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Stock fraud thrives on Net

THE BALTIMORE SUN

WASHINGTON - In 16 minutes one morning last month, a California-based company called Emulex lost more than $2.2 billion in value after a single false news release was distributed over the Internet by a college student.

The Aug. 25 release stated that Emulex Corp. - a technology company that makes data-storage equipment - was under investigation by the Securities and Exchange Commission, that its chief executive officer was resigning and that the company's latest earnings report would show a loss instead of a profit.

A news service soon sent out a report based on the release at 10:13 a.m. And that was enough to cause the stock to plummet by 60 percent of its value before the Nasdaq market halted trading of the stock at 10:29 a.m. after learning that the report was a hoax.

By then, the stock's value had dropped $70, from $113 a share to $43. Though the stock recovered most of its value after trading resumed, some investors lost thousands of dollars.

The Emulex case was only the latest - and by far the most striking - example illustrating how fraud artists are increasingly making easy, illicit profits by duping investors in Internet stock schemes. It is also a stark example of how swiftly stock fraud can spread and possibly cripple a company.

"This is happening all too often," said David Levine, senior adviser to the director of enforcement at the SEC, which regulates stock trading. He said stopping such fraud has become "one of our top priorities."

A few years ago, authorities say, stock fraud was perpetrated mostly by organized groups of criminals working telephones from "boiler rooms," trying to pump up securities or devalue them.

The Internet has changed all that. Today, stock manipulators are often individuals who orchestrate schemes from home computers. Even people without investing experience have set up Web pages, sent out e-mails or posted messages promoting or disparaging stocks to try to lure investors into bad deals, authorities say.

In the Emulex case, the suspect, Mark Simeon Jakob, 23, a community college student, is accused of varrying out the fraud from a college computer.

He is accused of sending the release via e-mail to his former employer, Internet Wire, a firm that distributes news releases. It soon posted the information on its Web site.

Jakob made $241,000 on the hoax, said federal authorities, who charged him with securities and wire fraud. He has been released on bail and could not be reached for comment.

Last week, the SEC announced that a school bus mechanic had posted misleading data on his Web site to inflate the market for some stocks, helping him reap $70,309.

In a settlement, the SEC said, the man agreed to give back $22,312 of his profits - apparently all that he could afford to return. SEC officials would not comment on whether the case has been referred for criminal prosecution.

Authorities say this new breed of swindlers preys upon the vast community of day traders and amateur investors who now spend hours on the Web in search of stock tips that might help them make a fast fortune. Many such investors don't take the time to research and weigh advice offered on the Web.

Stock fraud artists usually practice a scheme known as "pump and dump," in which they boost a stock's value with false information and then sell shares at the inflated price.

In the Emulex case, Jakob is accused of doing the opposite. Authorities said he placed an order for a trade that would earn him a profit if Emulex stock collapsed, then spread the false news release that ensured that it would.

As the stock fell that day, federal authorities said, Jakob executed his deal, making nearly $55,000. Later, he bought 3,500 shares when the stock hit bottom, which he sold three days later, making an additional $186,000.

Three years ago, the SEC set up an e-mail complaint center for investors, and most of the complaints - between 200 and 300 each day - deal with Internet-related schemes. In 1997, the SEC received only three or four e-mail complaints each day.

The number of Internet-related fraud cases has grown apace. In 1997, the SEC filed fewer than 10 Internet-related fraud cases; in 1998, officials said, they filed more than 40. Last year, they filed 55. Through August this year, they had filed 64.

The SEC typically files civil suits against suspected fraud artists to try to recover investor losses, and it refers the most serious cases to the Justice Department for possible criminal prosecution.

Federal officials could not specify the number of criminal prosecutions resulting from Internet-related fraud cases. Though the SEC said it refers a "high percentage" to the Justice Department, prosecutors said they doubted that many of them resulted in criminal cases. They note that criminal cases are harder to prove than civil actions and often produce the same results anyway: fines and restitution.

Besides stock fraud, federal officials are also concerned that fraud artists might be trying to dupe commodities and currency traders.

In one recent case, federal regulators accused a California man of using a Web site to promote a system that guaranteed investors profits by trading the Japanese yen.

None of his customers made money, federal authorities said.

The Commodities Futures Trading Commission has filed 15 Internet-related fraud cases since May and has posted a warning on its Web site urging investors to be "skeptical" of "trading systems and advisory services that claim their products and services will earn high profits with minimal risks."

In response to the schemes, federal regulators say they have stepped up their efforts to fight Internet stock fraud.

A unit the SEC created in 1998 to coordinate its drive against on-line crime has grown from two staffers to 17. The agency also has created a "cyber force" of 240 lawyers, accountants and investigators who surf the Web a few hours a week, looking for fraud.

Officials say that considering the rising number of online investors, the increase in Internet stock fraud is hardly surprising.

By the end of the year, the SEC says there will be 5.5 million online brokerage accounts in the United States. By 2003, the agency says, that figure is expected to reach 20 million.

"There is a huge need for education," said Susan Wyderko, director of the SEC's office of investor education and assistance. "We're focusing on trying to educate investors on how to avoid fraud."

Federal regulators and prosecutors say that Internet stock fraud typically backfires because nearly every transaction leaves a trail - often leading to quick civil injunctions and, sometimes, arrests.

Last year, officials said, a former employee of a California telecommunications company posted a bogus news report on a Web site that drove up the company's stock.

He was arrested nine days after posting the report.

In March, a Houston day-trader was charged with posting a fraudulent news release about Lucent Technologies that dropped its stock value by $7.1 billion dollars in one day. It took authorities a week to arrest him.

Federal agents also made a quick arrest in the Emulex case, but there undoubtedly will be other attempts to profit from stock manipulation via the Internet.

"The Internet is encouraging people who normally wouldn't become fraudsters to become fraudsters," said Jim Angel, an associate professor of finance at Georgetown University.

"With this new technology, a lot of people think they can get away with it."

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