E-Mailbag Monday: IPOs, 401(k) Borrowing, False Press Releases

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?

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