MEDIA: Media Watch - Don't believe the hype: Emulex, media learn a lesson

Like no other event in recent Wall Street history, the fraudulent press release involving Emulex proves that people formulate their opinions of companies based upon what they read and hear through the news media.

Like no other event in recent Wall Street history, the fraudulent press release involving Emulex proves that people formulate their opinions of companies based upon what they read and hear through the news media.

Like no other event in recent Wall Street history, the fraudulent press release involving Emulex proves that people formulate their opinions of companies based upon what they read and hear through the news media.

On August 25 Internet Wire, a distributor of corporate press releases, unknowingly sent out a fake release stating that Emulex was reducing its earnings estimates, its CEO had quit and the Securities & Exchange Commission was investigating the company's accounting practices. Bloomberg, Dow Jones, CNBC, CBS MarketWatch and Internet message boards subsequently reported the press release's contents as fact. In the span of about an hour, Emulex's stock was reported to have plunged as much as 67%, erasing nearly dollars 2.5 billion dollars in market value before the story was confirmed to be a hoax.

CARMA International investigated the coverage of the hoax and found that commentary most often centered on who was to blame. Both Internet Wire and the news organizations that carried the release earned their share of criticism for not verifying the content of the release with Emulex.

A market analyst commented, 'It's a shame that a rogue news story can do that kind of damage' (Los Angeles Times, August 26).

Internet Wire's CEO Michael Terpin said his company was duped by someone who used a 'secret code' to trick night-shift employees into thinking the release had already been verified. Meanwhile, several media outlets ran comments by Bloomberg's editor-in-chief that he was dissatisfied with the way his staff had handled the situation. 'What disturbs me is that the standards we have weren't adhered to' (The Washington Post, August 29).

A number of media outlets noted that the hoax highlighted the dangers of disseminating and receiving financial information immediately with today's technologies. The Atlanta Journal-Constitution (August 26) wrote, 'The hoax underscored the vulnerability of investors and corporations in a world where information zooms through the market in rapid-fire fashion.'

Discussion also addressed what investors can do to protect themselves from fraud. The most frequently conveyed notion was that investors need to question the sources of their news. The Philadelphia Inquirer (August 29) advised, 'Consider where the 'news' comes from ... consider whether it has been verified and evaluated by any objective party, such as a news organization.'

Coverage also addressed the consequences of not viewing news with a critical eye: all Emulex transactions that took place before the press release was revealed to be a fraud were reported to be final and non-refundable.

Several reports noted that Emulex was not alone in having been the victim of a hoax. Similar but less-damaging incidents involving Lucent and PairGain Technologies were recounted.

Although Emulex's stock recovered nearly all of its losses that same day, the fact that this kind of volatility exists is very disconcerting for corporations, news services and investors alike. On the bright side, law enforcement authorities have already announced the arrest of a suspect in connection with the case.



- Evaluation and analysis by CARMA International. Media Watch can be found at www.carma.com.



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