Once Bitten: Lessons From the Emulex Hoax

Do you smell that? It's the smell of scores of investors burned by another online hoax involving phony company news.

The latest case: A news release on the Internet this morning claimed Emulex (EMLX Quote) would restate earnings and report a loss rather than a profit. The stock, in turn, plunged 57% before it was halted on the Nasdaq Stock Market.

Emulex reopened after the hoax was detected and the stock regained most of its value, closing down 7 5/16, or 6.5%, at 105 3/4. But in the interim, many investors dumped the shares first and asked questions later. Among the many questions now being asked: How can investors protect themselves from making the same mistake twice?

Market-moving online hoaxes have happened before: In February, hackers broke into Aastrom Biosciences Web site and posted a phony notice about a merger with rival Geron. And in April 1999, a PairGain employee posted a bogus story online saying that the company had agreed to be acquired. In a market climate that sees an ever-increasing number of investors monitoring the latest news releases, it's likely to happen again.

Investment officials and cops on the beat at the top newswire outfits say there are lessons to be learned that can shield investors from the fire next time.

Live Wires

The Internet Wire, the six-year-old outfit that posted the bogus release, had this to say: "We are a delivery service of news announcements from corporations to the news media," said Jack Serpa, executive vice president of sales and strategic planning at Internet Wire. "We don't write or create the content of any of these news announcements that our clients send."

Business Wire and PRNewswire, the two best-known companies that disseminate news releases (who, in this case, didn't post the Emulex hoax), are the main line of defense against the spread of false news releases. The Big Two newswire companies offered some potential warnings signs for scanning news releases:

Beware of bad news on Friday.

Friday is typically a slow news day, and companies with bad news to share with the public will usually release it earlier in the week when it can be buried among other stories. "I'm always leery of Friday distribution of information," said David Savio, a spokesman at Business Wire. "There's less people to absorb it, and it's harder to hide."

Check contact information.

Many news releases offer several contact names, both within the company and its PR agency, said Kate Casey Foley, associate media relations specialist at PR firm Levick Strategic Communications. "A good release has several contacts," she said. In addition, it is important to check the email address provided in the contact name. An America Online or Hotmail address should raise suspicion.

Corroborate the information with other news sources and the company Web site.

"A lot of companies will post material information on their Web site as well," said Renu Aldrich, a spokeswoman at PRNewswire. "So if it's not there, that should be a red flag."

Once the news hits either Business Wire or PRNewswire, it should get the attention of investors. "It makes the first cut, that it's something I should pay attention to," said Ed Orgon, chief operating officer at Torrezano Group, a public relations firm. "Not act on it, but pay attention to it. Then you wait for legitimate news organizations to pick it up."

Check the title with the contents.

In the case of the phony Emulex release, the headline announced a Securities and Exchange Commission investigation into accounting practices. However, the contents of the release did not mention it further.

Of course, there is one foolproof way to avoid getting hoodwinked. "If there's any doubt, call the company," Aldrich said.

Last One Out's a Rotten Egg

Another key lesson from the Emulex hoax: If you're a small investor who has a full-time job that doesn't involve watching CNBC all day, you are never going to be the first one out of the door.

By the time you get around to unloading a stock following a negative announcement, plenty of other investors have already sold. You're probably going to be at the back of the pack. And, investment professionals say, you could wind up selling at the bottom, which is the last thing you want to happen.

"Usually by the time you've heard the bad news, it's too late anyway," says Bryan Olson, director of Charles Schwab's Center for Investment Research.

Instead, you should take a moment to do your own investigation of the news. You want to find out what the big institutional investors, the people with greater resources and greater company access, are saying in the press. What are their thoughts and concerns? Are they staying or going?

When you first buy a stock, you should have already decided what is going to cause you to sell. Are you going to sell on the first sign of pessimistic news? Do you plan on owning the company for five months or five years?

Owning an Array of Stocks

Lastly, the Emulex incident also illustrates the importance of building a diversified portfolio that you'll have for a long time.

"If you have a well-diversified, long-term strategy in place, you won't be sitting on the edge of your seat at every announcement," says Schwab's Olson.