E-Mailbag Monday: IPOs, 401(k) Borrowing, False Press Releases
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Any hot IPOs for the week?
Reply: None. Wall Street is on vacation.
Since it takes about two weeks for an IPO road show, do not expect the IPO market to start until the middle of September.
401(k)s: Going on the Wild Side
Seems like there are many opportunities for buying Internet stocks. I was thinking of borrowing money against my 401(k) to buy them. What do you think?
Reply: I would not borrow against a 401(k) unless it was a last resort (for example, you may need cash for medical bills). True, when you are borrowing money from a 401(k), you are basically borrowing from yourself and then the interest payments go straight into the 401(k) fund.
Also, Internet stocks are extremely volatile. You could easily lose 50% or more in a short period of time. If you are not able to pay back the loan from the 401(k), then the IRS will consider that you have made a premature withdrawal. This means you will need to pay taxes on the withdrawal, as well as a 10% penalty.
Finally, if you leave the firm or are fired, you may be required to pay back the loan in full.
Emulex: What to Do in the Future?
I own shares of Emulex. Fortunately, I did not sell the shares when the stock collapsed on Friday. Are there things to do to protect investors from such a problem?
Reply: As you know, Emulex fell victim to a fraudulent press release that was issued on an Internet news service. While news services have policies to guard against such problems, there are no guarantees. It would not be surprising to see more incidents.
In fact, it is likely that those investors who bought or sold based on the press release have no recourse. The brokerage firms do not have to unwind the trades. Also, the news service, InternetWire, is protected. In fact, even if the perpetrator is caught, there is likely to be no recourse, as the perpetrator probably is not wealthy.
Rather, the famous rule applies: Buyer (or seller) beware. When you see a damaging press release, read it and see if it is well written. Another good strategy is to check the company's Web site. The press release should have been posted. Finally, is the PR agency the same as the one used for prior releases?