U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 16671 / August 31, 2000
SECURITIES AND EXCHANGE COMMISSION v. MARK S. JAKOB, Civil Action No. EDCV-00-687 VAP (Mcx) (C.D. Cal.)
The Securities and Exchange Commission ("Commission") announced that on August 31, 2000, it filed a complaint against Mark S. Jakob ("Jakob") of El Segundo, California, for perpetrating an Internet hoax six days earlier. As a result of Jakob's scheme, in just 16 minutes, a Southern California high-tech company temporarily lost $2.2 billion in market value and investors suffered millions of dollars of trading losses. The Commission's complaint and documents filed in support of emergency relief allege:
- Jakob, age 23, until recently was an employee of Internet Wire, Inc., a press release distribution company, and a student at El Camino Community College.
- 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. By August 24, 2000, however, Emulex stock had risen to over $113 per share, resulting in Jakob's having unrealized losses of over $97,000.
- On the evening of August 24, 2000, Jakob, using an alias and purporting to act on Emulex's behalf, used a personal computer at El Camino Community College to send an e-mail instructing Internet Wire to issue an attached press release for Emulex.
- As instructed, on August 25, 2000, at 9:30 am EDT, Internet Wire issued what purported to be an Emulex press release. The release stated that the Commission was investigating Emulex's accounting practices, that its CEO had resigned, and that it would revise its earnings to report a loss instead of a profit. The release was a complete hoax--Emulex did not issue, or authorize the issuance of, the release and all of the statements in the release were false.
- The false press release's effect on the market was swift and dramatic. At 10:13 am EDT, a news service issued a headline containing information from the false release. In the next 16 minutes, 2.3 million Emulex shares traded, and the price plummeted almost $61, resulting in Emulex's losing $2.2 in market capitalization. At 10:29 am EDT, NASDAQ halted trading after learning from Emulex that the release was false. Emulex resumed trading later that day after the hoax was discovered, and the price rebounded to close at $105.75.
- On August 25, 2000, after the issuance of the false press release and just before the trading halt, Jakob covered his short position, realizing a profit of over $54,000. Minutes later, Jakob purchased 3,500 shares, which he sold on August 28, 2000, at a profit of over $186,000. In total, Jakob's profit from this hoax was over $241,000.
The Commission's complaint charges that Jakob's scheme violated the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The Commission is seeking a temporary restraining order, preliminary injunction and permanent injunction against future antifraud violations, disgorgement with prejudgment interest, civil penalties, and an order freezing assets, expediting discovery, and prohibiting the destruction of documents.
In a related action, Jakob was arrested by agents from the Federal Bureau of Investigation's Los Angeles field office and charged with securities and wire fraud.
The Commission acknowledges the assistance of the Office of the United States Attorney for the Central District of California, the Federal Bureau of Investigation, and NASD Regulation, Inc. in the investigation of this matter.