The opinion of the court was delivered by: Milton Pollack, Senior U.S. District Judge
Each defendant herein has moved this Court for a dismissal of the
amended complaint, pursuant to Rule 12(b)(6) of the Federal Rules of
Civil Procedure. This is a class action on behalf of the holders of stock
and options of Emulex, a manufacturer of computer communications
devices, and is asserted in connection with transactions which occurred
on August 25, 2000 on the NASDAQ.
The defendant, Internet Wire, is a news wire service which distributes
corporate news, including press releases, to the public. The defendant,
Bloomberg, is a world wide news organization and publisher by a variety
of media of financial and business news, from such services as the
co-defendant, Internet Wire.
The suit is based on a mistakenly reported news release issued by
Internet Wire and picked up and re-issued by Bloomberg, which turned out
to have been false, the work of a fraudster, one Mark Simeon Jakob, a
former employee of Internet Wire, who was indicted criminally and
convicted on a guilty plea.
Jakob was a short seller of Emulex stock in which he had a substantial
paper loss, and utilizing knowledge of the internal mechanics of how press
releases are submitted by Internet Wire, concocted a false release that
was distributed by Internet Wire reporting serious problems at Emulex:
that its earnings were being restated; that the company's Chief Executive
Officer was resigning; that the Securities Exchange Commission ("SEC")
had launched an investigation. The release was automatically re-broadcast
by members of the general press, including by the defendant, Bloomberg.
The fraudulent release caused the company s stock to plummet on the
NASDAQ by $60 a share in just 16 minutes, (enabling Jakob to cover his
short position at a profit) resulting in an estimated $2.2 billion lost
market capitalization and $1.10 million in loss to investors in Emulex
securities in the interim before trading was stopped.
Emulex Corp. ("Emulex") is a manufacturer of computer communications
devices, and is based in California. Securities issued by Emulex are
publically traded on the NASDAQ. On or about August 17 and 18, 2000, Mark
Simeon Jakob, a former Internet Wire employee, bought "short" positions
on 3,000 shares of Emulex stock, anticipating a drop in the shares'
price. When the price rose instead, Jakob, faced with losses of as much as
$97,000, hatched a scheme to drive the price of Emulex stock down and
recover his losses by disseminating a false report about supposed
problems at the company.
As a former employee of Internet Wire, Jakob knew the internal
mechanics of how press releases are submitted to, and published by,
On August 24, 2000, armed with this knowledge, Jakob initiated his plot
to drive down the price of Emulex stock. Posing as a public relations
executive named "Ross Porter" acting on behalf of Emulex, Jakob sent an
e-mail to Internet Wire's Content Production Department, requesting that
an attached press release be distributed by Internet Wire the next
morning at 9:30 a.m. Eastern Time. Internet Wire's Content Production
staff treated both the e-mail and attached Press Release as genuine.
The Press Release reported serious problems at Emulex: earnings were
being restated, the company's Chief Executive Officer was resigning, and
the SEC had launched an investigation. At approximately 9:30 a.m. Eastern
Time, it was automatically re-broadcast by members of the general press,
including Bloomberg. As republished by Bloomberg, the Press Release
contained certain typographical errors. At approximately 10:13 a.m.
Eastern Time, Bloomberg published a headline repeating the Press
Release's statement that Emulex's CEO was resigning and that the SEC was
investigating the company. One minute later, Bloomberg issued a second
headline based on the press release, this one repeating the Press
Release's statement that Emulex was restating its fourth quarter
results. In publishing the Press Release, Bloomberg performed
no independent investigation of its authenticity.
As the contents of the Press Release circulated around the financial
community, Emulex stock was the subject of intense selling, and the price
dropped by up to $60 per share. At 10:29 a.m. Eastern Time — less
than an hour after the Press Release was published, and 15 minutes after
the Bloomberg headlines ran, NASDAQ suspended trading in Emulex stock.
Within a few minutes, Emulex exposed the Press Release as bogus, and
issued genuine press releases dispelling the allegations made in the
false report. Upon becoming aware of the hoax, at 10:57 a.m. Eastern
Time, Bloomberg reported on it. After trading resumed, the stock's price
rebounded to close at $105.75 per share.
Within days after the hoax was exposed, Matthew Winkler, the editor in
chief of Bloomberg News, was quoted in The Wall Street Journal expressing
regret that the news was carried over the Bloomberg system, stating that
"Bloomberg had been right to report on the news release, especially since
Emulex stock was already dropping" but that he was "disappointed in his
organization's handling of the episode."
In late August 2000, FBI agents arrested Jakob and charged him with
securities fraud and wire fraud. On December 28, 2000, Jakob pleaded
guilty before Judge Tevrizian of the United States District Court for the
Central District of ...