Guilty Plea in Emulex Hoax

A 23-year-old man pleaded guilty today to securities and wire fraud for issuing a fake press release that sabotaged the stock of the high-tech company Emulex Corp. and cost investors nearly $110 million.

Mark Simeon Jakob entered the pleas before U.S. District Judge Dickran Tevrizian under an agreement with federal prosecutors. The judge accepted the pleas and set sentencing for March 26.

Under terms of the agreement Jakob surrendered $54,000 cash — a wad of rubber band-wrapped bills brought to court in a relative’s purse.

The agreement for the guilty pleas to two counts of securities fraud and one of wire fraud was revealed Thursday by prosecutors and Jakob’s attorney.

Lost Money While Day-Trading

Jakob, of El Segundo, was arrested in August on charges of creating a hoax that sent the stock of Costa Mesa-based Emulex plummeting as much as 62 percent in one day.

In exchange for his plea, authorities will recommend a sentence of between 37 and 46 months. Jakob also faces fines and an order to repay his victims, including investors who sold Emulex shares at huge losses based on news reports prepared based on the bogus release.

According to the plea agreement, Jakob began trading stocks in the summer of 1998 with a $40,000 stake, some of it borrowed. After some initial success, he lost most of the money day-trading — a technique in which shares are bought and sold quickly, often in the same day.

He started working at Internet Wire, an online distributor of press releases, in April 1999 and soon saved enough money to trade again.

In August, Jakob sold short 3,000 shares of Emulex. A short sale involves selling borrowed shares of a stock in hopes the price will decline, enabling an investor to repay the loan at a lower price and keep the difference.

Knew Ins, Outs of Internet Wire

Instead of falling, though, shares of Emulex began to rise, and Jakob faced a potential loss of $97,000 and a demand from an online brokerage that he deposit $20,000 in his account to cover anticipated losses. To cover his losses, Jakob decided to craft a phony press release, modeled after a legitimate release that caused shares of Extended Systems to fall one month earlier, the plea agreement states.

The release said that the chief executive of Emulex had quit and the company was restating its quarterly earnings from a profit to a loss.

Having left Internet Wire a week earlier on good terms, Jakob was able to use his knowledge of the online service’s system to get the release distributed on Aug. 25. It was then redistributed by several news organizations.

Within minutes, Emulex’s share price plunged until trading was halted on the Nasdaq. Jakob covered his short position and bought additional shares which he later sold.

SEC Seeks Rest of Money

The government charges Jakob made more than $241,000 from his trades.

As part of the plea agreement, Jakob was required to give $54,000 in profits recovered by investigators to the government.

A separate civil lawsuit brought against Jakob by the Securities and Exchange Commission, seeking the rest of the money Jakob allegedly made from his Emulex trades, is on hold until after the criminal charges are settled, said Jakob’s attorney, Joel Levine.