IndexFunds.com Staff

Bogus Press Release Causes Emulex Stock Plunge

In one of the most dramatic hoaxes in stock market history, a bogus press release caused the market value of networking technology provider Emulex to temporarily lose $2 billion on Friday.

The phony release claimed that the company's CEO, Paul Folino, had resigned, that Southern California-based Emulex had revised its fourth-quarter earnings report from a profit to a loss, and that the company was under investigation by the SEC.

The fake news release, which caused Emulex's stock to plummet 60% in a matter of minutes, was originally posted early Friday morning by an unknown person posing as an Emulex employee on Internet Wire, an online news-release service.

Shortly afterwards, the information was picked up and broadcast by Bloomberg and Dow Jones News Service, both of which failed to verify the information contained in the Internet Wire release. By midmorning, Emulex stock had plunged to $45 after originally opening on Nasdaq at $110.69 Friday morning. In response to the Emulex stock nosedive, Nasdaq temporarily halted trading on the stock.

As its office was flooded by calls from investors and the media, Emulex recognized the hoax and issued a press release over BusinessWire that refuted the claims of the bogus release. Later in the day, the various news services that ran the story acknowledged that the initial press release was a hoax.

When the stock resumed trading on Nasdaq, it recovered and finished the day at $105.75, down 6.5%. During its wild ride, Emulex stock ranged between $43 and $130 Friday.

It appears that the bogus press release was just one step in a larger scam to cash in off the ensuing drop in Emulex stock prices. Shortly before the fake release was posted, there was an inexplicable surge in Emulex put options trading. Buyers of the defensive put options could have cashed in on their Emulex options when the price plunged after the false news was publicized.

The SEC, FBI, National Association of Securities Dealers, and the U.S. Attorney's office in New York have all opened investigations, and Emulex's Folino has called for full prosecution of the culprits if they are found.

The hoax has caused news services that cover the stock market to take a step back and examine their fact-checking mechanisms, with Rick Stine, managing editor of Dow Jones News Services, commenting, "I'm not pleased we published this at all."

In many investors' minds, the Emulex hoax is a grim reminder that, in an age of lightning-fast dissemination of online information, the market is susceptible to scams like the one it experienced on Friday. On March 30, Lucent Technologies briefly lost almost $7 billion during a similar hoax when a day trader posted a fake profit warning on a Yahoo message board.