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Financial news and information provider Bloomberg L.P. cannot be held liable for erroneously publishing a phony press release issued by a short seller who was trying to drive down the price of a stock, senior federal Judge Milton Pollack of the U.S. District Court for the Southern District of New York ruled Thursday. Pollack found that aggrieved shareholders of Emulex Corp. failed to state a cognizable claim for fraud under securities laws in their complaint against Bloomberg and Internet Wire Inc. Pollack then dismissed the case, Hart v. Internet Wire Inc., 00 Civ. 6571. Stock owners of Emulex filed suit after an attack on the share price of the computer communications device maker was orchestrated by Mark Simeon Jakob. Jakob, a former employee of Internet Wire, used his knowledge of the way press releases are distributed to escape a $97,000 loss stemming from his ill-considered decision to short sell 3,000 shares of Emulex. When the value of his Emulex stock went up instead of down, Jakob wrote a press release fabricating problems with the company. Under the assumed identity of public relations executive “Ross Porter,” he sent e-mail to Internet Wire’s content production department containing a release that said Emulex would have to restate its earnings to show a loss instead of a gain, that the chief executive officer was resigning, and that the company was under investigation by the Securities and Exchange Commission. He also e-mailed Internet Wire and requested that the press release be distributed at 9:30 a.m. on Aug. 24, 2000. Internet Wire complied, and as the stock market opened for trading, the press release was republished by Bloomberg without independent investigation. Within 45 minutes of the release, Emulex’s share price dropped $60 per share. At 10:29 a.m., Nasdaq suspended trading in Emulex stock. Emulex officials scrambled to issue statements debunking the phony release issued by Jakob, and by 10:57 a.m., Bloomberg was reporting the hoax. Once trading resumed on Nasdaq, the company’s shares quickly came back and ended the day at $105.75 per share. Jakob was arrested by the Federal Bureau of Investigation, and in December pleaded guilty to securities fraud and wire fraud in the Central District of California. He is due to be sentenced next week. The shareholders sued under Rule 10b-5, promulgated under the Securities Exchange Act of 1934. NO MOTIVE, NO CASE When Judge Pollack reviewed the stockholders’ complaint, however, he said there was nothing “which charges Bloomberg with any more than a construction that Bloomberg did not verify that the release [was authentic], investigated only by an unanswered telephone call to Emulex and mistakenly proceeded … on the appearance of the release itself.” The complaint, he said, was devoid of any allegation that Bloomberg and Internet Wire issued the release with the intent to defraud investors. “A 10b-5 case requires intentional misconduct and this is not a 10b-5 case,” he said, adding that the allegations were premised on the “presumed negligent actions of the defendants.” “Rule 10b-5 scienter means intent to defraud, and even when plaintiffs rely on the ‘recklessness’ prong of scienter, they must still show that the defendants acted with fraudulent intent,” he said. And recklessness only amounts to the requisite scienter where the charges give rise to a strong inference of fraudulent intent. “Pleading a failure to heed ‘storm warnings’ does not suffice,” he said. “Nor is there any pleading of a motive for deliberately remaining ignorant of the facts in question to render any plausible suggestion of a characterization of willful blindness.” And even though the stockholders contended that it was Bloomberg’s standard practice to confirm press releases, the plaintiffs’ “suggestion that, in a race to be first, defendants published a story they knew (or even suspected) to be false, simply does not suffice,” he said. Patrick A. Klingman, Andrew M. Schatz and Jeffrey S. Nobel, of Schatz & Nobel, represented the plaintiffs. Richard L. Klein and Thomas H. Golden, of Willkie Farr & Gallagher, represented Bloomberg. Robert W. Perrin, Kenneth Conboy and Elena C. Norman, of Latham & Watkins, represented Internet Wire Inc.

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