Money Stuff

Facebook's Shareholders Are Disappointed

Also petros, pornography, VC diversity, tax indexing and Uber.

Oh Facebook.

Everything, I like to say, is securities fraud. For instance, if you are a public company that suffers a massive data breach and exposes sensitive data about millions of customers without their consent, and that data is then used for nefarious purposes, and you find out about the breach, and then you wait for years to disclose it, and when you do disclose it your stock loses tens of billions of dollars of market value, then shareholders are going to sue you for not telling them earlier, and probably the Securities and Exchange Commission is going to look into it as well. (In fact the SEC recently issued guidance about when you have to disclose a data breach.) The underlying bad thing that you did -- not keep your data safe -- is just an input into a function whose result is "securities fraud."

Facebook's Zuckerberg Outlines Steps to Protect User Data

But the result is always "securities fraud," whatever the nature of the underlying input. An undisclosed data breach is securities fraud, but an undisclosed sexual-harassment problem or chicken-mispricing conspiracy will get you to the same place. There is an important practical benefit to a legal regime that works like this: It makes it easy to punish bad behavior, at least by public companies, because every sort of bad behavior is also securities fraud. You don't have to prove that the underlying chicken-mispricing conspiracy was illegal, or that the data breach was due to bad security procedures. All you have to prove is that it happened, and it wasn't disclosed, and the stock went down when it was. The evaluation of the badness is in a sense outsourced to the market: We know that the behavior was illegal, not because there was a clear law against it, but because the stock went down. Securities law is an all-purpose tool for punishing corporate badness, a one-size-fits-all approach that makes all badness commensurable using the metric of stock price. It has a certain efficiency.

On the other hand it sometimes makes me a little uneasy that so much of our law ends up working this way. "In a world of dysfunctional government and pervasive financial capitalism," I once wrote, "more and more of our politics is contested in the form of securities regulation." And: "Our government's duty to its citizens is mediated by their ownership of our public companies." When you punish bad stuff because it is bad for shareholders, you are making a certain judgment about what sort of stuff is bad and who is entitled to be protected from it. 

Anyway Facebook Inc. wants to make it very clear that it did not suffer a data breach. When a researcher got data about millions of Facebook users without those users' explicit permission, and when the researcher turned that data over to Cambridge Analytica for political targeting in violation of Facebook's terms, none of that was a data breach. Facebook wasn't hacked. What happened was somewhere between a contractual violation and ... you know ... just how Facebook works? There is some splitting of hairs over this, and you can understand why -- consider that SEC guidance about when companies have to disclose data breaches -- but in another sense it just doesn't matter. You don't need to know whether the thing was a "data breach" to know how bad it was. You can just look at the stock price. The stock went down:

The social media giant has lost over $60 billion in market value over the past two days, following revelations that personal data of millions of users was obtained by a data analytics firm. 

And so, whatever other problems it has -- the Federal Trade Commission is examining Facebook's compliance with a 2012 consent decree about user privacy, and various members of Congress are gearing up to investigate -- Facebook has a securities-disclosure problem:

Facebook Inc.’s failure to safeguard privacy was blamed in an investor lawsuit for a slump in its share price that followed the revelation user data was harvested without permission by a research firm connected to U.S. President Donald Trump.

The world’s largest social media network was sued in San Francisco federal court on Tuesday by shareholders in a class action who said they suffered losses after the disclosure that Cambridge Analytica, a U.K.-based firm that aided Trump, improperly obtained profile information on 50 million users.

You can read the article for more about the lawsuit's allegations -- "defendants made false or misleading statements and failed to disclose that Facebook violated its own data privacy policies by allowing third parties access to personal data of millions of Facebook users without their consent," etc. -- but, again, it doesn't matter. Thing happened, thing wasn't disclosed, thing was disclosed, stock went down. It is a simple legal system but it has its uses. 

But also its oddities. At worst, Facebook is accused of violating tens of millions of users' privacy, and of doing so in a way that subverted democracy and frayed America's social fabric. Perhaps someone will investigate and punish Facebook on behalf of those users or that democracy and social fabric. But certainly someone will investigate and punish Facebook on behalf of its shareholders. 

Elsewhere, Sarah Frier: "How Facebook Made Its Cambridge Analytica Data Crisis Even Worse." And Paul Ford: "Facebook Is Why We Need a Digital Protection Agency." And Emily Stewart: "Banks have to know their customers. Shouldn’t Facebook and Twitter?"

The petro conspiracy.

Ahahahaha the Venezuelan petro, the world's dumbest cryptocurrency, is somehow dumber than I thought: "A TIME investigation has found Moscow’s fingerprints all over the creation of the petro, a scheme that reveals the range of Russia’s efforts to fight back against U.S. sanctions." 

According to an executive at a Russian state bank who deals with cryptocurrencies, senior advisers to the Kremlin have overseen the effort in Venezuela, and President Vladimir Putin signed off on it last year. “People close to Putin, they told him this is how to avoid the sanctions,” says the executive, who spoke to TIME on condition of anonymity. “This is how the whole thing started.”

Sure. Good lord. How did that conversation go?

Putin's gamer nephew: Uncle Vlad, we can evade U.S. sanctions using the blockchain.
Putin: ...
PGN: Smart contracts via crypto make this super doable.
P: ...
PGN: Don't let FUD hold you back from doing an ICO.
P: ...
PGN: Let's get some crypto and HODL!
P: ...
PGN: ...
P: Look, whatever, but why don't we let Venezuela try it first and see how it goes.

It seems to be going terribly, but that's only because it is terrible. "In recent weeks the authorities in Moscow seem to have cooled on the idea of an official cryptoruble."

Elsewhere in terrible crypto things, "German researchers have discovered unknown persons are using bitcoin’s blockchain to store and link to child abuse imagery, potentially putting the cryptocurrency in jeopardy." I am not quite sure what that means practically or how seriously to take it, but the question the researchers raise is, if you run a bitcoin mining or trading business in which you download and store blockchain data, are you illegally downloading child pornography? Man, I do not know, and I am not going to give you legal advice, but ... maybe someone should? Like, "does this business require me to possess illegal child pornography" is a question I would want to answer definitively before getting into any new line of business.

Elsewhere in silly crypto things, here's a "live air drop," come on. And here is an "Initial Chocolate Coin Offering," come on. And here is GoGo Chicken:

The company uses tracking devices and facial recognition technology to follow the movement of free-range chickens, from hatching to packaging, on hundreds of farms across China. Poultry are fitted with tracking devices on their legs and the data are logged using a blockchain ledger — an unalterable record that underlies cryptocurrencies such as bitcoin.

That article begins: "An insurance company in China is looking to shake up the country’s chicken supply chain — using blockchain technology." I have to say that it is an incredible testament to the power of blockchain evangelism that the first sentence of the article is about blockchain technology, and not chicken facial recognition technology. Chicken facial recognition technology is some wild sci-fi stuff! I don't think I could reliably recognize a chicken's face if I had it in front of me; I am blown away that artificial intelligence has advanced to the point that it can. Blockchain technology, meanwhile, is just a somewhat new way to run a database. But if you want to impress people you don't focus on your uncanny automated chicken-recognition abilities. You give the people what they want, and what they want, always, is blockchain blockchain blockchain.

Unicorns are worried about VC diversity.

Here is a story about technology entrepreneurs who don't want to be given money by "a bunch of white guys" anymore, and who have joined together to demand that the venture capital industry diversify. The group is called "Founders for Change," and "in a statement underlining the importance of diversity in the tech industry, the tech executives said the racial and gender makeup of a venture capital firm would be 'an important consideration' when they were raising money."

There is an old-fashioned way of looking at the world where, if you have an idea, and you meet with someone and tell him your idea, and he offers to give you millions of dollars to build that idea, he is doing you a favor, and you should be grateful and not quibble too much with the racial and gender makeup of his investing team. I think that was a standard way to think about venture capital not too long ago. Now things have changed. This is in part a story about values -- about the importance that founders personally place on diversity -- but it is also, obviously, a story about power. One thing I think about sometimes is that the power balance between entrepreneurs who come up with ideas and capital sources who come up with money to fund those ideas is tilting in favor of the entrepreneurs these days. SoftBank and Fidelity and whoever else are lining up to throw money at startups; capital is plentiful and ideas are scarce and valuable. It is easy to imagine a world -- a world described in corporate-finance textbooks -- in which the people who have the money use it to buy control, and get to tell the companies whom they should employ. But in the current startup world, the people who found the companies tell the people who put up the money whom they should employ.

Elsewhere: "This White Tech Guy Has an Idea to Make Tech Less White." And meanwhile in public companies, the sources of capital still matter, or at least assume that they do: The New York State Common Retirement Fund "intends to oppose the re-election of all directors at hundreds of U.S. corporate boards without a single woman."


Here is a story about how Larry Kudlow, the television personality who will now be the head of Donald Trump's National Economic Council, wants to index capital-gains taxes to inflation. The idea is that if you bought stock 20 years ago for $100 and sold it today for $200, you have $100 of nominal profit, but only some of that is real profit. That $200 today won't buy you twice as much stuff as the $100 you had 20 years ago. So taxing you on the full nominal profit seems unfair, and Kudlow wants to tax you only on the amount of profit above inflation: If you need $150 today to buy what $100 bought you 20 years ago, then your real capital gain is only $50 and you should only pay tax on that.

One problem with this idea is that Kudlow apparently wants to implement it in a legally questionable way: It wasn't in the recent changes to the tax code that Congress passed, and so the plan is apparently to just have the executive branch implement it, which seems aggressive. ("Some believe Potus could do it as exec order," Kudlow told the Wall Street Journal.) Another problem with it is that it rather gratuitously cuts taxes on rich people: "Democrats have opposed it as a complicated change that would give rich people a windfall for no serious economic benefit," notes Jonathan Chait. But one thing that works in its favor is that it is rather intellectually satisfying. You really don't have $100 worth of gains; taxing you on the $100 of gains seems wrong. Not wrong morally -- any choice of how much to tax people to fund the government will feel morally arbitrary in places -- but just wrong intellectually. You should pay taxes on your economic income; indexing capital gains to inflation gets a bit closer -- in one part of the tax code -- to doing that.

You occasionally see this problem in tax law: Do you make an intellectually satisfying change to the tax code that happens to cut taxes on rich people, or do you allow for some amount of sloppiness because the impacts of that sloppiness are felt mostly by rich people? On the one hand you have to get revenue from somewhere, and taxing unearned income of rich people in ways that are intellectually sloppy may be better, from the perspective of fairness and economic efficiency, than taxing the earned income of poor people. But there are obvious pressures that push in favor of intellectual satisfying tax cuts on rich people, specifically, (1) they are intellectually satisfying and (2) they are favored by rich people. It's a powerful combination.


I wrote a little yesterday about how a self-driving Uber killed a pedestrian. A natural reaction to that event is to try to slow down self-driving car development, and I said that I'm not sure that reaction is correct, because "if self-driving Ubers fully replaced human-driven cars while still killing only one person -- or 10 people -- a day, then that would represent an enormous improvement in human welfare, even though Uber would be killing people every day."

lot of people emailed and tweeted to resist the hypothetical, pointing out that the self-driving Uber fatality rate currently seems to be higher (on a very small sample size) than the human-driver fatality rate. Okay? I suppose I should have been clearer that, if and when autonomous cars are safer than regular cars, that will be good for humanity. I presume that the people working on autonomous cars are trying to make them substantially safer than human-driven cars. I recognize that they're not there yet, which is why people are working on them, instead of rolling them out widely. Perhaps they'll never get there! Feel free to resist the hypothetical, but of course I agree that widespread adoption of more dangerous driverless cars would be bad?

Anyway: "Uber Victim Stepped Suddenly in Front of Self-Driving Car." And: "Self-Driving Cars Keep Rolling Despite Uber Crash." And: "This week’s pedestrian fatality involving a self-driving car is likely to complicate efforts in Congress to speed the vehicles’ development by wiping away state safety regulations," which, yes, I can see how it would do that.

Things happen.

Peter Peterson, Lehman Exile Behind Blackstone, Dies at 91. John Paulson Returns Money From Gold, Special Situations Funds. Hong Kong Stock Market Holds Out Hope for Aramco Listing. Citigroup Says CEO Was Unaware of Loan When He Met With Kushner. BofA Dials Back on Some Stock Loans After $292 Million Loss. Steve Wynn Files to Sell, Opening Door to Takeover. US ire prompts Latvia to root out systemic failures on banking. Mozambique Unveils Debt-Restructuring Proposal. A Regulatory Framework for Exchange-Traded Funds. U.S. Starter Homes Are Scarcer, Pricier, Smaller and More Run-Down. As a Frenchman in banking, I’m appalled by the eating competitions of my British colleagues. Rangers pitcher Martin Perez gets revenge on bull that caused elbow injury: ‘I killed him and I ate him.’ 

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    Matt Levine at

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