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Investors Shrug As Government Sues Facebook For Housing Discrimination

Bloomberg Best of the Year 2018: Mark Zuckerberg, chief executive officer and founder of Facebook Inc., listens during a House Energy and Commerce Committee hearing in Washington, D.C., U.S., on Wednesday, April 11, 2018. Photographer: Andrew Harrer/Bloomberg © 2018 Bloomberg Finance LP

© 2018 Bloomberg Finance LP

On March 28, the Department of Housing and Urban Development (HUD) charged Facebook with housing discrimination.

Since then, Facebook shares have risen.

Why are investors untroubled? My guess is that they believe the cost of dealing with these charges is trivial and they are afraid of missing out on a big rise in Facebook stock the next time it reports earnings. (I have no financial interest in the securities mentioned in this post).

I am not a lawyer and so it came as a surprise to me that Facebook is subject to a law that bars social media from restricting who can view housing-related advertisements. HUD charged that Facebook’s violation stems from what amounts to digital redlining — the ability to limit housing-related advertising to Facebook users who satisfy specific demographic characteristics.

But as the Wall Street Journal reported March 28, HUD charged Facebook with doing just that — which it says is a violation of the Fair Housing Act. HUD wants to cut through the opacity of Facebook’s advertising platform to make sure it complies with the law. As General Counsel Paul Compton said, HUD’s priority is to “fashion appropriate remedies and rules of the road for today’s technology as it impacts housing.”

For example, HUD charges that Facebook allows “ad buyers to exclude people that some unscrupulous landlords might seek to avoid, including people who expressed interest in an ‘assistance dog,’ a ‘mobility scooter,’ or ‘deaf culture’ and to block people who identified themselves as interested in ‘Puerto Rico Islanders,’ ‘Hijab Fashion’ and ‘Hispanic Culture,'” according to the Journal.

A Facebook spokesman told the Journal that the company was surprised by the HUD charges since it had addressed the agency’s concerns in 2018 by eliminating “thousands of targeting options subject to misuse.” Moreover, the spokesperson said that Facebook was uncomfortable complying with HUD’s request to share its user data with HUD without “adequate safeguards.”

Investors don’t seem at all troubled by this. Facebook shares opened at $164 a share on March 28 — the day HUD announced its charges — and by April 1 they had risen to $168.

Perhaps one reason for this is that Facebook has not had to spend much money dealing with its discrimination troubles. For example, the ACLU and fair-housing groups filed a suit that Facebook settled last month “that included payments of just under $5 million. As part of that settlement, Facebook said it was removing age, gender and ZIP Code targeting for housing, employment and credit-related advertisements,” according to the Journal. (Facebook first faced discrimination charges in 2016 when ProPublica reported on how the social network could allow advertisers to exclude particular races, genders, and ages).

If Facebook’s costs to handle discrimination charges have been modest, it is difficult to pinpoint whether removing age, gender, and other targeting for housing-related advertising has reduced the social network’s advertising revenues. HUD charged that Facebook has other was to target advertising that are not related specifically to such key words.

For example, HUD alleges that Facebook’s machine learning algorithm predicts likely response to a specific advertisement and can block that ad from users who the algorithm predicts will not respond well to it. In short, Facebook may be able to keep generating the ad revenue that HUD claims is discriminatory through machine learning.

Meanwhile, Facebook — which suffered major national public relations flack last April when CEO Mark Zuckerberg testified in front of Congress — has enjoyed a boffo 2019. Indeed, in January alone, its shares surged 27.2% in the wake of a gloom-dispelling financial report. On Jan. 30, Facebook reported 30% sales growth to $16.9 billion and a 65% pop in EPS to $2.38. “After a string of mixed quarterly reports and controversies, that was exactly the kind of blockbuster performance investors were looking for, and shares soared following the release,” according to Motley Fool.

Facebook may be facing growth challenges — but investors seems to have concluded that dealing with HUD’s charges of discrimination is not one of them.

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