Facebook corporate development manager Michael Brown (pictured left in happier days) recently and abruptly left Facebook, and the company then hired a senior Google employee to replace him. It was a curious departure and the chatter around Silicon Valley was that there was a lot more to the story.
And in fact there is. Via a scandal that could have far reaching consequences by bringing even more SEC scrutiny onto rampant secondary trading in non-public startups like Facebook and Twitter.
Brown, multiple sources have confirmed, purchased Facebook stock on secondary markets (like those occurring weekly on SecondMarket), which Facebook considers insider trading and grounds for immediate termination. Sources say this is well communicated throughout the company. It’s unclear how egregious the trade may have been. We’ve heard the trade was related to knowledge of the Goldman Sachs investment that value the company at $50 billion earlier this year, and we’ve heard from others closer to the situation that it was just a naive mistake and Brown has paid the price and moved on. One source says the trades were made last September, well before the Goldman deal was in the works. Either way, Facebook took it seriously and no doubt the SEC would too.
In a public company this would almost certainly violate a number of federal laws. However, say sources, the fact that Facebook is not (technically) a publicly traded company means those laws don’t apply. His actions did violate Facebook’s own insider trading policies, say sources, and he was terminated by Facebook for those violations.
Facebook would not comment on this story, other than to say “we don’t comment on personnel matters.” We also spoke with Michael Brown’s attorney, Edward Swanson, who confirmed that he was representing Brown but wouldn’t comment further.
The size of the trades was relatively small, we’ve heard. But the consequences to Silicon Valley’s newfound love of free-wheeling unregulated secondary market trades may be much larger.
Update: Another source with knowledge of the situation says that Brown purchased the shares in September 2010, well prior to any discussions with Goldman Sachs. His termination, says this source, was for violations of Facebook’s insider trading policies that prohibited the trade(s) themselves, and had nothing to do with the Goldman Sachs transaction. We’re trying to verify this, right now we have conflicting stories from sources. We’ve edited the third paragraph above to include this side of the story.