In the wake of the Cambridge Analytica scandal, Facebook (NASDAQ: FB) is facing a fierce crescendo of questions about how user data was intentionally harvested for political purposes. And Facebook’s investors are scrambling because of the risk this scandal poses to the business.

Some shareholders are even suing the social media titan in the wake of the scandal, which has so far this week shot the company’s value down by nearly $50 billion…

Scandal Breakdown

This might be the mother of all scandals for Facebook. It’s already had a detrimental effect on its brand and its standing on Wall Street.

Recent claims made by the New York Times and the UK media accused London-based voter-profiling firm Cambridge Analytica of attempting to influence how Americans voted by using improperly sourced information from some 50 million Facebook users.

The scientist at the heart of this scandal, Aleksandr Kogan, has come forward, stating that he’s being used as a scapegoat by the social media company.

Four years ago, Kogan, a researcher at Cambridge University, collected a dataset of tens of millions of Facebook users through a personality quiz app.

Kogan then passed this information on to Cambridge Analytica, which claimed, but now denies, that it used the data to craft political ads for Donald Trump’s 2016 presidential campaign.

His comments described an environment of permissive data gathering and lax privacy policies:

We thought we were acting perfectly appropriately. We thought we were doing something that was really normal. My view is that I’m being basically used as a scapegoat by both Facebook and Cambridge Analytica.

Kogan went on to say he was constantly reassured by Cambridge Analytica that “thousands and maybe tens of thousands of apps were doing the exact same thing” and that “this was a pretty normal use case of Facebook data.”

Facebook says Kogan violated the company’s data policies by using the information collected for commercial purposes.

But multiple reports state that the social networking company did practically nothing to police this sort of activity, only asking third parties to sign weak agreements and only investigating misuses after they were reported to the company.

Industry insiders all say the collection and misuse of this data are very common.

But this most recent scandal, which broke this past weekend thanks to the testimony of former employee Chris Wylie, has placed these practices right in the hot seat.

Cambridge Analytica has been the subject of parallel investigations and not just on election meddling. An undercover reporter filmed Alexander Nix, the firm’s CEO, boasting about using bribes and sex workers to entrap politicians.

Nix has since been suspended indefinitely.

These reports have brought Facebook’s reputation to an all-new low. The #deletefacebook campaign is in full swing, with plenty of high-profile figures joining in.

The social network company is reportedly under investigation from the Federal Trade Commission (FTC), the New York and Massachusetts’ attorney general, and Canada’s privacy watchdog. CEO Mark Zuckerberg has also been summoned by UK Members of Parliament (MPs) to answer questions before Parliament.

Not to mention, some of Facebook’s shareholders have also filed a lawsuit against the company, as well.

Zuckerberg had been notably absent this week. But he finally broke his silence on Wednesday.

“We have a responsibility to protect your data, and if we can’t then we don’t deserve to serve you,” he added in a statement posted on his own Facebook page.

Although the social network CEO did not use the word “sorry” in his initial statement, he did later apologize in an interview with CNN:

So this was a major breach of trust and I’m really sorry that this happened… Our responsibility now is to make sure that this doesn’t happen again.

But could this be enough to regain the public’s trust?

Some analysts believe that tougher regulation is on the way for social media companies. And implementing these regulations could be accelerated thanks to this scandal.

And Zuckerberg has said he would be open to regulation…

Fed Up Investors

On Tuesday, Facebook shareholder Fan Yuan filed a lawsuit against the company in federal court in San Francisco.

The lawsuit was brought on behalf of an undisclosed number of investors who had bought shares between February 2017 and March 2018.

It stated that Facebook “made materially false and misleading statements” about the company’s policies. It also claims the company didn’t disclose that it permitted third parties to have access to the data of millions of users without their knowledge or consent.

“As a result of Defendants’ wrongful acts and omissions, and the precipitous decline in the market value of the Company’s common shares, Plaintiff and other Class members have suffered significant losses and damages,” the lawsuit stated.

On the other hand, Paul Grewal, Facebook’s deputy general counsel, said the company is “committed to vigorously enforcing our policies to protect people’s information.”

“We will take whatever steps required to see that this happens,” Grewal said in a statement.

Aside from the lawsuit, Facebook is also facing intense scrutiny from lawmakers and users after news broke that Cambridge Analytica had gathered data from approximately 50 million people.

Earlier this week, politicians from both the U.S. and the UK were demanding that Facebook and its CEO answer questions about the scandal.

After his suspiciously long silence, Zuckerberg finally agreed to testify in front of Congress if asked.

“So, if it is ever the case that I am the most informed person at Facebook in the best position to testify, I will happily do that,” he told Wired in an interview.

The social media company took a pounding on the stock market when the news of the scandal reached public attention earlier this week.

Share prices dropped nearly 5% overnight but have since regained some of their losses.

That’s all for now.

Until next time,

John Peterson
Pro Trader Today