The Facebook Fraud

by Matt Klassen on May 29, 2012

With investors trying to pick up the pieces following Facebook’s disastrous IPO, many are left wondering how this could have happened; particularly with a company like Facebook that is seemingly built on such a solid foundation of avid users. For this group of disenchanted investors, the Facebook fiasco is likely bringing to memory the not-so-distant dotcom debacle, a technological utopia built on a series of false beliefs and misguided promises.

As CNET writer Rob Enderle explains, like the original dotcom crash, the Facebook IPO was built on a series of false assumptions, a disconnection between estimated users, actual users, and revenues. Had potential investors actually ignored the hype and taken a moment to investigate a little deeper in to Facebook, they would likely have doubted Facebook was worth $100 million, let alone $100 billion.

Amidst all this Enderle smells something rotten in the Facebook camp, meaning that more than a well-intentioned start-up gone wrong, Facebook intentionally misled its investors to increase its overall valuation, putting money in certain people’s pockets and taking it from others’…which happens to be a little thing we call fraud.

As Enderle writes, the first step in investigating a possible Facebook fraud is defining our terms. Fraud, as many of us are likely aware, is a wrongful or criminal deception intentionally designed for personal or financial gain. So initially what we need to see is someone who gains, and someone who loses.

Now since the IPO you can bet that some initial investors, the underwriting banks, and of CEO Mark Zuckerberg are probably building their own personal money bins right now to store their gains, money that investors who jumped onto the Facebook ship at $42 per share only to see it sink to where it now sits at $32, wish they could get back.

So without even thinking about it, we have parties who have gained considerably at the expense of a group who has lost considerably, but of course we don’t have anything close to fraud yet.

The most critical element of any sort of Facebook fraud who be discovering whether or not investors were intentionally misled, and its here that we come to the claims Facebook made leading up to its disastrous IPO.

The official number of Facebook users bandied about during this entire process has been 1 billion, a benchmark that the company estimates it will reach sometime this summer. It was with this number that Facebook began to create hype, luring investors with the promises of huge revenues garnered from advertisers, who themselves would be lured by the promise of reaching one seventh of the world’s population.

While those were the promises, the reality is quite different. First, while some 1 billion people may have some loose connection with Facebook, estimates put the active user base at only about 250 million, and among those only a miniscule percentage of any given demographic actually sees advertisements, with the number that actually click on those ads lower still.

The point, with Facebook double-dipping with its new paid Highlight feature, with advertising increasingly jumping ship because their ad dollars aren’t paying dividends, and with users for the most part ignoring “targeted” ads (have you ever purchased something based on a Facebook ad?), it seems that Facebook’s entire revenue stream is built on a foundation of sand…and Enderle for one, thinks that Facebook has known it the whole time.

In the end, had the IPO been a success I doubt any of us would be talking about this (yet), but the situation as it stands strikes me as an unmitigated disaster for many investors. As Enderle writes, “It looks like a fraud, it smells like a fraud, and we’ll have a ton of folks now working to prove it was a fraud.”

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Written by: Matt Klassen. Follow by: RSS, Twitter, Facebook, or YouTube.

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