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HART v. INTERNET WIRE

June 14, 2001

RONALD HART, ON BEHALF OF HIMSELF AND ALL OTHERS SIMILARLY SITUATED, PLAINTIFF,
v.
INTERNET WIRE, INC. AND BLOOMBERG, L.P., DEFENDANTS.



The opinion of the court was delivered by: Milton Pollack, Senior U.S. District Judge

OPINION AND ORDER

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.

DISCUSSION

Mark Jakob's Hoax *fn1

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, Internet Wire.

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 ...


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