prevalent on Internet chat boards, such as those provided by Yahoo! and RagingBull.com, where investors, hoping to manipulate stock prices, frequently plant rumors and misinformation about specific companies.
The medium has been a boon to individual investors who now have access to data and news once available to a select few. But fewer gatekeepers have meant more questionable information.
Emulex's Folino said that Friday's fiasco with his company's stock highlights the pitfalls that come with the instant access to information investors now have with the Internet. He warned that people should be more discerning when it comes to believing what they read online. [198K WAV or 198K AIFF]
Internet Wire, a self-proclaimed press delivery mechanism, said it also was investigating how the fake release showed up on its site. The company said its clients, which include Emulex, provide it with press releases to distribute to news wires and services.
An Internet Wire spokesman said the company's policy is to call and verify the source of the press releases on its service. However, he said he was not sure if that had been done in this case.
Emulex's Roller said nobody from Internet Wire had called the company to verify the source and its attorneys are investigating whether they can sue Internet Wire for failing to do so.
Internet Wire Chairman and CEO Michael Terpin, in an interview on CNNfn's Digital Jam, claimed his company was a victim in the hoax and blamed its occurrence on the speed and accessibility of the Internet.
In a statement issued late Friday afternoon, Internet Wire said this is the first time in its six-year history that it has encountered such a situation.
--CNNfn's Steve Young contributed to this report