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FBI nabs Emulex suspect
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August 31, 2000: 10:33 p.m. ET
College student is charged in last Friday's 'press-release' scam
By Staff Writer Richard Richtmyer
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NEW YORK (CNNfn) - A 23-year-old college student was arraigned Thursday in California on charges of securities fraud and wire fraud in connection with the Emulex press-release hoax last week.
U.S. Magistrate Judge George T. Swartz set a bond of $100,000 for Mark Simeon Jakob, a former employee of Internet Wire, the online news release service that distributed the fake release last Friday, sending shares of Emulex tumbling. FBI agents arrested Jakob early Thursday morning in El Segundo, Calif.
If convicted, Jakob could face up to 15 years in prison for his alleged role in what officials described Thursday as "one of the most devastating financial hoaxes yet committed in the Internet age."
Prosecutors had asked for a $250,000 bail, nearly the amount of money Jakob made on sales of Emulex shares he traded in the days and hours leading up to the hoax. Assistant U.S. attorney Pamela Johnson said the bond would be secured by Jakob's parents' home in El Segundo.
Judge bars student from trading stocks
The judge also ordered that Jakob undergo a psychological evaluation before he's released, and set strict provisions for his actions during the pre-trial period. Jakob is restricted to the central California area, he is to consume no alcohol, he is not allowed to use a computer at home and is not allowed to trade any stock.
However, he is allowed to use a computer at school. He attended summer classes at El Camino Junior College in Torrance, Calif. and is expected to return there. Federal investigators traced the fake e-mail he sent to perpetrate the hoax to his school, where he was said to spend a considerable amount of time in the computer lab.
Jakob appeared in court in shorts and a T-shirt, accompanied by attorney Pedro Castillo from the federal public defenders office. During most of the proceedings, he covered his face with a piece of paper, apparently to foil the efforts of the courtroom sketch artist. He removed the paper only to answer the judge's questions.
A preliminary hearing is set for Sept. 15, at which Jakob will be indicted. A Sept. 18 arraignment will be held to set a trial date.
Jakob is accused of using one of the college's computers to send the bogus press release to Internet Wire on August 24, and then executing a series of trades in Emulex stock to benefit from the price fluctuations.
 Federal agents traced the source of the release through e-mail records back to the college, according to Alejandro Mayorkas, the U.S. Attorney in Los Angeles. Because he had been employed by Internet Wire, he was able to circumvent the safeguards the company has in place to guard against fraud, Mayorkas said.
"The e-mail included not only language that reflected familiarity with the procedures used at Internet Wire, but also a representation that the sales department at Internet Wire already had reviewed the matter," Mayorkas said at a news conference in Los Angeles Thursday afternoon.
Trading account records probed
The U.S. Attorney's office alleges that Jakob hatched the plan in an effort to make up for losses he incurred from selling Emulex stock short.
Investors who sell short borrow their shares from a broker in the hopes that the price will fall. They can then purchase those shares later at lower prices, pocketing the difference as profit.
On August 17 and 18, 2000, Jakob, expecting a decline in Emulex's stock price, sold short 3,000 Emulex shares at an average price of $80 per share, according to Mayorkas.
By August 24, 2000, however, Emulex stock had risen to over $113 per share, resulting in Jakob's having unrealized losses of more than $97,000. He is accused of covering his short position in Emulex just after the bogus release was issued, realizing a profit of more than $54,000 dollars.
Minutes later, law enforcement officials said, Jakob purchased 3,500 Emulex shares, which he then sold on August 28 at a profit of more than $186,000. In total, his profit from the hoax was more than $241,000, they said.
 The fake release included a series of damaging claims about the financial status and senior management of Emulex, which makes electronic components that connect computer systems to network storage devices. It was distributed just as the New York securities markets opened. The Costa Mesa, Calif.-based company's stock plunged more than 60 percent in the first hour of trading, knocking roughly $2.5 billion off its total market capitalization.
In Thursday trading, Emulex shares closed up about 4 percent or $4.19 a share at $104.69. They closed at $113.06 last Thursday, the day before the fake press release was circulated.
Hoaxters beware
The Emulex case was similar to another fraud that was perpetrated last summer against PairGain Technologies. In that case, a former PairGain employee posted a fake news story on several Internet chat boards saying that the company was poised to be acquired, driving shares more than 30 percent higher.
Authorities eventually tracked down that former employee, Gary Dale Hoke, who pleaded guilty to two counts of securities fraud. Hoke was ordered to pay $93,000 to investors who bought PairGain stock and sold it at a loss after the company denied the bogus report. Hoke also was sentenced to five years' probation.
In a similar case, Lucent Technologies' stock fell 4 percent in March after a fake news release was posted on an Internet bulletin board, claiming Lucent would report lower earnings.
 Last week's hoax underscored the perils that come with the instant access to information investors now have with the Internet. But Mayorkas used Thursday's arrest to warn any would-be Internet hoaxters, hoping to cash in on similar scams in the future, that they cannot hide in cyberspace. [861K WAV or 861K AIFF]
"Anybody who would use the Internet to commit a crime should also understand one thing: Do not count on the anonymity of the Internet to serve as a shield for your illegal conduct," Mayorkas said. "We in law enforcement can navigate the information superhighway just as we have had to, and continue, to beat the pavement to detect and apprehend criminals."
Paul Folino, Emulex's chief executive, said he was pleased that the authorities moved so swiftly in apprehending a suspect. He also said that very few of the trades that took place in Emulex shares during the sharp decline were block trades, indicating that individual investors and not institutions were harmed most by the hoax.
In addition to federal prison time, Jakob also faces a legion of angry investors who lost money as a result of the bogus news release.
"I suspect there are going to be a lot of class-action lawsuits," said Valerie Caproni, Pacific Regional Director for the Securities and Exchange Commission.
Caproni could not say if there was any evidence that others had illegally benefited from the decline and subsequent bounce in Emulex shares last Friday. She said the SEC is continuing its investigation into the matter.
"If others are involved, we will find them and we will charge them," Caproni said.
The SEC on Thursday filed its own complaint against Jakob, claiming he violated several antifraud provisions of Securities Act of 1933 the Securities Exchange Act of 1934. The agency is seeking a temporary restraining order, preliminary injunction and permanent injunction against future antifraud violations, as well as civil penalties and an order freezing Jakob's assets. 
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