“The stock price is withering. Investors and analysts are feeling burned….if Mr. Zuckerberg has a revolution up his sleeve, let’s see it. Otherwise, he should settle the lawsuits, expect large staff turnover, and get on with running a business whose scope, prospects, and share price are limited by the limited prospects of advertising on Facebook.” Holman W. Jenkins, WSJ, August 18, 2012

“Before Facebook went public last Wednesday, they were a fabulous company led by a visionary leader. Zuckerberg (Facebook) has been a public company for just 4  business days and he has already been sued for securities fraud by private class action plaintiffs and CNBC and other pundits are calling for Zuckerberg to return from his honeymoon and defend the company. The well respected CFO is being partially blamed. The Securities and Exchange Commission has announced an investigation. The Financial Industry Regulatory Authority pledged a probe. Think about it…you and your CFO did nothing wrong, other than build a fabulous, worldwide company from scratch that is now worth (even after the 20% decline) over $80 billion and employs lots of Americans…An IPO of a new company, without a fully established business model and with tremendous uncertainty about its future prospects…the initial valuation should be a BIG guess and investors who invest should know that it is a VERY speculative matter…The SEC should say that they have no business investigating unless there is some evidence of securities fraud, because they would expect these offerings of companies like Facebook, to go up or down by 100% or more in the short-run as the market settles on its current views of a proper valuation.”, Excerpts from Mike Perry E-Mail to his SEC defense attorneys entitled: “Relevant Thoughts on Facebook IPO”, May 23, 2012

And while Mr. Jenkins’ August 18, 2012 OpEd was highly critical (and very wrong to-date) of Facebook and CEO Zuckerberg, his comments also make clear how ridiculous/frivolous any securities fraud allegations were at the time:

“Mr. Zuckerberg made it clear to potential investors what they were getting into.”

“No, Mr. Zuckerberg never actually told investors his company was worth $100 billion. You never heard him say the valuation was justified, and you never heard him say it wasn’t.”

“Facebook investors were clearly up for a speculative IPO.”

“Today, Facebook’s stock price is nearly $70 a share, not quite doubling its IPO price of $38, in less than two years. And its market value is a whopping $177 billion. So those private, class action securities fraud lawsuits that were filed just days after Facebook’s IPO, based on the billions in paper stock losses at that time, have been exposed as more of the same: ridiculous and frivolous. And I imagine the announced (just after the IPO) SEC investigation has also been suspended, without any findings or action. And why would the SEC investigate Facebook, when they had just weeks earlier reviewed and approved their S-1 filing to go public? I read a recent Bloomberg BusinessWeek article (below) about Facebook’s 10-year anniversary and all the exciting and important initiatives on their and Mr. Zuckerberg’s plate. Mr. Zuckerberg probably doesn’t understand or care because of the stocks rise (neither do most public company CEO’s until it is too late), but all I could think of as I read the article was how unfair it was for the government to expect Mr. Zuckerberg, or any U.S. public company CEO, to provide a SOX certification with each key SEC filing (10-K’s and 10-Q’s). Before I was investigated and sued by the SEC alleging that I had committed securities disclosure fraud (see the SEC tab for a further discussion of this matter), I thought my SOX certifications were as the language of the certifications says: “Based on my knowledge”. I don’t recall giving the meaning of words “Based on my knowledge” much thought, but it provided me comfort because I logically assumed that this language meant that I would not be held liable for securities fraud, unless I created (or instructed someone to create) a materially misleading disclosure, I omitted a material disclosure or instructed someone to omit a material disclosure (or I knew that someone else did any of the above). I can tell you from first-hand experience, that is not how the SEC enforcement staff interprets the “Based on my knowledge” qualifier in the SOX certification. The SEC enforcement staff believes that if a CEO is aware of a material item or issue and it is disclosed in a misleading manner or omitted; whether or not the CEO was involved or even aware, the CEO has committed securities disclosure fraud. This is a huge and important difference that I don’t think many public company CEOs and CFOs, general counsels (and outside counsels), and boards are aware. It raises the bar for CEOs dramatically, because most CEOs are aware at some point of every material item or issue (or they aren’t doing their jobs, right?). So, if you follow the SEC’s logic here, then the CEO is liable for the work of every single person involved in drafting and reviewing material SEC disclosures. (Never mind that “material” is a completely subjective issue and that hindsight is used by the SEC and private plaintiffs to the detriment of the company, CEO, and CFO.) There is no way for a CEO to meet the SEC enforcement division’s “knowledge standard” without a CEO reading each SEC filing for which they provide a SOX certification from cover to cover to make sure that ALL material items/issues of which they are aware (pretty much everything) is properly disclosed. That is neither fair nor realistic and it makes the securities disclosure laws completely arbitrary and abusive. (Can you imagine Warren Buffett or any public CEO doing this? I can’t.) Let me expand on this important point. According to the OMB, the 10-K alone takes on average nearly 2,000 man hours to prepare each year (see email below). There is no realistic way that a CEO can read the annual 10-K, quarterly 10-Q’s, a proxy, and various 8-K’s cover to cover, recall every material item/issue, and vouch those into the company’s filings to ensure they are properly disclosed. These documents are prepared by a “village” of financial, legal, and SEC disclosure experts: the CFO, controller, chief accounting officer, general counsel, and other experts and reviewed by outside counsel, the independent audit committee of the board, and the independent auditors. For many of these individuals or groups, preparing and reviewing these documents are their most important and time consuming responsibility. Yet only the CEO and CFO are required to provide a SOX certification. Public company CEOs should not have to provide SOX certifications (given their significant other responsibilities) just because the CEO’s of a few big public companies were crooks (WorldCom, Enron, etc.). It’s unfair and wrong. Think about it. The President role is now the “sweet spot”, as that arbitrary title means that they don’t provide a SOX certification to the SEC. And why in the world does the CFO have to provide a SOX certification and the General Counsel does not? Does it have to do with the fact that lawyers lead the SEC (and business leaders and accountants do not)? In the long run, I believe it will hurt the competitiveness of U.S. public markets (relative to foreign markets), particularly for IPOs. It also means that U.S. public company CEOs are unnecessarily and unrealistically burdened with major disclosure and compliance responsibilities and therefore spend less time on strategy, innovation, and execution. That eventually has to be a negative for shareholders, employees, and our economy. And finally, it’s wrong that the Courts, Congress, and the SEC have not truly reigned in hardly any of these frivolous private class actions securities disclosure lawsuits. My now informed view, is that most of them involve unsubstantiated and/or fraudulent claims.”, Mike Perry, former Chairman and CEO, IndyMac Bank

In Mr. Jenkins’ August 18th Wall Street Journal OpEd entitled “Facebook Faceplant”, he also said the following:

“Should Mark Zuckerberg have made it clearer to IPO investors he didn’t intent to run it to justify the implausible $100 billion market cap the IPO was about to give it? Go ahead: Buy the shares at $38, but don’t assume my job is to justify the unearthly valuation you’re assuming for my company. Holman Jenkins, Jr. wonders whether Facebook CEO Mark Zuckerberg should pass the baton to a more experienced manager.”

“Right off, let’s acknowledge that Facebook’s initial unrealistic valuation is the real source of Mr. Zuckerberg’s trouble. The share price has halved since the IPO three months ago.”

“But such an IPO perhaps makes it morally incumbent on management at least to have an idea how the valuation can be realized.”

“Some also profess to see a link between Facebook’s plummeting share prices and waning user enthusiasm for the site.”

“Though it would require chutzpah, perhaps the solutions is to buy back the company and take it private. Mr. Zuckerberg’s ideas of ownership and control certainly are more suited to a privately held company.”

“Facebook Turns 10: The Mark Zuckerberg Interview”, Bloomberg BusinessWeek, January 30, 2014

Mike Perry E-Mail to his SEC defense attorneys entitled: “SEC…OMB Burden of Mandatory Disclosures”, August 22, 2012

“Facebook Faceplant”, Holman W. Jenkins, Jr., Wall Street Journal, August 18, 2012

Mike Perry E-Mail to his SEC defense attorneys entitled: “Relevant Thoughts on Facebook IPO”, May 23, 2012

Posted on February 20, 2014, in Postings. Bookmark the permalink. Leave a comment.

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