Take Stock in Sense, Not Rumor

Memo to stock market investors: If it sounds too bad to be true, maybe it isn’t. That was certainly the case last week when a phony press release sent a well-regarded Costa Mesa firm’s stock tumbling early Friday until the truth was revealed and the stock recovered most of its value.

Many investors panicked, selling their shares at huge losses before they learned, too late, that the allegations of incredible turmoil at the high-tech company were false. Shares of Emulex Corp., a developer of high-speed data transfer products, fell by 62% in a matter of minutes. More seasoned investors rode out the day’s events and saw the stock rebound sharply after trading was halted for several hours.

A fledgling news organization and then traditional, established business news wires went with the stock hoax without double-checking basic facts. A bogus “news release” on fake Emulex letterhead stated that the company was suddenly under investigation by the Securities and Exchange Commission; that its fourth-quarter profits would be revised to a loss and its chief executive had resigned.

This should have smelled bad from the start. Emulex had more than doubled its revenues over the past fiscal year and increased net income more than eightfold. Unlike many high-tech firms, it boasted veteran employees and low turnover. Respected stock databases contained no sharp concerns about Emulex.

But what Times reporter Thomas S. Mulligan called “a somewhat crude attempt to mimic the style of previous official statements by Emulex” quickly gained authority when the fledgling service Internet Wire distributed the bogus press release Friday. It was scooped up, apparently without independent fact-checking, by such respected news services as Bloomberg and Dow Jones. The Nasdaq moved quickly to stop trading of Emulex shares, but the damage was done.

In other words, low-tech, common-sense opportunities to quash this hoax or severely limit its spread were missed. And investors accepted the tidal wave of bad news as gospel. A pinch of old-economy caution would have saved the news wires severe embarrassment and the jumpy investors a lot of money.