Facebook Inc. (Nasdaq: FB) is in a heap of trouble.
Users are deleting their accounts and threatening a class-action suit.
Advertisers could pull back in droves.
Congress wants CEO Mark Zuckerberg to testify before them.
UK regulators could file charges against the company.
And, worst of all, Facebook likely violated a 2011 consent agreement with the Federal Trade Commission to safeguard users' personal information and could be subject to trillions of dollars in fines.
Here's the fiasco facing Facebook, what it means for its once high-flying stock price, and the far more insidious things that are going on behind the scenes.
Zuck Let Hackers into His Network
What looks like a new problem is actually Facebook's business model.
The current firestorm in front of Facebook, which over the past two weeks knocked $100 billion off the company's equity value, centers around British data-mining company, Cambridge Analytica.
Cambridge Analytica's co-founder, Christopher Wylie, for reasons no one's sure about, blew the whistle on his company after they got 270,000 Facebook users' information (obtained legally with their consent). Then through those users, the company illegally acquired personal data on 50 million of their Facebook friends.
Rather than mining all that information to figure out how to hard-target advertisements to users, Cambridge used personal data to create "psychographic profiles" to target users with political ads, news, and who knows what else, to try to influence how they might vote in elections.
Cambridge sold data to Donald Trump's campaign, to the "Vote Yes on Brexit" campaign, to politicians in Kenya, and probably other political entities around the world.
The outrage over Facebook letting Cambridge "hack" into its databases, as Facebook's Mark Zuckerberg called the breech, is what's front and center today. What Cambridge did, with whom, to what ends, and how effective it may have been is another story.
Facebook's in trouble because its business model includes allowing advertisers and others access to its databases. That's how they sell tens of billions of dollars' worth of ads a year. Facebook is paid by advertisers because of their ability to target ads.
That's all fine and good when someone's trying to sell a pair of sneakers or a vacation package - not when someone's trying to influence democratic processes, like voting.
High-profile Facebook users like Elon Musk, his Tesla Inc. (Nasdaq: TSLA) car company, and his SpaceX company have publicly deleted their Facebook pages. So has Playboy. There's a huge #DeleteFacebook movement.
Facebook's earnings come out in early May. We'll see then what's happened to user engagement, total subscribers, and ad revenue. If they're all off, and they could be, Facebook's stock is headed even further south.
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The stock's already been hit as investors flee the unknown. And that's not about users and ad dollars.
Regulators in the United States and around the world are looking at Facebook and likely to file charges against the company for its part in allowing Cambridge to continue doing what Facebook knew it was doing.
Things aren't looking good for Zuckerberg and company because this isn't the first time the company's been in trouble for playing fast and loose with user information.
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There's Even More Beneath the Surface
At the time this all started, which was when a Cambridge University data analytics professor created an app called "thisisyourdigitallife" to gather research on users who granted access to their Facebook information, Facebook's policy allowed for the collection of friends' data by app creators and academics. Selling data to third parties or using it for advertising wasn't prohibited.
However, in 2015, Facebook found out the researcher's company violated its policies when it passed data onto Cambridge Analytica. In March 2015, Facebook said it had been assured that Cambridge Analytica, Kogan (the researcher), and Christopher Wylie had deleted the data.
Facebook never told users their data was hijacked and took "limited steps to recover and secure the private information of more than 50 million individuals," according to The Observer newspaper in London.
The thisisyourdigitallife app was removed from Facebook in 2015, but Facebook didn't suspend Cambridge Analytica and SCL Group - the firm that serviced contracts won by Cambridge Analytica until March 16, four days after The Observer contacted Facebook for comment on the breech it reported.
On top of the political blaze and likely fallout Facebook's going to face for years to come, it's potentially facing a more immediate problem.
If Facebook violated its 2011 consent decree with the FTC to not share personal user information, it could be subject to fines of up to $40,000 per incident. That per incident number times 50 million users... well, it's astronomical.
David Vladeck, formerly director of the FTC's Bureau of Consumer Protection, who oversaw the investigation of alleged privacy violations by Facebook and the subsequent consent decree resolving the case in 2011, recently said to The Washington Post about Facebook's sharing of data with Cambridge Analytica that it "raises serious questions about compliance with the FTC consent decree."
Jessica Rich, former deputy director for the Bureau of Consumer Protection, who oversaw the FTC's privacy program and also led the investigation into Facebook before the 2011 consent decree, said in an e-mail to The Washington Post, "Depending on how all the facts shake out, Facebook's actions could violate any or all of [the consent decree] provisions, to the tune of many millions of dollars in penalties. They could also constitute violations of both U.S. and EU laws. Facebook can look forward to multiple investigations and potentially a whole lot of liability here."
Wednesday morning, Sens. Amy Klobuchar (D-MN) and John Kennedy (R-LA) wrote this letter to the chairman of the Senate Judiciary Committee, Richard Grassley, calling for hearings:
Dear Chairman Grassley:
We write to express serious concern regarding recent reports that data from millions of Americans was misused in order to influence voters, and to urge you to convene a hearing with the CEOs of major technology companies - including Facebook, Google, and Twitter - regarding the security of Americans' data in light of this significant breach.
Reports indicate that private information from the Facebook profiles of more than 50 million users - representing nearly a quarter of potential U.S. voters in 2016 - was taken to conduct sophisticated psychological targeting for political ads in order to influence voters. The reports further indicate that Facebook knew about this breach more than two years ago and failed to acknowledge it and take swift and meaningful action.
While Facebook has pledged to enforce its policies to protect people's information, questions remain as to whether those policies are sufficient and whether Congress should take action to protect people's private information. The Committee considered similar cybersecurity issues in an October hearing featuring testimony from the former chairman and CEO of Equifax. We believe that the Committee should revisit these issues in light of recent events and upcoming elections.
Important questions also remain unanswered about the role of these technology companies in our democracy. Major social media platforms store an enormous amount of data and have a user base larger than all of the major broadcasting companies combined. The remarkable innovation that these companies have championed has changed how we share and collect information. In the process, Facebook, Google, and Twitter have amassed unprecedented amounts of personal data and use this data when selling advertising, including political advertisements. The lack of oversight on how data is stored and how political advertisements are sold raises concerns about the integrity of American elections as well as privacy rights.
Senators from both parties have called for more transparency and accountability from social media platforms in their efforts to guard against interference by foreign actors. Testimony before this Committee and others from current Administration officials, as well as former officials from the Administrations of President George W. Bush and President Obama, has made clear that the threat of foreign interference continues to exist, and that these foreign powers will make similar attempts to interfere in future elections.
It is our view that Senators on the Judiciary Committee should have the opportunity to question the CEOs of technology companies about these critical matters. While this Committee's Subcommittee on Crime and Terrorism convened a hearing with witnesses representing Facebook, Twitter, and Google in October of 2017, we have yet to hear from the leaders of these companies directly. A hearing featuring testimony with CEOs would provide the Committee the opportunity to hear an update on the progress of these companies' voluntary measures to combat attempted foreign interference and what is being done to protect Americans' data and limit abuse of the platforms, as well as to assess what measures should be taken before the next elections.
It is for these reasons that we request that you announce a hearing of the Judiciary Committee at which Senators can publicly question the CEOs of technology companies. We would be happy to discuss this matter with you further and we appreciate your consideration of this request.
Make no mistake about it, Facebook's in deep trouble. That's been clear from the beginning of these revelations. When the stock was at about $165, I publicly said it was going to $150, a 10% drop. Which it got to in less than a week.
Facebook bounced last Thursday, but only in sympathy with the market bouncing.
The stock's going to be under intense pressure, and it wouldn't surprise me to see it test $120.
Bad news aside, there's a silver lining. If you've been following me for a time, you know that I always say there's a way to profit no matter how the market looks.
And, especially, no matter how a company looks.
Fossil is the perfect case; in January, I recommended subscribers to my Zenith Trading Circle elite research service to buy Fossil, even though I hate the company, and guess what...
Those who followed my guidance grabbed a staggering 1,156% gain on the first half of the recommendation just a few weeks later... and raked in 1,138% on the second half of the position the very next day.
This isn't the first time I've done this either...
I broke my own record, 995% gains on one-half of a KR play in 2017... and I'm the one who set the record in the first place.
This trend seems to just keep happening, over and over... You're missing out if you're not in on it.
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.