U.S.

The $2.5 Billion Scam

By CBSNews.com staff CBSNews.com staff

August 26, 2000 / 8:10 PM EDT / CBS

It was a $2.5 billion scam that took only minutes.

A network equipment maker's stock plummeted by more than 60 percent after financial news agencies picked up a bogus Internet news release on the company's earnings and personnel changes. Shares of Emulex later recovered when the company denied the reports.

The shares plunged Friday to $43 from their previous close of $113.063 after the false news circulated that the California-based company was restating its earnings, its CEO had quit and it was under investigation by the Securities and Exchange Commission.

Again: none of it was true.

"You'd like to think that all you need to do is continue to focus on your business, but unfortunately from time to time something like this happens," said Paul Folino, president and CEO of Emulex.

The information originated on Internet Wire, a 6-year-old online distributor of press releases. CEO Mike Terpin said the hoax was perpetrated by someone claiming to be with a public relations agency representing Emulex.

"Internet Wire deeply regrets that this incident has occurred and for any problems or confusion it has caused for Emulex, the company's investors and the market place in general," Terpin said in a statement.

"It was like the old game where you pass the rumor around and you see how it comes back to you," said Kirk Roller, an Emulex vice-president.

Bloomberg was the first financial news service to headline it. CNBC, Dow Jones News Service and CBS Marketwatch followed.

Investors then rushed to shed their shares. Emulex's stock plunged from $103 to $45 — in just 15 minutes, more than $2 billion from the company's stock market value had been lost while trading was halted. Emulex executives just waking up in California scrambled to publicize the truth.

SEC officials and federal investigators are trying to determine who pulled the hoax.

Part of the problem, said David Callaway, executive editor of CBS Marketwatch, is that in the rush to be first with the news, no one verifies it.

Matt Winkler, the editor-in-chief at Bloomberg, said his agency should have been more careful in how it handled the story.

"The issue is us: how rigorous are we as reporters and editors," Winkler said.

Rick Stine, the managing editor of Dow Jones News Services, said he wanted to know "if some sort of safeguard was dropped, if it was human error" on the part of Internet Wire.

"Until we hear something from them that makes us feel more comfortable, we're going to call every company to verify any press release we receive from them," Stine said.

The incident also raised new concerns about the accuracy of information distributed via the Internet. Other companies have also seen their stocks manipulated by false information disseminated online.

Lucent Technologies' shares fell 4 percent in lat March after a fake news release was posted on an Internet bulletin board saying that Lucent would report lower earnings. In April of last year PairGain Technologies's stock jumped more than 30 percent after a former employee duped investors with a fake Internet news story saying the company was about be taken over.

The lesson in all of this, investors say, is this: invest with research, not with headlines.