August 2000 Newsletter
Issue Eight, Volume One

SOMETHING ABOUT EMULEX

By Mike Gasior

I have been an active observer of the investment markets for the better part of the past 20 years. During that time I have observed the greatest bull market in stocks that the world has ever seen. I saw the market crash 20.7 percent in one day. Then there was that day back in 1981 where the U.S. Treasury issued a 20-year bond with a 15.75% coupon and no call feature as well as 20 percent yielding money market accounts. I've lived through the insider trading debacles of the 80's and the hedge fund mania of the 90's. The names I've read about and followed have been famous, and infamous; Milken, Boesky, Levine, Greenspan, Volker, Soros, Lynch, Buffett, Merriweather et al.

I hate to pull that "old farty" side of me back out of the closet to share with you once more, but I honestly thought I had "seen it all"; that there was probably nothing that could happen in the markets that would surprise a guy like myself. The only thing that I can tell you for sure is that the longer you are around Wall Street and the markets, they will ultimately show you that you haven't seen anything yet. The stories that play out in this place are better than anything Hollywood could ever dream up. Once again, this was proven to me by what happened last week to a stock called Emulex.

THE PLAYERS

Until a week ago, I admit that I had never heard of a company called Emulex. I have since learned that they are world's largest supplier of fibre channel adapters......whatever the heck those are. I also learned that their stock was somewhere in the neighborhood of $113.00 at the close of business on August 24, 2000. Their stock trades on the NASDAQ with the ticker symbol EMLX and they had a market capitalization of somewhere just north of $3 billion. Lastly they boast clients ranging from Hewlett-Packard, IBM, NEC, Unisys, Compaq, EMC and more. As I have read more about them in recent days, they actually sound like a fine company.

Another business I had never heard of before last week was Internet Wire. They are some sort of public relations firm that I guess will post press releases from companies on their Internet site. A gentleman by the name of Michael Terpin is their CEO and during the past week he has been spending a lot more time than usual talking to the press himself. Sadly, I don't think he's all that happy about it, nor has it been all that good for his company either.

There were also some very astute investors who did a bit of options trading for themselves last week. Considering that Emulex was around $113 it was quite the gamble for someone to be laying out their hard-earned dough betting that Emulex was going to collapse by buying a boat-load of the September 80 puts. On Friday, August 16th only one such contract existed. On August 24th there were 384. The next day 785 traded. Hmmmm. Interesting.

The NASDAQ market is the home of somewhere in the neighborhood of 6200 different companies stocks and they bear the responsibility for making sure that the trading is fair and legitimate. Perhaps the downside of their system, however, is that there is no single human being that is charged with overseeing each of those companies; one that could halt trading and take action if something seemed amiss. Perhaps the New York Stock Exchange's trading system is not the way of the future, but an NYSE Specialist not only controls all trading in their respective stock, but also usually know their company's intimately. More on this later.

We all are familiar with the SEC and the FBI. Their role in our lives is clear and easy to understand; they catch the bad guys. What was news to me was that the SEC has this new team called the "Cyber Squad". Basically it's 240 attorneys who scour the Internet EVERY DAY looking for signs of fraud. Imagine that.

And finally, there is the "bad guy" who makes every great story possible. I think we'll let him/her flesh themselves out in the course of the story.

AUGUST 25th, 2000

This was quite the day, and I thought it makes for the best reading if I just give you the chronology of things. The story gets better by the minute.

9:30 a.m. Eastern Time

Internet Wire releases a press release from Emulex claiming that they will be restating their fourth quarters results from a profit to a loss; that the company was under investigation by the SEC; and that their CEO was resigning.

Michael Terpin, the CEO of Internet Newswire, stated that someone contacted Newswire claiming to be from Emulex and knowing about Newswire's need for a password, was able to convince some night employees that the release was legitimate. He says that since this was all carried out by e-mail some "electronic footprints" should make catching the culprits an easy task. He also says that they were the victims of a "sophisticated fraud".

10:13 a.m. Eastern Time

Bloomberg picks up the story and runs it with a headline that the CEO was stepping down and that the SEC had them under investigation.

10:14 a.m. Eastern Time

Dow Jones News now also picks up the report and runs with it, as well as CNBC and Marketwatch.com who make mention of the press release.

10:33 a.m. Eastern Time

The NASDAQ finally halts trading in Emulex with the stock price down 62% and about $2 billion in market capitalization gone. The stock has dropped from it's previous close of around $113 to the low $40's. This is about the time when news begins to spread that the whole thing is a hoax.

Now think about this a little. There were people who already owned the stock and thought the company was in trouble and sold out at a massive loss. All on completely bogus information. It would have been difficult to short sell the stock during this turmoil since an uptick would be necessary and there was likely none of those.

Then there are those people, who once they knew the whole thing was a hoax, put in orders to buy the stock at the new low price after, or just before trading was halted. The order imbalance was so enormous that if your market order was still sitting there when trading opened you bought some Emulex at the first trading price of $125. Yikes. The daily price range for the day ends up being $43 for a low, $130 for a high and the closing price was $105.75.

1:30 p.m. Eastern Time

Emulex shares are finally reopened for trading and the stock finishes the day down $7.32, or about 6.5 percent.

THE MORALS OF THE STORY

Obviously, in the competitive world of the news business, you can't really blame the news agencies for falling all over themselves trying to get this information out. You don't want to be viewed by your bosses as the last ones on board......except this time of course. But common sense would dictate that a story, which is apparently quite the whopper, deserves a little bit closer look. Come on now. They are going from a profit to a loss in a restatement of their earnings, the CEO is resigning and the SEC has them under investigation? Please. Any one of those stories is pretty amazing. Somebody should have checked this out a little deeper before running with it. At least that seems as though it would be prudent.

The investors who bought or sold the stock during this rampage deserve whatever they got. Big profits or big losses. Remember that if you live by the sword, you should be prepared to die by the sword. Enough said.

The NASDAQ was missing in action here. Let me summarize by quoting a Mr. Mike Rochendach who is Emulex's CFO. "We didn't get calls from NASDAQ, and I don't think it's appropriate for me to criticize how NASDAQ handles trading, starting or stopping a stock. But I can tell you how we handle investor relations, and anyone who knows how we do these things knows that we don't announce it at 6:30 a.m. Anything that we announce as a company, we do it when the market can digest it, and we would always have somebody available to comment." Officials from Emulex say they were deluged with phone calls from reporters, but not from the market they trade on. Hmmmmm.

The person/persons responsible for the fake e- mail and press release are going to be wishing they had a lot more of those options under their belt if they are the ones who bought the options. Not that they'll see a dime of that money. I'm certain their broker went under investigation before the trade even settled. I never cease to marvel at the stupidity of criminals sometimes. This guy has no chance. With the ability to trace activity on the Internet it shouldn't take law enforcement much time at all to bust this one open.

The SEC, the FBI, NASDAQ and the CBOE are all in the middle of full-swing investigations now. You can be certain they are out there in force with flashlights and funnels looking to crack this one. And they will.

So what's the moral? That it's a brave new digital world. That the markets can be very volatile. That money can get people to do all sorts of stupid stuff. That the news business needs to keep their common sense, their compasses out and at the ready to keep from looking like morons. That markets need to be closer to the companies they list. That law enforcement usually gets their man......or woman as the case may be. And that Wall Street never ceases to amaze me. Yikes.

BREAKING NEWS

During the past 8 hours since I began writing this newsletter the authorities have already made an arrest in the case. The person's name is Mark Jakob and he is a 23 year old community college student at El Camino Community College. More interesting still is that he was an employee of Internet Wire up until August 18th.

I just so him doing his "perp walk" after his arrest on the CBS Evening News. The woman covering the story for CBS harped on the most salacious news; that Mr. Jakob made in the neighborhood of $250,000 in profits. Most interesting to me was the strategy the CBS reporter said that Mr. Jakob employed to make all that money. She said, and I quote, that "Mr. Jakob made his money by buying the stock and selling it short". My dear God. I nearly broke out into tears at that one. I wonder sometimes if the media could find their own ass with both hands. If you don't know what I'm so bothered about, then you need a seminar with me as much as the woman from CBS does.

So there you have it. I hope you enjoyed the story as an observer and not as a participant since I don't think any of the players in this story enjoyed being involved in it at all.

CNBC IS RE-RUNNING "THE GREAT GAME" THIS WEEKEND

If you missed the first broadcast of this terrific program, CNBC will re-run "The Great Game" at 1:00, 3:00, 8:00 and 10:00 p.m. Eastern Time on Monday, September 4th.

You can link directly to CNBC's site by clicking the below link:

http://www.cnbc.com

BERMUDA CONFERENCE IN NOVEMBER

The response to these Bermuda Courses have been amazing, and all the details are posted on the Website at http://www.afs-seminars.com The short story is that we will be hosting a week-long series of programs in Bermuda beginning November 27th at the Sonesta Beach Resort in Southampton. This format will allow participants to construct a program of topics relevant to them, without having to sit through the other subjects. The topics to be covered and the dates are as follows:

Monday, November 27, 2000 - Equities Markets & Issues

Tuesday, November 28, 2000 - Debt Markets & Issues

Wednesday, November 29, 2000 - Mortgage & Asset Backed Securities

Thursday, November 30, 2000 - Derivatives

Friday, December 1, 2000 - Private Placements & Restricted Securities

You may register for as many, or as few days as you wish and the program cost includes the seminar, training materials, continental breakfast, luncheon and snacks each day. Printed material is available and will be mailed to you upon your request. Please contact my office at (860) 347-6568.

Copyright 2000, Michael Gasior. All Rights Reserved.

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