Unwitting dupes. That’s how a judge described Internet Wire and Bloomberg when they distributed the ‘news’ last August that Emulex’s chief executive officer had resigned and its earnings estimates were overstated – information that, unknown to them, didn’t come from the company and was intentionally false.
But simply being negligent or not following their own standards by taking a phony press release at face value doesn’t make a company liable, Judge Milton Pollack determined June 19 when he threw out a class-action lawsuit against Internet Wire and Bloomberg. It was the third such dismissal of an Emulex-related lawsuit brought by angry investors.
Relief at not being found liable, however, is small comfort for the credibility hit the two companies and others in the financial media business took. Companies that distribute corporate press releases, like Internet Wire, had to defend how they screen the hundreds of releases that pour out of their operations every day. Bloomberg had to explain how something got reported without being verified, and other news organizations had to examine how they contributed to the frenzy.
More than a year after the Emulex hoax, executives at media companies say they’re far more aware of the potential dangers in distributing financial information in the internet age. But they caution that just because they tightened their safeguards, that doesn’t mean another determined hacker couldn’t fool them again.
‘The internet, with its low cost, anonymity and large number of innocent investors, makes it ripe for out-and-out fraud,’ Arthur Levitt, then chairman of the Securities and Exchange Commission, said in a speech about a month after the hoax. ‘Be wary of illusions of easy money or fancy web sites promising you’ll make a fortune with one quick gamble. Be wary of hot press releases.’
The hoax
The strategic hit on Emulex began late on August 24, 2000 when Mark Jakob sent an e-mail with the phony press release attachment to Internet Wire that purported to be from a public relations firm representing Emulex. Jakob, who had worked at Internet Wire from April 1999 until shortly before he sent the e-mail, was trying to drive the company’s stock down because a week earlier he lost more than $97,000 by shortselling 3,000 shares of Emulex’s stock.
The night staff at Internet Wire approved the release and it was posted on the wire at 9.30 the next morning. Within about 15 minutes, the news of Emulex’s supposed woes was the talk of internet message boards. At 10.13 and then again a minute later, Bloomberg ran headlines that reported the CEO resignation, the SEC investigation and, finally, the lower fourth-quarter results. Emulex’s stock went into free fall. Within 16 minutes, the stock’s price plummeted $61 as 2.3 mn shares changed hands. The company lost $2.2 mn in market capitalization.
Three hours behind east coast time, Emulex’s offices in California were just beginning to come alive. Phones began to ring with the Nasdaq general counsel’s office among the first to call. Emulex chief executive Paul Folino took the call and rebutted the press release. Nasdaq and Emulex agreed to halt trading on the stock. By then, CNBC was reporting on the plunge in the stock price and Dow Jones Newswire moved a headline on the drop in Emulex’s fourth-quarter earnings. By 11.00, news organizations began reporting that someone had pulled a hoax.
Emulex issued its own press release over Business Wire at 12.51 pm, and 40 minutes later Nasdaq resumed trading on the stock. By the end of a trading day that saw Emulex’s share price swing between $130 and $43, the stock was down just 6.5 percent to close at $105.75.
After the hoax
For Mark Jakob, it looked as if the stunt had paid off. As the stock price fell, he covered his short position and realized a profit of $54,000 before buying up a further 3,500 shares to be sold three days later for a $186,000 profit.
Whatever satisfaction Jakob felt didn’t last long, however. As dawn broke on August 31, FBI agents wearing bulletproof vests swept into Jakob’s neighborhood in El Segundo, California, and arrested him as his parents watched. Jakob, 23 years old, pleaded guilty to three counts of securities and wire fraud, and was sentenced to nearly four years in prison.
The news cycle barely had time to digest the rollercoaster of what happened to Emulex before a much bigger question emerged: How could companies entrusted with distributing legitimate and accurate information allow something so damaging to slip through?
‘It’s easy to criticize after the fact. When you’re handling thousands of press releases, any single release doesn’t stand out as you’d think it would,’ says Jim McGovern, Internet Wire’s chief executive. In the Emulex case, Internet Wire was dealing with a former insider who knew the procedures and the verification process. Emulex was not even an Internet Wire client, but the codes Jakob used convinced the staff to move the release. The hoax led to changes in Internet Wire’s practices, namely a requirement to authenticate every release that comes into the system with a phone call.
The potential damage to Internet Wire if another hoax slips through is great. ‘We’re doing everything in our power to ensure this doesn’t happen again,’ McGovern says. ‘One more could be fatal.’
Internet Wire sends its content to traditional media via the Bloomberg Professional service, Dow Jones Newswire and Comtex News Network and reaches a broader audience via the internet on Yahoo, iSyndicate, Screaming Media and Wavo.
‘This is an industry problem and an indication of the fact that if someone is clever enough and committed enough to commit a crime, it is damn hard to stop him,’ McGovern says. ‘Some of the smartest people in the world are building firewalls and creating authentication systems but there are also equally smart people trying to break through.’
Wire services
The US press release industry is dominated by Business Wire and PR Newswire, two companies that got their start sending releases via mail long before anyone fathomed an unrelenting demand for instant news. Together these two major players control more than 95 percent of the press release business. The lesson in all this, according to Cathy Baron Tamraz, Business Wire’s chief operating officer, is this: ‘There is no substitute for experience – you start to smell this stuff after a while.’
But both Business Wire and PR Newswire have had their own problems. A release for a fictitious company moved over Business Wire on April 1, 2000 in what turned out to be an April Fool’s Day joke. In July 2000, PR Newswire retracted a release supposedly from Florida-based AutoNation, the largest US automotive retailer, that discussed a buy-out offer. The company said the release was ‘nonsensical’. Neither incident led to the kind of financial fallout or credibility damage of the Emulex hoax, however.
‘You have to expect that someone is trying to trip you up. That’s the climate we’re in,’ admits Tamraz. Even before Emulex, Business Wire had set up a more secure system for clients to submit their releases, and Tamraz says the Emulex hoax allowed Business Wire to get more clients into this new system. ‘We see ourselves as a news agency. The most important thing for us is credibility,’ says Michael Lissauer, Business Wire’s senior vice president of marketing. ‘We’re not in a position where we’ll take just anything to put it out.’
Dave Armon, PR Newswire’s president for the Americas, says his company’s policies have not changed since Emulex. PRN’s editors continue to call a contact for every release they receive, although in the past the contacts were often administrative assistants. ‘Since Emulex, it’s amazing how many vice presidents and chief financial officers are in our client profiles in case a question comes up,’ he says, adding that the Emulex incident prompted PR Newswire to embark on a client education campaign to explain the distribution process and to stress the importance of obtaining authorization.
‘This is a tough business, one that requires a lot of quality control and a commitment to test in technology and training,’ Armon says. Executives with all three of these information distribution companies say they have to be able to guarantee that a news release comes from a legitimate source. But they all stress that verifying the accuracy of the information in the release is not part of their job. That’s the media’s responsibility and in the Emulex case, some outlets clearly failed.
Media responsibility
Journalists at Bloomberg saw the bogus Emulex release move over Internet Wire and re-reported it on Bloomberg’s influential newswire – without getting further confirmation. As a matter of course, journalists should verify that a press release is bona fide, or should at least tell readers the information is coming from a release that has yet to be confirmed.
‘I was chagrined, disappointed that we didn’t measure up to our own standards,’ says Matthew Winkler, Bloomberg’s editor-in-chief. Those standards include stating when information comes from a press release and spelling out for the reader whether or not the company named in the release was contacted. But Winkler cautions such policies won’t stop fraud completely: ‘There’s nothing you can do about a criminal who’s determined to beat the system.’
Where once there were just daily newspapers, nightly newscasts and weekly news magazines, there are now 24-hour cable news channels and internet news sites in the mix to feed a steady stream of information to consumers. The drive to beat competitors with the freshest news is intense, particularly with financial news. It’s the era of minute-to-minute journalism, and it has its dangers.
‘The whole news business has changed in that you report everything and you report it the minute you get it,’ says Joe Kernan, one of the anchors on CNBC’s morning Squawk Box program. Kernan and his on-air colleagues paid heavy attention to Emulex’s drop but stayed away from reporting the information in the phony press release because it had yet to be verified. The Emulex release, Kernan says, was ‘just so bad’ in its presentation that it raised red flags at CNBC. ‘On [releases like] those, I don’t care if I’m that early. I’ll let someone else screw it up first. I’ll come in a little bit later as long as we get it right.’
Winkler says competitive pressures existed way before the internet. ‘I would not blame the internet for the carelessness or fraud or the kinds of mistakes we’re talking about here. I blame us, and would blame anyone who is not critical enough, thoughtful enough, careful enough to make sure of what they’ve got.’ The Emulex hoax wasn’t given life just by the traditional media, however. The fire was also stoked by individual investors who access the same press releases as reporters and then post them or discuss them on a multitude of message boards. The fake Emulex news reached a broader audience here first – just 15 minutes after the release moved on Internet Wire, someone posted a warning on the Yahoo Finance site: ’emlx to restate earnings down.’
Executives at the information providers say the press release has become an even more important tool in this new age, but they caution the general public. In this context, a press release ‘isn’t going to be reviewed by anyone. It’s going directly to the consumer. So, for the last five years, people have had to be more vigilant,’ says Business Wire’s Lissauer. ‘The internet has been described as either pure democracy or pure anarchy. It’s a combination of the two.’
‘There is a place for the news release in real-time distribution to serve as notification for a shareholder or analyst to know that something is out there,’ says PR Newswire’s Armon. His advice is for people to absorb the information and then ‘stay tuned’ to see whether Bloomberg, Dow Jones and others verify it and put it into context. ‘The journalist isn’t necessarily the breaker of information, but the information the journalist puts out there is every bit as important because they’re the ones who ferret out the news nuggets.’
Bloomberg’s Winkler agrees: ‘While anyone can be a source for a press release, anyone can put a press release on their web site, it doesn’t guarantee to a reader that it’s news you can use. That’s why news organizations exist.’
More than a year after Emulex, the worlds of finance and business media exhibit different terrain. ‘Emulex had an enormous impact,’ confirms Richard Walker, the SEC’s outgoing head of enforcement. ‘People are much more on their guard, much more cautious about the information they receive.’ And then there’s the end of the technology stocks boom.
Indeed, the Nasdaq’s drop and the pile-up of failed companies has actually helped prevent another calculated fraud via a fake press release. ‘You don’t have people buying and selling first, and asking questions later. In general, you hear bad news and it’s true now,’ says CNBC’s Kernan. If someone wanted to manipulate the market in this environment, Kernan says a fraudster would have to leak good news, and positive information doesn’t move stocks the way negative information would.
Indeed, there is good news at the end of the Emulex saga. Despite an increase in the number of press releases issued since Regulation FD came into effect, tighter controls at the information providers have prevented a repeat episode.
Perhaps the most significant lesson to be learned by the investing public, though, is among the oldest: Caveat emptor – let the buyer beware.
