April Fools Market, Revisiting Greatest Stock Market Hoaxes (ALU, AAPL, ELX, GE, GIS, AMR, EK, MSFT, MAR, T)

It is April Fools’ Day but we are not going to propagate any hoaxes.  What we do want to revisit is some of the great frauds which have originated outside of public companies and managed to harm companies and their investors.  From chat rooms to fake press releases, corporations have found themselves victim of external hoaxes.  There are of course the great internal frauds that are even more sinister from Enron to WorldCom to Adelphia to Madoff.  Still, on April Fools’ Day the worst hoaxes are the ones where it is almost impossible for the investment community to immediately decipher fiction from fact.  These all act as great lessons today. 

Perhaps the biggest scams out there were the instant messenger scams taking place during the financial meltdown. Unfortunately, it was on all of the major banks and on all of the major brokerage firms.  So what others are there?  Companies to the tune of Alcatel-Lucent (NYSE: ALU), Apple Inc. (NASDAQ: AAPL), Emulex Corporation (NYSE: ELX), General Electric Co. (NYSE: GE), General Mills Inc. (NYSE: GIS), WCI Communities and more have found themselves as hoax victims.  AMR Corporation (NYSE: AMR), the parent of American Airlines, and Eastman Kodak Co. (NYSE: EK) appear to both be in the midst of a hoax (or a serious stretch) just this week.

Alcatel-Lucent (NYSE: ALU) had a big hoax going back to when Alcatel was Alcatel and when Lucent was Lucent.  Back in early 2000, a man named Fred Moldofsky was arrested and charged in Houston for posting a fake press release on the Yahoo! Finance message boards. Moldofsky’s fake press release noted that Lucent expected operating results for the second quarter of 2000 to be lower than consensus analyst estimates. What caught people was that the press release was modeled after a previous warning from Lucent.  This was back during the tech bubble and the move was when the stock was back in the $60’s but it still took out some $7.1 billion in share value.

Apple Inc. (NASDAQ: AAPL) has been the subject of many not-so-fake Steve Jobs health issues as you already know.  But one rumor was floating around about a Steve Jobs heart attack and rush to the hospital on October 3, 2008.  The news story was run on CNN’s iReport, a user-generated content site, and was then picked up at other news outlets before the company said it was a fake.  What was so sad outside of the impact on an already-ill Steve Jobs is that shares were weak going into the rumor. On October 1 shares closed at $109.12, then at $100.10 on October 2, and shares had risen on October 3 to $106.50 before the rumor surfaced.  Shares hit a low of $94.65 that day and the stock closed at $97.07.  It was close to a drop of 10% in about 10 minutes, worth close to $10 billion in market value destroyed.  Shares stayed under $100 until mid-October after earnings brought the stock from $96.80 to $110.26.  This one did not kill long-term holders in Apple, but imagine how many investors were shaken out and imagine how many investors got caught short here. 

Emulex Corporation (NYSE: ELX) was a hoax back in 2000 during the day trader and tech-boom craze that changed how news gets reported.  In mid-2000, Emulex suddenly took a massive dive south after a press release from Internet Wire hit the wires and news screens.  The release said that Emulex’s CEO was stepping down, earnings guidance was being lowered, and contained news of an SEC investigation. The problem is that the news was fake, and was nothing more than a short seller who was a former Internet Wire employee named Mark Jakob who manipulated the stock.  Nonetheless, shares fell from north of $100.00 to under $50.00 in one day, then started screaming back up when it was announced to be fake.  The SEC halted trading in Emulex and busted all sorts of long and short transactions.  This single event cost traders millions and millions and wiped out many emerging trading careers. The Emulex Hoax was punished with a prison sentence of nearly 4 years and serious fines.

Can you imagine someone with the pockets deep enough to acquire General Electric Co. (NYSE: GE)?  It is almost impossible to believe, even during the financial meltdown.  What is amazing is that someone tried to not just issue a fake GE buyout, but this person claimed to be making a tender offer for the biggest companies in America at that time.  So what about a $2 trillion tender offer?  Some guy named Ade Ogunjobi created a company called Toks with the tender offers for something like 15 of the largest companies.  He was effectively claiming that he wanted to acquire General Electric Co. (NYSE: GE), Microsoft Corporation (NASDAQ: MSFT), Marriott International Inc. (NYSE: MAR), AT&T Inc. (NYSE: T) when it was the old AT&T, and News Corp. (NASDAQ: NWS).  He even tried to sell $100,000.00 in securities to help fund the new company.  This jokester had no credentials to run any of those individually and certainly none of them in combination.  Needless to say, he was sued by the SEC and this deal could have never happened.  The lesson here is that this proved to be illegal as investors of any size are not allowed to issue public tenders and cannot make acquisition offers if they cannot afford the transaction.

General Mills Inc. (NYSE: GIS) was set to take it on the chin as recently as June, 2010.  A false press release over PRNewswire had been sent out late at night titled “Obama Orders Full Investigation of General Mills Supply Chain Following Food Recalls.”  The good news is that the company was all over it and the company managed to prevent what could have otherwise (or in the older days) been a financial catastrophe in its shares on that trading day.  Had this fraudster done this during trading hours it would have likely been worse.  The lesson: companies which do not monitor the news on themselves are setting themself up for loss and shareholder damage.

WCI Communities ultimately ended up in bankruptcy and that was after Carl Icahn tried to tender for all shares at $22 per share in 2007.  That didn’t quite work out and the company hit skid row.  Before it imploded, someone named Richard Karp (is he a Richard or a Dick?) created a phony press release that looked to be an announcement from WCI Communities that was faxed around to media outlets claiming that it had received a buyout offer potentially worth about $220 million.  Some media outlets ran the news, WCI’s share price rose substantially, and Tricky-Dick sold his shares and illegally made money while other ‘chasers’ undoubtedly got stuck with long-and-wrong shares worth a fraction of what was expected.  Karp had traded WCI stock during late-2007 and early-2008, but in July he bought about 42,000 shares for about $54,700. On July 14, WCI said it was no longer in talks over alternative restructuring proposals.  It took until 2010 to get the final hooks into Mr. Karp.  A court ordered him to pay disgorgement of $27,966 from profits gained, prejudgment interest of $1,991, and a civil penalty of $27,966.  Amazingly, the SEC’s release said “Karp consented to the entry of the final judgment without admitting or denying any of the allegations in the Commission’s complaint.” 

A current ‘hoax’ or set of hoaxes happening this week is in AMR Corporation (NYSE: AMR).  On March 30, 2011 we saw a large run in shares of AMR as the company said it was investigating an “offer of questionable legitimacy” from a group called Sterling Global Holdings that was reported to be $9.75 per share or $3.5 billion for all of the outstanding shares of the company.  This same Sterling Global Holdings reportedly made a similar offer to Eastman Kodak Co. (NYSE: EK) for some $1.3 billion.  Eastman Kodak probably couldn’t get away with selling itself for that sum even if it wanted to.  Both companies have reportedly referred these offers to the SEC as apparent hoaxes.

We already said we would skip the internal fraud instances where it was company officers causing the fraud.  There is one unique instance of fraud that went even far worse than WorldCom, far worse than Adelphia, and far worse than Enron.  Those were all awful, but there were at least real businesses underneath those companies.  The all-time fraud came via Bre-X, a Canadian gold mining company which reached a market value of more than $5 billion at the peak. 

It was believed that Bre-X was effectively sitting on the richest gold deposit in the world.  It turns out that certain individuals were simply adding actual gold into the mining and test equipment at the Busang, Indonesia gold site.  After the fraud started to come to light, Bre-X geologist Michael de Guzman ‘fell’ to his death out of a helicopter in the Borneo forest.  With gold at its peak today, it has frankly been a shock that more scams have not arisen from speculative junior and developing gold mining or exploration companies.

As always, understand what you are investing in.  There have been many great frauds in the past and it is likely that some are either happening now or will happen again.  It seems that fraudsters think they will never get caught.  Fraudsters often do get caught and the small gains made usually end up not being worth the jail sentences and fines.

JON C. OGG