For a company that urges users to share the details of their lives with friends and far flung strangers, Facebook, as Heidi Moore points out in the Guardian, did a really bad job of monitoring its own privacy settings.
Mark Zuckerberg's timeline may have scooped The New York Times in announcing his wedding and $1 billion Instagram acquisition, but the paper was among those revealing another Facebook bombshell: that the company's executives may have told select analysts about a coming earnings disappointment.
The analysts were reportedly able to tip off large investors, helping them get out profitably before Facebook's share price started tanking. Small investors, who may have heard about Facebook's pending acquisition of Instagram through a status update from Zuckerberg, were forced to decipher what Moore describes as "a vague blurb" in an SEC filing.
Facebook simply failed at figuring out "who should know what," Moore wrote.
A status update shared with such a limited list could violate US securities laws, but the company may have decided its Wall Street friends and its own fortunes were worth more to it.
Barry Ritholtz, the brains behind The Big Picture blog, put it beautifully:
Facebook, a wildly overvalued momentary internet phenomena led by an arrogant 28 year old man-child, decided to treat the process of going public with the same respect they do their users’ privacy, which is to say, with none at all. So they went public more or less unlawfully over the past two years, allowing 1000s (or more) outside investors to acquire substantial stakes via secondary markets from their employees and early investors. Note this is within the company’s control, and could have been stopped, but they elected not to do so.
That gave certain investors riding the Facebook hype wave a highly profitable way out of their positions, but left out at least some of the users/investors who give Facebook its value.
Financial analyst Joshua Brown, a voracious blogger, tweeter and author of Backstage Wall Street, put it like this:
Essentially mom and pop were left holding the bag. People that were excited about getting involved with the deal, all of the sudden were left with something that was literally dropping on them from ten stories above.
He told Marketplace underwriters might be able to argue they didn't break the law because Facebook was private at the time.
Henry Blodget of Business Insider details how it all went down:
Soon after Facebook amended its prospectus, all three analysts at the company's lead underwriters—Morgan Stanley, JP Morgan, and Goldman Sachs—cut their estimates for Facebook's Q2 and the full year. These estimate cuts were conveyed verbally to sophisticated institutional investors.
The "smart money," as Blodget called it, cashed out leaving Facebook's real friends to lose money investing in a company that widely shares their information while it may have chosen to more selectively disclose its own.
That should be worth several million dislikes, particularly if Facebook share prices drop toward the $10 mark where some analysts fear they could be heading.
Thumbs down hack, anyone?