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Summary:

If you’re tired of the old cliché that information is power, here’s a new one: Disinformation is every bit as powerful. That much we know from the mischievous email that was apparently sent out to Apple employees and that – naturally – quickly found its way […]

If you’re tired of the old cliché that information is power, here’s a new one: Disinformation is every bit as powerful.

That much we know from the mischievous email that was apparently sent out to Apple employees and that – naturally – quickly found its way into the tech-news cycle via the respected and highly trafficked tech site Engadget. The terse email said simply that the iPhone would be delayed to October from June and that the OS X Leopard operating software would not be released until January.

(Apple declined to offer any comment beyond reiterating that the email “wasn’t authentic” and that both the iPhone and Leopard are on track as previously announced.)

That was enough to cause Apple’s stock to tumble 5% from its morning high.

It took only seven minutes for Apple to fall to its intraday low of $103.42 from $108.83. Apple was trading below $105 for only two minutes, but in those two minutes more than 2.2 million shares were traded.

In the volatile 23 minutes of turmoil between the minute the disinformation hit the stock market at 8:55 PST and Apple’s announcement that the initial email “is fake and did not come from Apple,” nearly 15 million shares changed hands. That’s 60% of Apple’s normal volume in well under a half hour. That’s also an awful lot money lost for some investors – and gained for others – all of it because of a lie.

There are two things about this that are interesting: The practice itself, seeding the stock market with deceptive news that moves prices, is usually reserved for over-the-counter stocks, where a frantic post on a hyperactive message board can cause illiquid stocks to rise or fall five or 10 percent in less than a day.

But Apple, with an average trading volume of 25 million shares a day, is no penny stock. And yet, given all the hype that has surrounded the iPhone since January you’d have to think long and hard to come up with a piece of fake-news that would cause, in a matter of seconds, more investors (and Apple fanboys) to lose control of their anal sphincter muscles than this rumor did.**

The other notable twist is in how the fake news was spread. It seems someone figured out how to send an email to Apple employees around the world, putting the familiar “Bullet News” in the from line (for Apple’s sake, one hopes this is not as simple as sending an email to “everyone@apple.com”).

A week ago, I noted how H-P pre-announced key earnings data after a non-employee had been emailed access to the market-moving numbers. This incident is the dark side of the same phenomenon: An email leads to investors being broadsided with surprising news, only this time the message is false.

And the fallout? Apple reacted as swiftly and judiciously as H-P did. The SEC would do right to take this as seriously as they do backdated stock options, and look into who may have profited from shorting the stock ahead of the news.

And there is also already debate about how Engadget handled the news. Some say it just ran with what an Apple employee sent in; others say it could have benefited from double-checking with Apple. But let’s not forget that only 11 days ago, the New York Post, the country’s 13th oldest newspaper, ran the rapidly discredited news of a Microsoft-Yahoo merger. That fake news drove Yahoo’s stock up 19%, and most of those gains have since eroded away. The SEC has its work cut out for it.

But what really stands out for me in this bizarre but fascinating episode is that Apple investors were taken by a technological goof that could have happened a decade ago but that in 2007 is like being sold the Eiffel Tower. If the irrational hopes surrounding the iPhone had not gotten so overheated, this would never have happened.

Hat tip to Paul Kedroksy for coming up with the phrase, Stock Hackers

  1. Very nice analysis of the situation today. Kind of makes you wonder what else would have happened if it were true. Just a flase rumor caused a 5% disruption in only a few hours… maybe the speculation has gotten a little out of hand?

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  2. Jim Cramer talked about this topic in an interview last year. He talked about how you (hedge fund guys) manupliate the market, how you have to do it. He even said that Apple was the perfect company to use because they are pretty tight lipped.

    Its not about the company or their fundamentals, its about the Market.

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  3. The interesting thing about this, to me, is that anyone who has followed Apple for any amount of time would surely have an extremely hard time believing this story was real from the outset. Apple just announced the original delay of Leopard and the confirmation of the June shipping date for the iPhone. It would be unprecedented for anyone within Apple to let Jobs make such a misstep with his original delay announcement only to follow it with another one. Maybe in the Amelio days, but not today.

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  4. Mike D, like Cramer said, what does reality have to do with the stock market. Wall Street guys create their own “new” reality.

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  5. but now we come to the problem of web sites who print stories without adequate due diligence reporting. Failure to make due diligence calls on the part of a reporter or editor before the story is released is flat out unprofessional and should be a “due cause” for instant dismissal.

    Jim Forbes
    an old reporter

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  6. Kevin Kelleher Wednesday, May 16, 2007

    Nate: I do think the markets have, if I may use a terrible if apt metaphor, jumped the tracks of fundamentals and are rolling through the hilly grasslands of speculation. I bet we’ll see a lot more of this kind of thing before it’s over.

    RT: Full disclosure – I also write for TheStreet.com and RealMoney.com, favored soapboxes of Cramer. If you are referring to the infamous video clip of him spelling out hedge fund strategies, I think he was mostly talking about RIMM.

    I would be a little surprised if this was a ploy by hedge funds. Given the attention and scrutiny this might draw, they’d have to be desperate. Also, hedge funds tend to hammer on a stock for months, rather than the in-and-out guerrilla attack we saw today.

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  7. Actually, it was not only RIMM, but also AAPL and GOOG….I remember because I was long AAPL and GOOG during December when Cramer came up with the video clip. We had to deal with FUDs day after day in December.

    Well this is an OE week. We know what is going on. Short hedge funds are desperate. We will see more FUDs until Friday.

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  8. It’s wrong to suggest that this happens because investors panic or even believe the story; they don’t; they’re mainly not even there to see it happen or to trade. But they do have stop-loss orders in place that trigger automatically. A big stock dump on the market is amplified once the price drop runs through these stops. Those who were ready waiting for this event can steal a few tens of millions of dollars from the stockholders who had prudent stop-loss orders in place. The sequence is: seed the story; dump stock to trigger the drop; buy back 4% lower. You’ve suckered one bunch of investors into buying a dollar too high, and another bunch into selling 2 dollars too low.

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  9. Looks like this is more profitable than the Nigerian Bride Scheme. Think about it. Ric

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  10. What happened is a testimony to how powerful blogs have become. The extremely popular ones at least.

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