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.
You Must Act Now: America is headed for an economic disaster bigger than anything since the Great Depression. If you lost out when the markets crashed in 2008, then you are going to want to see this special presentation…
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.
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.