The inconceivable account of a whistle-blower destroying a tech giant
Dear whomever may be concerned,
I’ve sent a similar text this week to the members of the Senate whistleblower protection caucus and thought you may find an interest as well.
I’m an SEC whistle-blower responsible for exposing a novel and unfamiliar type of securities fraud which occurred on Wall Street late 2015. I have informed the SEC of this very significant fraud more than 18 months ago but to the best of my judgement no investigation or inquiry has been initiated.
The investors have lost billions and meanwhile the public is clueless and there is severe risk of recurrence of the same type of fraud by others.
The fraud I’ve exposed, which caused LinkedIn’s Feb 2016 stock tanking, is novel and concerns the fudging of reported users’ engagement metrics by an Internet giant operating a social network. These crucial metrics reported quarterly by many companies (Facebook, Google, Twitter etc) are oddly not regulated or audited by third parties and so are susceptible to manipulation, as I proved was the case with LinkedIn.
I have read with despair the SEC Office of Inspector General’s (OIG’s) comprehensive investigation report on SEC’s failure to uncover Madoff’s Ponzi scheme and am attempting to avoid a similar faith to this case. On a personal note, I don’t wish to be the next “Markopolos”, completely ignored until it was too late.
I fear the next occurrence of this type of fraud may not “only” evaporate 11 billion dollars (as in LinkedIn’s crash) but hundreds of billions, so the fact the claimed fraud is novel and professionals in the SEC (apparently also outside it) have difficulties identifying it should alarm the SEC to place this inquiry on high priority.
Some background on me. I’m an Israeli entrepreneur living in Tel-Aviv with 17 years of past professional experience as a lawyer and a partner in a large Israeli law firm, specifically dealing with securities law and technology. I’m also an obsessive geek.
I have no hidden agenda or motives. What drove me to investigate this issue was sheer curiosity and the intellectual challenge in solving what I recognized as a puzzling case with substantial implications to others.
I’ll now detail the crux of this story and the fraud as it unfolded before me.
What led me to investigate and expose this fraud was a question Mark Mahaney from RBC Capital asked on LinkedIn’s Q3 2015 earnings call.
Mahaney asked what was driving the very promising “20% year-over-year growth in page views per unique visiting member” claimed by LinkedIn and also inquired about the puzzling discrepancy between such accelerated growth and an actual slowdown in revenues from marketing solutions.
The answer Mahaney received did not satisfy me at all and so I did some digging and got lucky.
I uncovered a technical change introduced by LinkedIn to its platform during the first half of 2015 which I believed was responsible for falsely bumping the engagement metrics of LinkedIn’s users and for the false claims of accelerated growth it presented to its shareholders, while in reality the opposite occurred and there was a deceleration in users’ engagement — an awful sign for a traded company (which was also reflected in the slowdown in revenues Mahaney commented on)
On January 7, 2016 I wrote a detailed article explaining and proving my outrageous claim and had short correspondence on this matter with several Wall Street analysts covering LinkedIn who read my article, including with Mark Mahaney.
3 weeks later on February 4, 2016 LinkedIn filed its full year results and guidance and the stock tanked by almost 50% vaporizing about 11 billion $ of value. Several months later LinkedIn was wholly acquired by Microsoft.
No one really knew what caused the analysts to behead Linkedin so severely although Mahaney, after slashing LinkedIn’s target price from 300$ to 156$, provided an important tell:
“We do not believe that this alone can account for all of the downside to guidance, implying to us material deceleration in the core business”
This quote deserves a careful look because it validates my claims. A senior Wall Street analyst killing LinkedIn by slashing it in half, 3 weeks after he read my claims, goes on record to say he does not believe the statements made by the company explaining the lowered guidance and thinks that, contrary to LinkedIn’s statements there is actually a material deceleration in its core business — the exact point I was making.
Obviously the analysts who read my claims waited for the February 4, 2016 filings in order to make a determination if I was onto something or not and they concluded that I was right and so completely lost faith in LinkedIn’s management and prospects.
The only way for LinkedIn to go forward was to seek a deal that would take it off Wall Street and that was the main drive behind the deal it struck with Microsoft.
BTW, 2 months before exposing this securities fraud I’ve exposed and proved that LinkedIn was making false representations and empty promises to its 400,000,000 users on what matters most to them — their freedom of speech. 24 hours after I’ve posted that article LinkedIn silently changed such statements without notifying anyone of us.
Thanks for reading this, now do your part and share as well as follow my twitter account :-)