An arrest has been made in the Emulex press release hoax that shaved a couple billion dollars off the company's market cap for a few hours last Friday. A press conference will be held today at 2:00 p.m. Eastern Standard Time.
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Last Friday, someone sent out a hoax press release -- that was subsequently disseminated to news service Internet Wire -- claiming that networking equipment company Emulex (Nasdaq: EMLX) was restating earnings, that the Securities and Exchange Commission (SEC) was investigating it, and that the CEO was resigning.
By the time Nasdaq halted trading an hour later, the company's stock had been shaved more than 60%. Some $2.5 billion of market value went "poof!" Once everything had been sorted out, Emulex stock rebounded almost all of the way back, but the 5 million shares that traded hands during the early hours would not be reversed. People who traded on the headlines got crushed.
One person was arrested in the Los Angeles area at 7:00 a.m. Pacific Standard Time this morning. The FBI will hold a press conference at 2:00 p.m. Eastern Standard Time today.
Some people have called for the trades to be reversed, citing the fact that they were made based upon the fraudulent release. Unfortunately, the Nasdaq has no power to do such a thing. The news organizations that reported the release have received significant black eyes, Internet Wire in particular. This loss of credibility may be substantially greater than any penalty could ever be.
My original critique of the whole situation stands: If your research into a company rests upon any single source, or even worse, the headlines of a single source, you're not investing, you're gambling. But even gamblers have to have some faith that they are being dealt a fair game. Trust-encroaching events like this hurt the entire legitimacy of the capital markets, and thus all of us.
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Related Links:
Emulex Fraud Hurts All, Fool Plate Special, 8/28/00
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