Facebook Looks to Become Big Fish in Another Big Pond

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Bits Blog: Makers of Paper Ask Facebook to Change Its New App Name

DealBook: Facebook to Join S.&P. 500

Facebook Shares Touch a Symbolic Threshold

On Wednesday morning, the company’s stock crossed an important psychological barrier, trading above $38 a share, the price at which Facebook, the world’s leading social network, first sold shares to the public in May 2012.

The catalyst for the rise was the company’s surprisingly strong second-quarter earnings report last Wednesday, which quelled many investors’ doubts about Facebook’s ability to make money from its legions of mobile users and suggested that the company’s profit stream would continue growing.

Since last week’s report, shares have risen about 34 percent. Early Wednesday, they briefly touched $38.31 a share, although they pulled back to end at $36.80 a share at the time the market closed.

The company’s shares hit a low of $17.55 last fall. Since then, investors have warmed to the company as its management demonstrated that it can increase profits and not just users.

“There was a perception that they hadn’t monetized the users they have,” said Aaron Kessler, an analyst at the Raymond James brokerage firm, referring to last summer, when the Facebook’s stock was trading at half the current level.

These days, Wall Street sees revenue potential everywhere — from soon-to-come video ads in the Facebook news feed to the expansion of high-dollar ads targeted to specific swaths of Facebook users.

“Facebook was caught flat-footed by the shift to mobile,” said Mark S. Mahaney, an analyst with RBC Capital Markets. Now, he said, “they appear to be set up as a sustainable, high-growth business.”

Still, there are reasons to be concerned. Mobile messaging platforms like Snapchat and WhatsApp are grabbing the attention of many of Facebook’s younger users. Twitter is mounting a major effort to go after marketers, especially brands that typically advertise on television, as it prepares for its own likely public offering.

And Facebook risks turning off users with too many ads. About 1 in 20 items in the news feed, the main flow of items that a Facebook user sees, is an ad. During the company’s quarterly conference call with analysts, Facebook’s co-founder and chief executive, Mark Zuckerberg, said that users were beginning to notice the number of ads, suggesting that the company could not greatly increase their frequency without losing some users.

Nate Elliott, a principal analyst with Forrester Research, said Facebook users who visit the site on a computer’s browser still see too many cheap, poorly targeted ads on the right side of the page. “They’ve got to get much better at targeting,” he said.

Despite these worries, investors’ views of the company’s prospects have clearly changed.

Mr. Mahaney, whose firm has a $40 price target on the Facebook stock, said that analysts across Wall Street had increased their projections of the company’s financial performance. Analysts now expect Facebook to increase its profits 30 to 35 percent a year through 2015.

Because stocks tend to trade as a multiple of a company’s future profits, those upgrades last week sent Facebook’s stock soaring.

Facebook officials declined to comment on the stock rise on Wednesday. But for the company’s executives, who had urged investors to be patient as their strategy played out, the surge surely offers some vindication.

The company raised $16 billion from the initial public offering on May 18, 2012, vaulting it into the big leagues of American stocks, but problems struck immediately. The Nasdaq stock exchange botched the handling of buy and sell orders on the first day of trading — so badly, in fact, that regulators eventually fined Nasdaq $10 million for the fiasco.

In ensuing weeks, Facebook shares continued to fall. Instead of pouring into the stock, as they did a decade earlier with Google, many investors questioned whether Facebook’s stock was overpriced at $38 a share.

Particularly worrisome was Facebook’s seemingly nonexistent mobile strategy just as Internet users were abandoning PCs for their smartphones. The company’s smartphone and iPad applications were clunky, and it was generating no revenue from mobile ads.

Facebook’s management, including Mr. Zuckerberg, recognized the problem and began a crash course to revamp the company’s approach to mobile and better position the company for fast-growing emerging markets.

The company overhauled its apps, introduced ads into its users’ news feeds, and created a new category of revenue called app-install ads. With the app-install ads, a game maker, for example, can promote its new game in Facebook’s mobile software and give users an easy way to install the app with just a couple of clicks.

Facebook also introduced new advertising products meant to give marketers more ways to target specific groups of customers, which allowed the service to charge higher advertising rates.

While mobile advertising continues to grow, and was about 41 percent of Facebook’s ad revenue in the second quarter, investors are also looking to new areas of potential profit growth. Those include video advertising in the news feed, which is expected to begin later this year, and the possible sale of ads in Instagram, the fast-growing photo and video-sharing app that Facebook bought in 2012.

“All of those seem like relatively large low-hanging fruit, and they are starting to go after them,” Mr. Mahaney said.

You're the Boss Blog: E-Commerce Company Learns to Sell Directly on Facebook

Facebook to Shield Ads From Offensive Content

In a message posted on its Web site, the company wrote: “Our goal is to both preserve the freedoms of sharing on Facebook but also protect people and brands from certain types of content.”

“We know that marketers work hard to promote their brands, and we take their objectives seriously. While we already have rigorous review and removal policies for content against our terms, we recognize we need to do more to prevent situations where ads are displayed alongside controversial Pages and Groups. So we are taking action.”

Facebook said it would begin the manual review for pages containing sensitive content next week with a team of hundreds of employees in offices around the world.

The action comes a month after feminist groups campaigned for an improvement in Facebook’s process for identifying and removing pages that glorify violence against women. At the time, Facebook acknowledged that its procedures had not worked effectively. Activist groups sent more than 5,000 e-mails to Facebook’s advertisers and elicited more than 60,000 posts on Twitter, requesting the removal of pages featuring women who had been abused.

The protests caused Nissan and a number of smaller advertisers to temporarily withdraw their ads from the site. Other advertisers, including Zappos, Dove and American Express, stopped short of removing their ads but issued statements on digital media saying they did not support violence against women.

“The way you allocate your resources identifies what your priorities are,” said Soraya Chemaly, a writer and activist who was involved in the digital media campaign.

Ms. Chemaly said that since the protests in May Facebook had been “great” about removing content the groups flagged as offensive but that the procedure for removing such content had not been systematic. “Before you can remove the ads, you need to have an accurate assessment of what counts as controversial and that’s not happening now systemically,” she said.

Elisabeth Diana, a Facebook spokeswoman, said dealing with offensive content was something the company handled on a daily basis. “We take it really, really seriously,” she said, adding that the goal of the new procedure “won’t be as much content policing as there will be advertising policing.”

Removing the ads from such pages also removes a pressure point that activist groups have used to get media companies and advertisers to listen to their concerns. “They are hoping to dismantle the leverage,” Ms. Chemaly said. “From a business perspective that makes perfect logical sense.”

The company expects to automate the process of identifying such content after a manual review of thousands of its pages.

Facebook Says Technical Flaw Exposed 6 Million Users

Facebook blamed the data leaks, which began in 2012, on a technical flaw in its huge archive of contact information collected from its 1.1 billion users worldwide. As a result of the problem, Facebook users who downloaded contact data for their list of friends obtained additional information that they were not supposed to have.

Facebook’s security team was alerted to the problem last week and fixed it within 24 hours. But Facebook did not publicly acknowledge the flaw until Friday afternoon, when it published a message on its blog explaining the situation.

A Facebook spokesman said the delay was because of a company procedure stipulating that regulators and affected users be notified before making a public announcement.

“We currently have no evidence that this bug has been exploited maliciously, and we have not received complaints from users or seen anomalous behavior on the tool or site to suggest wrongdoing,” Facebook said on its blog.

While the privacy breach was limited, “It’s still something we’re upset and embarrassed by, and we’ll work doubly hard to make sure nothing like this happens again,” it added.

The breach follows recent disclosures that several consumer Internet companies, including Facebook, Google, Microsoft, Apple and Yahoo, turned over troves of user data to a large-scale electronic surveillance program run by American intelligence officials.

The companies, led by Facebook, successfully negotiated with the United States government last week to reveal the approximate number of user information requests that each company had received, including secret national security orders.

Bits Blog: Facebook Discloses Basic Data on Law-Enforcement Requests

Jeff Chiu/Associated Press A sign outside of Facebook’s headquarters in Menlo Park, Calif. The company on Friday disclosed information about government requests for data, the vast majority of which did not pertain to national security matters.

12:10 a.m. Saturday, June 15, 2013 | Updated Added Microsoft’s release of more data on Friday night.

Facebook on Friday disclosed for the first time how many requests for data about its 1.1 billion users it had gotten from law enforcement authorities in the United States.

The social networking company said that in the last six months of 2012, it had 9,000 to 10,000 requests for information about its users from local, state and federal agencies. Those requests covered 18,000 to 19,000 user accounts.

“These requests run the gamut — from things like a local sheriff trying to find a missing child, to a federal marshal tracking a fugitive, to a police department investigating an assault, to a national security official investigating a terrorist threat,” the company’s general counsel, Ted Ullyot, said in a blog post disclosing the data.

Facebook said it was legally prohibited from saying how many of the data requests were related to national security. But generally speaking, the vast majority of the law-enforcement data requests received by tech companies are for other matters, like local criminal cases.

Facebook’s disclosure comes after negotiations with the federal government that began after the first news reports a week ago about the National Security Agency’s secret Prism surveillance program. Those reports revealed that a number of American Internet companies, including Facebook, Google, Microsoft and Yahoo, had secretly provided data about foreigners to the United States government under the Foreign Intelligence Surveillance Act.

The tech companies have also secretly provided data to the F.B.I. under National Security Letters, which the government uses to gather information about Americans.

Under federal law, companies generally cannot disclose even the existence of national security data requests they receive. But in recent days, Facebook, Google and Microsoft have been pressing the government for permission to share more information.

“We’re pleased that as a result of our discussions, we can now include in a transparency report all U.S. national security-related requests (including FISA as well as National Security Letters) – which until now no company has been permitted to do,” Mr. Ullyot wrote. “As of today, the government will only authorize us to communicate about these numbers in aggregate, and as a range. This is progress, but we’re continuing to push for even more transparency.”

Google had previously published a transparency report that included N.S.L. but not FISA data requests. Microsoft’s recent transparency report similarly excluded FISA requests but included National Security Letters.

Late Friday, after Facebook’s data release, Microsoft provided similar information about requests for data that it had received from law enforcement at all levels of government.

For the six months ending Dec. 31, 2012, Microsoft received between 6,000 and 7,000 criminal and national security warrants, subpoenas and orders affecting between 31,000 and 32,000 consumer accounts from governmental entities in the United States, the company’s deputy general counsel, John Frank, said in a statement.

“We have not received any national security orders of the type that Verizon was reported to have received that required Verizon to provide business records about U.S. customers,” Mr. Frank said.

This post has been revised to reflect the following correction:

Correction: June 15, 2013

An earlier version of this article incorrectly described Microsoft's transparency report. It included National Security Letters requests, but excluded FISA requests. It did not exclude both types of national security requests.

Mobile Ads Help Propel Earnings At Facebook

Those concerns were silenced a bit on Wednesday, when Facebook’s earnings report offered early signs that the company was cracking the mobile revenue code.

In the first three months of the year, the company’s mobile advertising generated $375 million in revenue, exceeding what analysts had expected. Mobile revenue accounted for 30 percent of the company’s advertising revenue in the first quarter of this year, compared with 23 percent in the same period last year.

“What we have seen has made us more confident we can do more with advertising over time,” the company’s chief executive and co-founder, Mark Zuckerberg, told analysts on an earnings call on Wednesday. He said one of his top goals was to build “the best mobile product” — and make money from it.

Despite the strong mobile numbers, investors did not extol the company on Wednesday, largely because it continues to spend a lot of money to develop new features. The company’s shares fell about 1 percent, closing at $27.43, before the earnings were reported. Facebook shares swung up and down in after-hours trading but ended at $27.51.

Just last year, Mr. Zuckerberg said that Facebook was late in retooling itself for the mobile era. At Facebook headquarters, morale-raising posters went up on the walls screaming “Our Mobile Future.”

Since then, Facebook has introduced more than a half-dozen advertising products. They include what are called app-install ads, which are meant to help app developers draw new customers and more refined advertising tailored to consumers’ online and offline behavior.

Facebook has recently partnered with third-party data companies that track who buys soda at the supermarket and who is planning to buy a car in the next six months.

Facebook executives said the company planned to hone its targeting even more.

Two-thirds of Facebook’s 1.1 billion users across the world log into the site on their phones, the company said Wednesday, accounting for what executives described as strong growth in populous countries like India and Brazil.

For those mobile users, the changes mean more ads when they log in on their cellphones and eventually more finely targeted ads. And they mean a redesigned News Feed, a feature introduced in March, that offers marketers a chance to show off pictures and bigger and more prominent links.

“We want content in ads that’s as good as content from a friend or somewhere else on the site, as well as to have a higher return for marketers,” said Sheryl Sandberg, the company’s chief operating officer. “Those go hand in hand. What you’ll see from us is better targeting.”

All told, revenue increased 38 percent, to $1.46 billion, exceeding the $1.44 billion estimate of financial analysts surveyed by Bloomberg News. The company had $219 million in net income. It reported a profit of 12 cents a share, missing the average estimate by a penny.

“Over all, they’re on track,” said Aaron Kessler, an analyst with Raymond James. “They’re still rolling out new products for advertisers. They’re definitely more focused on creating shareholder value and driving revenue growth.”

In early April, the company introduced mobile software for Android phones called Facebook Home that is intended to nudge Facebook users to return to their mobile News Feeds even more frequently than they do now.

The new suite of applications effectively turns the News Feed into the screen saver of a smartphone, updating it constantly with Facebook posts and messages. It appears to be only a matter of time until the company introduces ads there.

Last May, Facebook held a widely publicized initial public offering of stock, at a price of $38 a share. Its fairy tale rise took a sharp dive almost immediately, resulting in lawsuits and angry recriminations. Its shares slumped to half the opening price at one point last fall, and they have inched up cautiously since then.

On Wednesday, Facebook filed a motion asking a federal judge to dismiss a lawsuit that accused the company of misleading investors about its financial strategy before the public offering, Reuters reported. The company said in court papers that it was not legally obligated to disclose publicly how mobile adoption would affect its financial performance in the future.

Wall Street analysts have watched closely for signs of Facebook fatigue among users. In the first quarter, they point out, fewer monthly users returned to Facebook on their desktop computers in the United States and Europe, according to comScore figures.

Analysts worried whether that meant that users in more mature and lucrative markets were getting bored with Facebook. But they noted that the figures applied only to desktop users and revealed little about mobile users of Facebook.

Bits Blog: For Zuckerberg, a Big Payout From Facebook Stock

Paul Sakuma/Associated Press Mark Zuckerberg, Facebook’s co-founder and chief executive.

Facebook shares may have been on a roller coaster ride in the year since they made their debut on Wall Street, but they haven’t been too shabby for its top executives. Mark Zuckerberg exercised stock options worth $2.3 billion, according to a proxy statement filed with the Securities and Exchange Commission late Friday — and sold about half, to cover his tax bill.

Sheryl Sandberg, the company’s chief operating officer, retained her spot as the company’s best-paid executive for two consecutive years. She received total compensation of about $26 million in 2012, down slightly from nearly $31 million the year before.

Mike Schroepfer, the engineering chief of the company, had almost $21 million in compensation, while Mr. Zuckerberg claimed a far more modest package of just under $2 million last year.

The proxy statement reported that Mr. Zuckerberg had spent $1.2 million on chartered aircraft for his personal travel.

Ms. Sandberg had vested stocks worth over $820 million, while David A. Ebersman, who as chief financial officer led the company’s public offering in May, had vested options worth just over $100 million.

Facebook came out of the box in May at $38 a share, and its value sank sharply over the next several months. It closed on Friday at $26.85.

The company also announced that Jim Breyer of Accel Partners, an early investor who personally made more than $100 million from his sale of Facebook stock, was leaving the board. He was one of the most prescient venture capitalists to back Facebook and had served as a director since 2005. He was recently elected a fellow of the Harvard Corporation, a governing board of the university.

DealBook: Never Mind Facebook; Winklevoss Twins Rule in Digital Money

The Winklevoss twins, Cameron and Tyler — Olympic rowers, nemeses of Mark Zuckerberg — are laying claim to a new title: bitcoin moguls.

The Winklevii, as they are known, have amassed since last summer what appears to be one of the single largest portfolios of the digital money, whose wild gyrations have Silicon Valley and Wall Street talking. The twins, the first prominent figures in the largely anonymous bitcoin world to publicly disclose a big stake, say they own nearly $11 million worth.

Or at least $11 million as of Thursday morning — when trading was temporarily suspended after the latest and largest flash crash left a single bitcoin worth about $120 and the whole market worth $1.3 billion. At one point, the price had plummeted 60 percent.

To skeptics, the frenzy over the bitcoin network created by anonymous programmers in 2009 looks more like the mania for Dutch tulip bulbs in the 1600s than the beginnings of an actual currency.

“To say highly speculative would be the understatement of the century,” said Steve Hanke, a professor specializing in alternative currencies at Johns Hopkins University.

Whatever else it is, bitcoin has become the financial phenomenon of the moment.

In addition to the identical twins, Silicon Valley investment firms, while not holding bitcoins, are starting to show interest in the technology.

On Thursday, a group of venture capitalists, including Andreessen Horowitz, announced that they were financing a bitcoin-related company, OpenCoin.

Sean Gallup/Getty ImagesA sticker on the window of a pub in Berlin signifies acceptance of bitcoin for payment. Few places accept the digital currency.The New York Times

The Winklevosses say this week’s tumult is just growing pains for a digital currency that they believe will become a sort of gold for the technorati.

“People say it’s a Ponzi scheme, it’s a bubble,” said Cameron Winklevoss. “People really don’t want to take it seriously. At some point that narrative will shift to ‘virtual currencies are here to stay.’ We’re in the early days.”

While little is known about the creator of bitcoin, or if it even was a single person, the work involved serious programming chops, building a system that could live on borrowed computer space around the world. It was determined that only a finite number of bitcoins could be created — the count is currently around 11 million. New coins are “mined” by programmers who solve mathematic riddles and can sell their coins on upstart exchanges.

For now, there are few places where bitcoins can be used. One marketplace is an online bazaar, Silk Road, where narcotics are reportedly the main wares for sale. But bitcoin believers imagine a future where the e-cash can be used at their local Starbucks. The Winklevosses have paid in bitcoin for the services of a Ukrainian computer programmer who has worked on their Web site.

“We have elected to put our money and faith in a mathematical framework that is free of politics and human error,” Tyler Winklevoss said.

This is not the brothers’ first gamble on an unproved technology. As students at Harvard, the twins founded a social networking site, ConnectU, and enlisted their schoolmate, Mark Zuckerberg, to help them build the company. After Mr. Zuckerberg went off to start Facebook, the brothers sued him, accusing him of stealing their idea — a story that was dramatized in the movie “The Social Network.” The case was settled with the brothers being given $20 million in cash and Facebook shares that are now worth more than $200 million.

They have parlayed that fortune into Winklevoss Capital. Their first two investments were in Hukkster, a start-up shopping Web site and SumZero, an online community for professional money managers.

The brothers began dabbling in bitcoin last summer when the dollar value of a single coin was still in the single digits. To keep their holdings secure from hackers, they have taken the complex codes that represent their holdings off networked computers and saved them on small flash drives, putting the drives, in turn, in safe deposit boxes at banks in three different cities.

It’s hard to verify how the Winklevoss holdings compare with other bitcoin players, given the anonymity of accounts, and the twins say they believe that some early users of the system probably have holdings that are at least as large.

A Maltese company, Exante, started a hedge fund that the company says has bought up about 82,000 bitcoins — or about $10 million as of Thursday — with money from wealthy investors. A founder of the fund, Anatoli Knyazev, said his main concern was hackers and government regulators, who have so far mostly left the currency alone.

These investments were all in an uncertain state on Thursday after the big price swings and the shutdown of trading on Mt. Gox, a Japanese-based company that claims to handle 80 percent of all bitcoin trades. Mt. Gox said in a statement that the problems were a result of the currency’s popularity, making it impossible to process all the incoming orders. It added that it was not the victim of hackers but “instead victim of our own success!”

The 6-foot-5 Winklevoss brothers were unfazed. The brothers said they took advantage of the low prices to buy more.

“It has been four years and it has yet to be discredited as a viable alternative to fiat currency,” Tyler Winklevoss said. “We could be totally wrong, but we are curious to see this play out a lot more.”

DealBook: Nasdaq Cuts Chief’s Bonus Over Facebook I.P.O.

Lucas Jackson/ReutersRobert Greifeld, the chief executive of the Nasdaq OMX Group.

The board of the market operator Nasdaq OMX Group has cut the 2012 bonus of the company’s chief executive, Robert Greifeld, by 62 percent, as a result of the botched Facebook initial public offering last May.

Over all, Mr. Greifeld earned $8.9 million last year, including salary, stock awards and a “non-equity incentive plan compensation” of $1.35 million, down from a 2011 bonus of $3.59 million. In 2011, he received $7.6 million in total compensation.

The board also reduced the bonus of Anna Ewing, executive vice president of global technology solutions, the company’s top market technology executive, by 53 percent, to $574,125.

In a securities filing on Thursday, the company said that the management compensation committee and the board “explicitly considered the Facebook I.P.O. in connection with their review and determination of these reduced payouts. ”

The trading debut of Facebook shares on May 18, 2012, was the most anticipated market event in more than a decade, generating intense interest among retail investors as well as on Wall Street. But the start of trading was marred by what Nasdaq calls “systems issues,” including a surprising opening delay and missing trade execution messages. Amid the chaos of the day, the electronic market had to fill out out orders by hand for a spell.

The market operator has pledged to pay $62 million to member firms who suffered losses during trading that day as a result of computer malfunctions.

In a statement last summer, Mr. Greifeld said: “We deeply regret the problems encountered during the initial public offering of Facebook, We failed to meet our own high standards based on our long history of providing outstanding technology to our members and exchange customers. We have learned from this experience and we will continue to improve our trading platforms.’’

Bits Blog: New Phone by Facebook to Showcase Its Network

Valentin Flauraud/Reuters Facebook has been putting increasing focus on its mobile products for over two years.

8:45 p.m. | Updated

Facebook users post more photos, write more status updates and hit the like button more often from mobile devices than they do from computers. So it was almost inevitable that Facebook would introduce a smartphone that put its social network front and center.

On Thursday, Facebook plans to unveil the first smartphone created to showcase its social network. The phone, made by HTC, uses a version of Google’s Android software, according to two people briefed on the announcement, which will be made at a news conference at the company’s headquarters in Menlo Park, Calif.

The software is designed so that some of the core features of the phone, like the camera, will be built around Facebook’s services, according to one of the people, who is a Facebook employee. Both people briefed on Facebook’s plans spoke on the condition of anonymity because they were not authorized to discuss the product before the formal announcement.

Derick Mains, a Facebook spokesman, declined to share details of the event. But he said it would be a “significant mobile-focused announcement.” The invitation sent to members of the news media says, “Come see our new home on Android.”

For Facebook and any other online business that is supported by ads, mobile is a tough puzzle to crack. It is difficult to get people to look at advertisements on smaller screens, where display space is limited, without becoming too intrusive.

Facebook’s business strategy is to persuade people to congregate around its social network as much as possible and eventually show them more ads. That is why, over the last year, Facebook has been revamping its organization to be “mobile first.” Every team at Facebook is involved somehow in its mobile products. And the company has recruited engineers who specialize in mobile phone development, including former Apple employees who worked on the development of the iPhone.

The Facebook employee familiar with the announcement said that when the Facebook phone is turned on, it will immediately display a Facebook user’s home screen. A phone with a strong Facebook focus would prompt customers to use Facebook more than competing apps and services. But the success of such a device would depend on how much support the handset received from wireless carriers, said Chetan Sharma, an independent telecommunications analyst who consults for carriers. The carriers can choose which devices are sold in their stores, as well as how prominently to promote them.

“Unless the phone is in front of the consumers in stores, it’s hard to see how it will gain traction,” Mr. Sharma said.

He said it was difficult to imagine that big carriers like AT&T and Verizon Wireless would place a serious bet on a Facebook phone from HTC, because that manufacturer’s other phones have not been selling very well. HTC once made a phone called the Cha Cha that had a button for posting photos directly to Facebook, but it sold poorly.

The idea of a Facebook-powered Android phone is not new. In 2008, Inq, a phone maker based in London, released a phone called the Inq1 that integrated Facebook services into crucial areas of the device. In 2011, it said it would release an Android phone called the Inq Cloud Touch, which had some of Facebook’s services integrated into the home screen.

But early last year, Inq pulled the plug on theCloud Touch, saying it would instead focus on other products. Frank Meehan, the former chief executive of Inq, said in an e-mail interview that the Inq had felt too threatened by Samsung Electronics, now the biggest maker of phones in the world, so it abandoned its plans.

“Samsung was already on a path to crush everyone, and we decided to get out of hardware and turned the company into software only,” Mr. Meehan said.

Mr. Meehan said that if HTC released an Android phone with a focus on Facebook, it would still face the problem that Samsung is the dominant player on Android, Sony is gaining traction in mobile and Huawei, a Chinese handset maker, is dominant in Asia. He said it would be better for Facebook to create a special layer that consumers could install on Android devices so the social network would embed more deeply into Android apps and Google services.

“I would see this as a more radical way of providing the social layer functionality on mobile that would really bring the power of Facebook to Android,” he said.

The Facebook employee familiar with plans for the new phone said the stand-alone mobile apps it released over the last two and a half years were essentially experiments to see what worked on mobile devices before rolling them into a Facebook-focused Android phone. This year the company introduced Poke, a private messaging service, as a stand-alone app. Last year, it released a camera app that specialized in tagging and uploading photos to Facebook. In 2011, it introduced Messenger, an app for free text messaging, which was later expanded to include free voice calls.

Facebook has been exploring making its own smartphone for the last two years. But the project, which was at one time code-named “Buffy,” had stalled because the company could not decide whether to make its own hardware or team up with a phone maker.

Facebook’s approach to modifying Google’s Android software is similar to Amazon’s, said a former employee of Facebook who had been briefed on the product. For its Kindle Fire tablets, Amazon removed Google’s apps and promoted its own services, like the Kindle e-book store, Amazon’s video service and Amazon’s own app store. The tablet is essentially an Amazon-powered shopping console.

A smartphone that gives priority to Facebook services is good for Facebook, but it is unclear whether that is something consumers want. Jan Dawson, a telecommunications analyst at Ovum, said the concept was “a solution to a problem that doesn’t exist.”

“There are lots of people who love Facebook, but I doubt if any of them feel like they need a more Facebook-centric experience on their phones,” he said. “There isn’t anything obviously missing.”

He agreed that it was unlikely that wireless companies would put much support behind such a device, because they are already worried about the way Google and Facebook are supplanting carriers in people’s minds as providers of content and communication services.

Ex-Oregon Governor Candidate Charged in Facebook IPO Fraud

Craig Berkman, 71, falsely told investors he had access to scarce pre-IPO shares of Facebook and other social media companies such as LinkedIn Corp, Groupon Inc and Zynga Inc, the U.S. Securities and Exchange Commission said in a statement.

But instead of buying shares for investors as promised, Berkman made "Ponzi-like" payments to earlier investors and funded personal expenses, including costs in a bankruptcy case, according to the SEC, which filed a civil case.

The defendant received at least $8 million from various schemes, according to U.S. Attorney Preet Bharara in Manhattan, which filed criminal charges against Berkman.

"Berkman blatantly capitalized on the market fervor preceding highly anticipated IPOs of Facebook and other social media companies to fleece investors whose cash flow he treated like an ATM to fund his own living expenses and pay court-ordered claims to victims of his past misdeeds," said Andrew Calamari, director of the SEC's New York office.

Berkman was arrested at his home in Odessa, Florida, and was expected to appear in a Tampa, Florida federal court on Tuesday.

The Manhattan U.S. Attorney's Office charged Berkman with two counts of securities fraud and two counts of wire fraud. Each count carries a maximum of 20 years in prison.

In one allegation, more than 50 investors sent $4.6 million into a bank account controlled by a Berkman entity called Ventures Trust II, according to the complaint filed by the Manhattan U.S. Attorney's Office.

Berkman told investors the funds would be used to buy pre-IPO shares of Facebook, but instead the "vast majority" was transferred to other accounts Berkman controlled for his own personal benefit, according to the complaint.

Berkman has long been active in Oregon politics and served for a time as the head of the state's Republican Party, according to press accounts. He lost in the Republican primary for governor in 1994, and he explored a bid for governor in the 2002 race, according to The Oregonian.

The SEC's order details what the agency called a "recidivist history" for Berkman.

The Oregon Division of Finance and Securities issued a cease-and-desist order and a $50,000 fine against Berkman in 2001 for offering and selling convertible promissory notes without a brokerage license, according to the SEC statement.

In 2008, an Oregon jury found Berkman liable in a private action for breach of fiduciary duty, conversion of investor funds and misrepresentation to investors related to his involvement with a purported venture capital firm, according to the SEC.

Berkman reached a settlement with the firm, called Synectic Ventures, after it filed an involuntary Chapter 7 bankruptcy petition against him in 2009 for debts he didn't pay related an earlier judgment against him for $28 million, according to the SEC.

Rather than use his own money to pay the claims, Berkman spent more than $5.4 million from investors in his pre-IPO offerings to make payments in the bankruptcy settlement, according to the SEC.

The SEC brought a separate case against John Kern of Charleston, South Carolina, whom it said took part in the fraud as legal counsel to some of Berkman's companies.

Marc Blackman, a lawyer for Berkman, was not immediately available for comment.

It was not immediately clear whether Kern has hired a lawyer for his defense. Kern was not immediately available for comment.

The criminal case is U.S. v. Berkman, U.S. District Court, Southern District of New York, No. 13-mg-00732.

(Editing by Bernadette Baum and Richard Chang)

Disruptions: On Facebook, Sharing Can Come at a Cost

Paul Sakuma/Associated Press The way Facebook highlights or hides information on its site raises ethical questions.

7:23 p.m. | Updated

Something is puzzling on Facebook.

Early last year, soon after Facebook instituted a feature that let people subscribe to others’ feeds without being friends, I quickly amassed a healthy “subscriber” list of about 25,000 people.

Every Sunday morning, I started sharing my weekly column with this newfound entourage. Those posts garnered a good response. For example, a column about my 2012 New Year’s resolution to take a break from electronics gathered 535 “likes” and 53 “reshares.” Another, about Mark Zuckerberg, Facebook’s founder and chief executive, owing me $50 after the company’s public offering, quickly drew 323 likes and 88 reshares.

Since then, my subscribers have grown to number 400,000. Yet now, when I share my column, something different happens. Guess how many people like and reshare the links I post?

If your answer was over two digits, you’re wrong.

From the four columns I shared in January, I have averaged 30 likes and two shares a post. Some attract as few as 11 likes. Photo interaction has plummeted, too. A year ago, pictures would receive thousands of likes each; now, they average 100. I checked the feeds of other tech bloggers, including MG Siegler of TechCrunch and reporters from The New York Times, and the same drop has occurred.

What changed? I recently tried a little experiment. I paid Facebook $7 to promote my column to my friends using the company’s sponsored advertising tool.

To my surprise, I saw a 1,000 percent increase in the interaction on a link I posted, which had 130 likes and 30 reshares in just a few hours. It seems as if Facebook is not only promoting my links on news feeds when I pay for them, but also possibly suppressing the ones I do not pay for.

Facebook proudly informed me in a message that 5.2 times as many people had seen my post because I had paid the company to show it to them. Gee whiz. Thanks, Facebook.

This may be great news for advertisers, but I felt slightly duped. I’ve stayed on Facebook after its repeated privacy violations partly because I foolishly believed there was some sort of democratic approach to sharing freely with others. The company persuaded us to share under that premise and is now turning it inside out by requiring us to pay for people to see what we post.

Facebook takes a different view, saying that it is still finding the right balance for the algorithm that decides what people see in their news feeds.

“The two aren’t related; we don’t have an incentive to reduce the distribution that you send to your followers so that we can show you more ads,” said Will Cathcart, product manager for Facebook’s news feed.

“The impact ads are having on engagement is relatively low, and we’re really pleased with how low that is,” he said. “Over time, we’ve shipped a number of changes to our algorithm that may cause content to go up or down.”

Facebook said in a statement that “the median amount of feedback on posts (likes, comments, shares) from people who have more than 10,000 subscribers is up 34 percent from a year ago.” But Facebook has also said that there has been a 2 percent drop in interaction on the news feed, and is now replacing free content with paid content, which means a large number of free posts will disappear from people’s feeds as sponsored ads float to the top.

Eben Moglen, a professor at Columbia who specializes in Internet law, said that although Facebook’s decisions to prioritize paid content could be seen as unethical, the company is not breaking any antitrust laws, yet.

“While the effort that is being characterized is problematic, no one has defined Facebook as dominant in a market,” he said, adding that the competition among social networks leaves it open to operate of its own devices.

In the past, lawmakers have gone after big companies that favor their own products and suppress others.

Microsoft in the late 1990s took advantage of its hold on PCs to force Internet Explorer onto people. Recently, Google has caught the attention of the Federal Trade Commission and a number of European regulators for highlighting its own products in search results. But in both instances, the companies were monopolies. Although Facebook has one billion users, there are plenty of other social networks and billions of people still not on the site.

“Certainly Facebook has changed its policies and adjusted its products in order to squeeze as much revenue out of all of the openings of the business model in a way that they didn’t have to do before they went public,” said James McQuivey, an analyst at Forrester Research and author of the book “Digital Disruption.” “It’s very possible there’s now a giant pendulum swinging within Facebook, where every division is under pressure to find revenue and advertising solutions.”

But for those who use Facebook for business needs, like restaurants, news outlets and local mom-and-pop shops that rely on the site to update customers, the changes could be damaging.

“It’s not just that people will feel nickeled and dimed by this, it’s that ultimately the value of the product disappears as the stream of information in your social network, one that used to be rapid and friction-free, is no longer there and now consumed by advertising,” Mr. McQuivey said.

When I asked Avichal Garg, another product manager for Facebook’s news feed, why my interaction count dropped so sharply, he said the company clearly needed to improve its algorithm.

“It’s really not in our best interest to take out the most engaging stuff and replace it with ads,” he said. “We want to make sure we show the right content to the right people.” Facebook’s ability to control the algorithm puts it in a different position from its competitors.

Twitter has the same type of advertising module, the sponsored tweet, but although it might highlight the ad in a user’s stream, it does not suppress other people’s content in the process. Everything just falls into a time-based stream.

Facebook may become dominant enough that its actions vex regulators, then it may be forced to change what it highlights. Or, maybe its users will grow so tired of what seems like another bait-and-switch that they will decide to stop sharing, even if it seems to be free.

E-mail: bilton@nytimes.com

With Graph Search, Facebook Bets on More Sharing

SAN FRANCISCO — Facebook’s greatest triumph has been to persuade a seventh of the world’s population to share their personal lives online.

Now the social network is taking on its archrival, Google, with a search tool to mine that personal information, just as people are growing more cautious about sharing on the Internet and even occasionally removing what they have already put up.

Whether Facebook’s more than one billion users will continue to divulge even more private details will determine whether so-called social search is the next step in how we navigate the online world. It will also determine whether Facebook has found a business model that will make it a lot of money.

“There’s a big potential upside for both Facebook and users, but getting people to change their behaviors in relation to what they share will not be easy,” said Andrew T. Stephen, who teaches marketing at the University of Pittsburgh and studies consumer behavior on online social networks.

This week, Facebook unveiled its search tool, which it calls graph search, a reference to the network of friends its users have created. The company’s algorithms will filter search results for each person, ranking the friends and brands that it thinks a user would trust the most. At first, it will mine users’ interests, photos, check-ins and “likes,” but later it will search through other information, including status updates.

“While the usefulness of graph search increases as people share more about their favorite restaurants, music and other interests, the product doesn’t hinge on this,” a Facebook spokesman, Jonathan Thaw, said.

Nevertheless, the company engineers who created the tool — former Google employees — say that the project will not reach its full potential if Facebook data is “sparse,” as they call it. But the company is confident people will share more data, be it the movies they watch, the dentists they trust or the meals that make their mouths water.

The things people declare on Facebook will be useful, when someone searches for those interests, Tom Stocky, one of the creators of Facebook search, said in an interview this week. Conversely, by liking more things, he said, people will become more useful in the eyes of their friends.

“You might be inclined to ‘like’ what you like so when your friends search, they’ll find it,” he said. “I probably would never have liked my dentist on Facebook before, but now I do because it’s a way of letting my friends know.”

Mr. Stocky offered these examples of how more information may be desirable: A single man may want to be discovered when a friend of a friend is searching for eligible bachelors in San Francisco or a restaurant that stays open late may want to be found by a night owl.

“People have shared all this great stuff on Facebook,” Mr. Stocky said. “It’s latent value. We wanted a way to unlock that.”

Independent studies suggest that Facebook users are becoming more careful about how much they reveal online, especially since educators and employers typically scour Facebook profiles.

A Northwestern University survey of 500 young adults in the summer of 2012 found that the majority avoided posting status updates because they were concerned about who would see them. The study also found that many had deleted or blocked contacts from seeing their profiles and nearly two-thirds had untagged themselves from a photo, post or check-in.

“These behavioral patterns seem to suggest that many young adults are less keen on sharing at least certain details about their lives rather than more,” said Eszter Hargittai, an associate professor of communication studies at Northwestern, who led the yet unpublished study among men and women aged 21 and 22.

Also last year, the Pew Internet Center found that social network users, including those on Facebook, were more aggressively pruning their profiles — untagging photos, removing friends and deleting comments.

Internet Law: Trial Courts Yet to Find Consistency in 'Facebook Race'

Highlighting the need for guidance from the state's appellate courts, a Monroe County judge's recent decision on a discovery motion into a woman's social media account appears to have deviated from the growing school of thought among Pennsylvania jurists.

Facebook Cancels Shortcut Over Concern for Security

SAN FRANCISCO — What was supposed to be a shortcut for Facebook users to log into their pages ended up exposing their e-mail addresses — and, in some cases, potentially allowing access to their accounts as well.

A Facebook spokesman said on Friday that the company had created the shortcut, called auto login, to let some users go directly to their pages by clicking on a Web link sent to their e-mail addresses. Once they clicked on the link, they could get into their accounts, rather than having to go to Facebook.com and log in.

Some of the links required users to type their passwords, while others did not, the company said.

On the Web site Hacker News, a technology discussion board, Matt Jones, an engineer at Facebook, said the company had offered the service for “ease of use” and never made the Web addresses “publicly available.”

But they did become publicly available, as the discussion on Hacker News revealed on Friday.

The Facebook spokesman, Frederic Wolens, said some users may have posted the links on the Web, allowing anyone to search for them. Those links could give a stranger access to the Facebook pages connected to them, as well as the e-mail addresses of those users. Mr. Wolens said he had no explanation why someone would post the links.  

When Facebook found the problem, it discontinued the shortcut.

The Hacker News thread said over one million Facebook accounts had been affected. Facebook could not confirm that figure on Friday afternoon.

TrendMicro, a private security company that offers safety tools for Facebook users, said Web address shortcuts were inherently dangerous because they could ultimately end up on the Web.

“Many, many hackers are targeting these portals because of the ubiquitous trust and use of them,” said Tom Kellermann, vice president for cybersecurity at TrendMicro. He added, “You don’t take shortcuts through the woods in cyberspace.”

The news of the security hole comes a week after a Bulgarian blogger, Bogomil Shopov, said he had bought 1.1 million Facebook users’ names and e-mail addresses on the Web for $5. He found the information for sale on a marketplace site, gigbucks.com. The items are no longer available.

Mr. Wolens of Facebook said the data had been acquired and compiled by someone who took whatever information Facebook users made public on their pages — and from other publicly available data about those users.

Mr. Kellermann of TrendMicro said the problem with the shortcut could explain how the names and e-mail addresses that Mr. Shopov had found became public. Facebook said the security flaw and the user data for sale had nothing to do with each another.

“We have no reason whatsoever to believe that these two incidents are related,” Mr. Wolens said.

DealBook: Man Claiming Facebook Ownership Arrested on Fraud Charges

John Anderson/Wellsville Daily ReporterPaul Ceglia, who claimed he owned half of Facebook, at home in 2010.

In 2010, a New York entrepreneur made an explosive legal claim: An agreement that he had with Facebook’s founder, Mark Zuckerberg, entitled him to a major stake in the social-networking giant.

Mr. Zuckerberg staunchly denied the allegation, and his lawyers insisted that the entrepreneur, Paul Ceglia, was a scam artist.

On Friday, federal authorities sided with Mr. Zuckerberg, arresting Mr. Ceglia and charging him with a multibillion dollar scheme to defraud Facebook.

Prosecutors say that Mr. Ceglia, 39, of Wellsville, N.Y., filed a sham federal lawsuit claiming to have been promised a 50 percent share of Facebook in 2003, and then doctored, fabricated and destroyed evidence to support his allegations.

“Ceglia’s alleged conduct not only constitutes a massive fraud attempt, but also an attempted corruption of our legal system through the manufacture of false evidence,” said Preet Bharara, the United States attorney in Manhattan. “Dressing up a fraud as a lawsuit does not immunize you from prosecution.”

Gonzalo Fuentes/ReutersMark Zuckerberg, the chief executive of Facebook.

Mr. Ceglia is expected to make an appearance in federal court in Buffalo on Friday afternoon. His lawyer, Dean Boland, did not immediately return a telephone call seeking comment.

The improbable claims made by Mr. Ceglia received outsized attention in part because it came at around the same time as the release of “The Social Network,” the Academy Award-winning film that told the tale of Mr. Zuckerberg’s legal battle with his Harvard schoolmates, the Winklevoss twins, over the origins of Facebook. Mr. Zuckerberg paid the Winklevosses at least $65 million to settle their case.

Since the lawsuit was first filed, Facebook’s lawyers have raised questions about Mr. Ceglia’s credibility. In 1997, he pleaded guilty to possessing hallucinogenic mushrooms. And in 2010, the New York State attorney general criminally charged him with defrauding customers in a now-defunct wood pellet manufacturing business that he had run with his wife.

Questions are now also being raised about the lawyers that represented Mr. Ceglia in his lawsuit.

In his original complaint, filed in 2010, Mr. Ceglia was represented by Paul Argentieri, a sole practitioner in upstate New York. An amended lawsuit was filed in April 2011 by Robert W. Brownlie of DLA Piper, the world’s largest law firm, and Dennis C. Vacco, a former New York attorney general now in private practice at Lippes Mathias Wexler Friedman in Buffalo.

In 2011, Mr. Brownlie of DLA Piper declined a request by The New York Times to produce the original documents backing his client’s legal claims. “That will come out during the course of litigation,” Mr. Brownlie said. “Anyone who claims this case is fraudulent and brought by a scam artist will come to regret those claims.”

Yet court records indicate that another law firm, Kasowitz Benson Friedman & Torres, had been hired by Mr. Ceglia before DLA Piper and Lippes Mathias becoming involved. Kasowitz Benson withdrew from the case and put DLA Piper and Lippes Mathias on notice that it had determined that the purported contract was a fraud.

Mr. Brownlie and Mr. Vacco later withdrew from the case. They did not return calls and e-mails seeking comment.

Mr. Ceglia’s alleged plot dates back to 2003, when Mr. Zuckerberg was a student at Harvard University. Mr. Ceglia had placed an advertisement on Craigslist looking for a programmer for an Internet business he was trying to get off the ground. Mr. Zuckerberg responded to the ad, and Mr. Ceglia agreed to pay him $1,000 for his work.

Months later, in his college dorm room, Mr. Zuckerberg started a business called Facebook.

Mr. Zuckerberg did not hear from Mr. Ceglia again until 2010, when he was served with a complaint that claimed Mr. Ceglia was entitled to a substantial ownership stake in Facebook.

According to the lawsuit, Mr. Zuckerberg had promised him a substantial interest in either “The Face Book” or “The Page Book.” Attached to the legal papers was a contract that contained language giving Mr. Ceglia an interest in Mr. Zuckerberg’s start-up. The filing also included e-mail exchanges between Mr. Ceglia and Mr. Zuckerberg that purported to show their collaboration on ideas for the social network business.

Federal prosecutors say that Mr. Ceglia’s claims were entirely false. Government investigators searched Mr. Ceglia’s hard drive and discovered the original contract, which had no reference to Facebook. And Harvard’s e-mail servers had no record of the supposed e-mails.

Facebook’s lawyers at Gibson, Dunn & Crutcher commended the Justice Department for filing criminal charges and, in statement, indicated that it would pursue possible claims against the lawyers that represented Mr. Ceglia.

“Ceglia used the federal court system to perpetuate his fraud and will now be held accountable for his criminal scheme,” said Orin Snyder, a partner at Gibson Dunn. “Facebook also intends to hold accountable all of those who assisted Ceglia in this outrageous fraud.”