Facebook IPO Scrutiny Forcing It to Grow Up in Washington

Jack Krumholtz
In February, Facebook brought on Jack Krumholtz, who used to run Microsoft Corp.’s government affairs shop in Washington, Senate records show. Photo: Chris Kleponis/Bloomberg

Congressional questions about Facebook Inc.’s initial public offering are forcing its nascent lobbying operation to play defense as it builds the political support companies need before coming under scrutiny.

“They have not made the connections and personal relationships they would like to have made,” former Senator Byron Dorgan of North Dakota, a senior policy adviser at law firm Arent Fox LLP, said in an interview.

“I’m sure they’re going to be doing double duty trying to introduce themselves and at the same time answering questions about the IPO.”

U.S. House and Senate committee officials said yesterday their staffs are gathering information about the social networking company’s offering and that the topic may come up at congressional hearings.

Lead underwriter Morgan Stanley may face regulatory review over claims an analyst shared negative news about Facebook with institutional investors before the offering, Richard Ketchum, chairman and CEO of the Financial Industry Regulatory Authority, said May 22.

Securities and Exchange Commission Chairwoman Mary Schapiro said her agency may also review the offering.

Andrew Noyes, a Facebook spokesman in Washington, declined to comment on the congressional activity.

Playing Catch-up

Facebook, which first registered to lobby in 2009, is playing catch-up to other technology companies such as Google Inc. and Microsoft Corp. that have more established efforts in Washington.

Google Inc. spent $5 million in the first quarter of this year, and Microsoft Corp. spent $1.8 million during the same period. Facebook reported expenditures of $650,000 from January to March, more than double the $230,000 it spent during the same period a year earlier, Senate records show.

Its annual lobbying expenses expanded to $1.4 million in 2011 from $207,878 in 2009.

Facebook lobbied on more than 20 bills in the first quarter of this year, many of them focused on online privacy and cybersecurity, Senate records show. The company lobbied the House and Senate, the White House, the Federal Trade Commission, Commerce Department and other federal agencies.

Lobbying Team

The social networking site this year added former Republican U.S. Representative John Shadegg and Jack Krumholtz, Microsoft’s former chief lobbyist, to its Washington team. Its Washington operation also includes Steven Elmendorf, top aide to then-House Democratic leader Dick Gephardt; and James Ryan, former counsel to Senate Majority Leader Harry Reid, according to Senate lobbying reports.

Kirk Blalock, who is raising money for presumptive Republican nominee Mitt Romney, previously lobbied for Facebook and ended that relationship as of Jan. 31, Senate records show. Joel Johnson, a former aide to President Bill Clinton, also lobbied previously and isn’t any longer, he said.

“You have people that have worked on issues at the highest level in government,” Markham Erickson, executive director of NetCoalition, a technology trade group representing companies including Google and Amazon.com Inc., said in an interview. “There’s nothing that really can happen in Washington that is going to overwhelm that group of people.”

NetCoalition’s members include Bloomberg LP, the parent of Bloomberg News.

“Part of being a major player is not just going public but having a presence in Washington to prove you’re a grownup,” Linda Fowler, a professor of government at Dartmouth College in Hanover, New Hampshire, said in an interview.

Winning Friends

Facebook has made some of its Washington connections in ways more subtle than traditional lobbying.

It holds training sessions with U.S. lawmakers and congressional staffers from both parties to explain its site’s features and how to use the service to reach constituents. Hundreds of members of Congress and staffers take part in the training sessions annually, said Noyes, the Facebook spokesman.

“Our presence and growth in Washington reflect our commitment to explaining how our service works, the actions we take to protect the more than 900 million people who use our service, the importance of preserving an open Internet, and the value of innovation to our economy,” Joel Kaplan, head of Facebook’s Washington office, said in an e-mail.

Kaplan served as deputy chief of staff for former President George W. Bush.

Social Phenomenon

“They recognize that the government and society will continue to grapple with understanding privacy-related issues and a panoply of other issues,” Rey Ramsey, president of TechNet, a technology trade association, said in an interview. “They’re spending time doing the nuts and bolts of educating people how to use this social phenomenon.”

Facebook formed a corporate political action committee in September. It has given $119,000 in donations to U.S. lawmakers through March 31, Federal Election Commission records show.

The PAC’s initial recipients included Senate and House leaders of both parties. It gave $5,000 apiece to Senate Republican leader Mitch McConnell of Kentucky; House Speaker John Boehner, an Ohio Republican; House Majority Leader Eric Cantor, a Virginia Republican; and House Democratic leader Nancy Pelosi of California; and $2,500 to Senate Majority Leader Harry Reid, a Nevada Democrat.

Other recipients of Facebook PAC contributions serve on House and Senate committees that handle Internet and online privacy issues.

Under Pressure

In November, Facebook agreed to settle complaints by the U.S. Federal Trade Commission that the company failed to protect users’ privacy or disclose how their data could be used.

Facebook, based in Menlo Park, California, agreed to get clear consent from users before sharing material obtained under earlier, more restrictive terms. It also agreed to independent reviews of its privacy practices over 20 years.

“Now that it’s public, Facebook is under pressure for short-term profits and that may stimulate it to be more aggressive in developing ways to use this huge amount of data,” Dartmouth’s Fowler said.

Banking Briefings

The Senate Banking Committee is coordinating bipartisan staff briefings with Facebook, regulators and others, Tim Johnson, a South Dakota Democrat who chairs the panel, said in an e-mail.

Senator Richard Shelby of Alabama, the ranking Republican on the banking committee, said he wasn’t convinced there was anything amiss with the IPO and that he wanted to wait and see what the panel discovered.

“Our committee watches things, they do their due diligence, but I don’t know anything that this is not just an ordinary IPO that maybe went south,” Shelby said today in an interview.

Johnson said he will decide if the committee needs to hold a hearing after the briefings.

“The key now is for the regulators to act with urgency and for Congress to hold those involved accountable,” Senator Jack Reed, a Rhode Island Democrat who chairs the Senate Banking subcommittee on securities, insurance and investment, said in an e-mailed statement.

‘Learning Curve’

The House Financial Services Committee, headed by Representative Spencer Bachus, an Alabama Republican, is gathering information on the Facebook IPO.

The topic will probably be raised during hearings in the coming weeks, Jeff Emerson, a committee spokesman, said in an e-mail.

“The learning curve will be steep and quick,” Larry Noble, an attorney with the Washington law firm of Skadden, Arps, Slate, Meagher & Flom LLP, said of Facebook’s lobbying team in an interview.

“They’re just going to have to get in there and have their people work the Hill and work the various agencies,” said Noble, a former general counsel with the Federal Election Commission.

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