Nothing like good old-fashioned Internet fraud to spice up a lazy summer trading session. Emulex (Nasdaq: EMLX) lost $2.4 billion in market capitalization Friday on a bogus press release that had fraud written all over it. Get used to it. Internet fraud is here to stay, but there are a few steps you can take to avoid getting bamboozled.
Here's a brief recap of the Emulex debacle. Emulex, a maker of fiber-channel adapters and one of the best performing tech stocks in the last year, was creamed by a fake press release that moved over Internet Wire, which disseminates press releases. The fake release said Emulex CEO Paul Folino resigned and earnings will be restated. About an hour later, Emulex issued a real press release calling the previous release a fake. By the end of the day, Emulex regained most of its early losses. Regulators and law enforcement authorities are investigating.
The lesson to be learned here is simple: You have to do your own homework on the Net. If you've followed this Emulex story you've heard armchair quarterbacks highlighting what went wrong, a scoop-happy financial press doing a bit of soul searching and commentators trying to pin the blame on Internet's information overload.
The real question: How do you avoid these Internet scams in the first place?
It really comes down to two words -- common sense. Here are a few steps employed by most journalists nearly every day (except for Friday apparently). You won't hear much about these rules because the gatekeepers must think that it's a trade secret. Bottom line: With information (some of it bogus) flowing freely on the Net, you can't rely on gatekeepers to set you straight. Everyone is a reporter.
Here's how to avoid being Emulex-ed.
1. Try a little common sense. The Internet Wire press release had a lot of fishy items in it. For starters, the headline said the Emulex CEO quit, but didn't mention it in the release. The alleged restating of earnings was vague. And the press release also noted that Emulex would release more information after the trading session. Companies never keep investors guessing for the whole day. The press release had too many holes.
2. Stick to the major press release wires. Never heard of Internet Wire before Friday? You're not alone. There are two major press release wires -- Business Wire and PR Newswire. Nearly every company uses one of the two services. We suggest scrutinizing everything else you see. A tip: Look at a company's previous releases. If previous press releases ran on Business Wire, chances are pretty good the latest ones will also be carried on Business Wire.
3. Confirm, confirm, confirm. Companies get this investor relations thing. If there's a major release, most companies will also post it on their Web site. If no mention of a new CEO or earnings problems appeared on the Emulex site, you should be suspicious.
4. Think before you trade. Avoid rapid-fire decisions. Many folks probably bailed on Emulex with only a headline, which was actually a fake. If you're an average trader, you often can't time the market anyway. By the end of Friday's trading session, Emulex looked like it had just a boring trading session. If you waited for the facts, you wouldn't have panicked. Remember that the market usually overreacts. TDAIN
• Emulex regains hoax-driven losses
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