Facebook likely violated a 2011 consent agreement with the FTC (Federal
Trade Commission) to safeguard users' personal information and could be subject
to trillions of dollars in fines.
by Shah Gilani
Facebook Inc. (NasdaqGS: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.
U.K. regulators could file charges against the company.
And, worst of all, Facebook likely violated a 2011 consent agreement with the FTC (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 highflying stock price, and the far more insidious things that are going on behind the scenes.
Zuck Let Hackers into His Network
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.
#DeleteFacebook
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. (NasdaqGS: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 to ad revenue.
If they’re all off, and they could be, Facebook’s stock is headed even
further south.
The stock’s already been hit as investors flee the unknown. And that’s not
about users and ad dollars.
Regulators in the U.S.
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.
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 of 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 London Observer newspaper.
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 “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 US and EU laws. Facebook can look forward to multiple
investigations and potentially a whole lot of liability here.”
Wednesday morning, Sens. Amy Klobuchar, D-Minn., 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.
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 yesterday, 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…
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