Facebook fired a corporate development manager named Michael Brown because he bought Facebook shares on a secondary market, violating the company’s insider trading rules.
TechCrunch, which broke the news, reports that Brown may have bought the Facebook shares in September, knowing that Goldman Sach’s planned to invest in Facebook at a $50 billion valuation in January.
Other sources dispute this allegation.
The SEC is already investigating secondary markets. A few more stories like this, and the heat will get turned way up.
These markets are, we’ve warned, “a disaster in the making.”
A DISASTER IN THE MAKING
The growing prominence of secondary markets for private stocks is likely to generate increasing regulatory scrutiny. It’s also likely a legal disaster in the making.
Based on stories we’ve heard recently from senior technology executives, the information and behaviour in these markets is every bit as “asymmetrical” as the information and behaviour that that led to the SEC and modern securities laws being created after the crash of 1929.
For now, with hot private-market stocks going nowhere but up, everyone’s happy: Insiders and venture capitalists get some liquidity, and purportedly “accredited” investors (like rich dentists) get to cash in on the hot new things.
But when a red-hot private market stock like Twitter eventually crashes–which one inevitably will–woe to super-sophisticated insiders like Kleiner Perkins who have sold stock in these private markets. Because, just as inevitably, some of the stock that these insiders have dumped will have found its way into the retirement accounts of some dentists.
And those dentists will be just as aggressive about shouting that they got swindled as they were about buying hot private-market stocks. And they won’t lose their shirts without a fight.