At the beginning of this semester, a student came into my office with an idea for an independent research project.  My first response was, "You're kidding."  My second was, "That doesn't sound like a student research paper.  That sounds like it should be on the front page of the Wall Street Journal."  

Try DealBook.  Brad Flynt, the J.D./M.B.A. student, researched the paper this semester, and then we took it to Steven Davidoff.  Christine posted about Sharespost last year: it's a way for accredited investors to buy shares of private companies pre-IPO.  Companies like Facebook, Zynga, and (until its recent IPO) Groupon.  Earlier this year I posted about the unorthodox language in the Facebook materials available on SharesPost.

Say you want to buy shares of Facebook right now.  How do you know what they're worth?  SharesPost offers third-party reports that describe the business and value the shares.  Here's what Brad uncovered was that one of these third parties, Global Silicon Valley Partners, as described by DealProf:

[Global Silicon Valley Partners] is affiliated with the Global Silicon Valley Corporation, a publicly traded company that is active in purchasing shares on the private markets. G.S.V.C. is headed by Michael Moe, who is also a director of SharesPost.

Last spring, Global Silicon Valley Partners published a research note that estimated Facebook shares at $22.24 to $22.57 apiece, valuing Facebook at $52.3 billion to $53.1 billion. About this time G.S.V.C. purchased 225,000 shares of Facebook at $29.28, valuing Facebook at roughly $68 billion.

This raises conflict-of-interest issues because Global Silicon Valley Partners set a low valuation target at the same time its affiliates, Mr. Moe and G.S.V.C., were buying shares at a higher one.

That's about where I told Brad the story sounded crazy.  It means that a Facebook employee could have sold shares on Facebook at $23/share, relying on the GSVP report's valuation--while not realizing that at the same time GSVC, a GSVP affiliate, was buying Facebook shares at $29/share.  And that sounds to me like, if not fraud, then a serious conflict of interest.

Through August and September we knew that the SEC was investigating SharesPost because it argued that, unlike its competitor SecondMarket, it didn't need to register as a broker-dealer.  I kept expecting to read something about this conflict of interest angle--the story publicly available, even if it required some dogged research by a determined law student.  But nothing!  So we emailed Steven Davidoff to see what he thought.

GSVC's CEO, Michael Moe, told Steven that GSVP's research was "always independently prepared by Candlestick Advisers, a consulting and advisory firm based in India," -- but the reports available at SharesPost don't mention Candlestick. Moe told Steven that "neither he nor G.S.V.C. received money from Candlestick."  But that isn't really the question is it?  The question is, is GSVC or an affiliate or Moe paying or otherwise encouraging Candlestick to lowball its valuations so that GSVC can buy shares on the cheap?  Moe told Steven "there was no economic relationship between Candlestick and G.S.V.C. but rather a personal one between himself and Candlestick’s owners."  And no one else is talking.

This post's title is tongue-in-cheek, even if there were days Brad told me he felt like he was living a John Grisham novel.  There might not be much to this story except poor disclosure.  Still, as Steven writes, "It all raises questions about what exactly shareholders know and how they know it on these markets."  I'm fascinated by SharesPost, and I actually think it's a great idea: it gives outside investors a chance to invest in promising companies, and it offers liquidity to current investors.  But disclosure should be the order of the day, especially when it comes to the source of the information.

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