Emulex Recovers Most of Lost Ground After Hoax-Driven Collapse

(Updated from 2:25 p.m. EDT)

Emulex (EMLX) plunged 57% Friday on what the company says was a hoax press release, but the stock mostly recovered its losses soon after reopening following Emulex efforts to set the record straight.

The stock reopened around 1:30 p.m., some three hours after the hoax started showing up in financial news reports. The hoax temporarily wiped more than $2 billion off the stock's market capitalization, leaving it at around $2 billion during the halt. But since reopening, Emulex has regained most of its lost ground. It ended down 7 5/16, or 6.5%, to 105 3/4, valuing the company at $3.8 billion.

The release, which appeared on the Internet around the time of the market's opening bell, claimed Emulex would restate fourth-quarter earnings to swing to a loss from a profit, and that regulators were probing accounting irregularities. The release also claimed Emulex executives were stepping down. The company, based in California, vehemently disavowed the release.

"It's totally bogus," said an Emulex spokeswoman. "None of the information is true. It's business as usual." The spokeswoman added that the company was in the process composing a press release to that effect, and trying to track the source of the hoax through Nasdaq and the Securities and Exchange Commission.

Counterthrust

Emulex said in a press release Friday afternoon that business remains at "record levels" and that a just-completed audit of fiscal 2000 results showed no need for any restatement.

Emulex also said it "contacted the appropriate authorities, who are investigating this matter." The company continued that it plans "to launch our own investigation into this fraudulent release."

Bad Trade? Emulex plunges on hoax press release, then bounces back

Source: BigCharts

Distribution

The false press release first appeared on Internet Wire, an Internet-based distributor of corporate news, at around 9:30 a.m. EDT. It was then distributed to a number of other news services, notably Bloomberg. The press release wasn't distributed by the leading business press release disseminators, BusinessWire and PRNewsWire, and didn't appear on one of the leading Net news aggregators, Yahoo! Finance.

Up and Down Emulex's eventful year

Source: BigCharts

But around quarter after 10 in the East, price alerts detailing the stock's drop -- though not indicating any news -- started popping up. Then, starting shortly after 10:30, leading news organizations such as Dow Jones Newswires, CBS MarketWatch and TheStreet.com ran headlines on the release, detailing the supposed restatement, probe and executive departure news.

Nasdaq halted trading in the stock at 10:35. It wasn't until around 11 a.m. that Emulex's disavowal of the release started making the rounds of the financial wires, Web sites and television channels.

Hardly Cheap

Emulex was certainly vulnerable to such a shock. The company makes fibre-channel peripherals that quicken the performance of network storage systems, and its position in the extremely hot storage and networking markets helped its stock put together a Qualcommian (QCOM) 1999, gaining 1,025%. But Emulex fell hard in April, plunging to 41 from 218 as investors grew leery of its towering valuation. Investors feared that the fiber-channel networking standard, on which the company's products are built, was coming under fire from competing platforms like Internet protocol and gigabit ethernet.

But the stock had regained traction, running up as high as 113 before Friday's hoax. And even at its depressed pre-reopening levels Friday, sitting back around its lows of 2000, Emulex was hardly cheap. Its P/E was just above 130.

Shares of network-card maker QLogic (QLGC), which was spun off from Emulex in 1992 and is now independent, also took a dive Friday morning. Shares of QLogic fell as much as 35 11/16, or 32%, to 74. The stock closed down 5 13/16, or 5.3%, to 103 7/8.

Incarceration

"Someone's going to jail," said Todd Clark, head of listed trading at WR Hambrecht. "I'm glad we don't own it.

"How do they resolve this?" the trader continued. "Do you break all the trades? What do you do?"

"It's scary that a rumor that effective can get floated," said Tony Cecin, manager of Nasdaq trading at U.S. Bancorp Piper Jaffray. "This isn't going to go away fast. The market cap swing is in the billions."

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