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Emulex Accused of Insider Trading

Stocks: Shareholders sue, alleging that officials sold stock just before an earnings warning. Shares fell 48% the next day.


Shareholders of Emulex Corp. filed four lawsuits Tuesday against the Costa Mesa company in the wake of big stock gains by insiders just before the company warned about possible slower revenue and earnings growth this quarter.

The securities fraud lawsuits, which seek class action status, were brought against the maker of storage network products on behalf of investors who bought shares between Jan. 18 and Feb. 9.

The investors contend that seven insiders wrongly profited by selling nearly 388,000 shares for more than $40 million shortly after painting a rosy financial forecast Jan. 18--and just before their warning three weeks later that the forecast could fall short.

The warning sent Emulex stock plummeting 48% in a day to $40.38 a share.

Such a drop in itself would not have triggered a lawsuit, said Laurence King, one of the investors' lawyers. It was the combination of insiders selling shares shortly before releasing bad news that prompted the suit, he said.

"Where insiders sell . . . shortly before revealing bad news about their company, as we allege here, it is often a strong indication of fraud," King said in an interview.

The lawsuits do not name an eighth insider, Chairman Fred B. Cox, who sold 200,000 shares for nearly $21 million.

Emulex executives declined to comment on the lawsuits, but they had said previously that the timing of the sales was coincidental.

Company insiders have traded Emulex stock during specified periods, and Chief Executive Paul Folino "has traded pretty much every trading window for the last several quarters," Mike Rockenbach, the company's chief financial officer, said last week.

Insiders Unaware of Outlook, CFO Says

The insiders simply were not aware at the time of the sales about the possible diminished outlook for the current quarter, Rockenbach said then.

Folino, for instance, sold 200,000 shares Jan. 24 for a total of $20.8 million.

On Feb. 9, the company on its Web site said that some customers were deferring orders and that the delays could affect quarterly sales and could cause the company to miss quarterly earnings estimates by 3 to 5 cents a share.

After the stock price plunged, the stake Folino sold would have been worth a little more than $8 million--a difference of more than $12 million from the actual gain.

The lawsuits should have little impact on Emulex's operations, analysts said.

"I think these things are pretty common when you have such a volatile stock," said Edward Sun, an analyst with Salomon Smith Barney in San Francisco.

What affects the company's stock price more is the continuing drag on tech stocks. Emulex shares lost $6 Tuesday to close at $32.06 on Nasdaq.

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