Suspect Charged in High-Tech Stock Hoax

The 23 year-old California man who allegedly orchestrated last month’s “Emulex hoax” was indicted by a federal grand jury on Thursday, according to published reports.

Mark Jakob, a student at El Camino Community College near Los Angeles, faces 11 criminal counts of securities and wire fraud for an audacious stock market scheme in which he is said to have reaped over $241,000 (US$) in profit.

The grand jury determined that Jakob “knowingly and willfully” committed fraud by fabricating a press release about high-tech firm Emulex Corp. and sending it to an Internet news wire.

False Press Release

The release — which said Emulex’s accounting was under investigation by the U.S. Securities and Exchange Commission (SEC), that it was revising its earnings report and that the company’s chief executive had resigned — was picked up by financial services reporters and editors around the globe, generating a tidal wave of negative publicity.

Upon hearing the news, jittery investors pulled out en masse, sending Emulex’s stock plummeting as much as 62 percent. The company lost more than $2.5 billion in market value before the hoax was discovered and Nasdaq halted its trading. Shares eventually bounced back after the company denied the reports.

The Emulex case reverberated throughout Internet news organizations, raising concerns about the speed at which unconfirmed information can travel on the Web. Investors who unloaded their shares during the nose dive reportedly lost an estimated $50 million.

Jakob is said to face a maximum of 100 years in federal prison if convicted on all counts, with cumulative fines totaling as much as $9.5 million. The indictment also includes separate counts on behalf of six investors who lost money selling Emulex shares, but does not specify how much each victim is seeking in restitution.

Jakob is scheduled to enter a plea on October 10th.

Orchestrating the Plan

Federal authorities say Jakob planned the hoax to cover almost $100,000 in paper investment losses after selling short 3,000 shares of Emulex on August 24th. Betting that the stock’s value would decline, he purchased the shares on margin from his broker and was relying on a subsequent drop in price to earn a profit.

Instead, the stock skyrocketed, and Jakob faced having to deposit more money in his account or see his shares sold off. The same day, Jakob reportedly created the phony press release hoping to drive down Emulex’s stock and sent the bogus report from a computer at his college, which the FBI was able to trace. Jakob was arrested less than a week later.

While the stock was plunging, authorities say, Jakob was able to buy enough shares to cover his losses. He also allegedly purchased additional shares of the stock and sold them at a profit, ultimately making $241,000.

At the request of the SEC, a federal judge has reportedly frozen about $400,000 in Jakob’s bank and brokerage accounts, as well as his personal documents and computer records.