Facebook Faces Reckoning: SCOTUS Weighs In on Cambridge Analytica Shareholder Lawsuits
The U.S. Supreme Court heard arguments Wednesday in a bid to throw out Meta’s proposed documents from Facebook. Federal Securities Fraud Litigation It was raised by shareholders who accused the social media platform of misleading them. Misuse of User Data.
Facebook appealed a lower court’s decision to allow a 2018 class action lawsuit led by Amalgamated Bank to proceed. One of two cases before them this month, the other involving artificial intelligence chipmaker Nvidia, could lead to a ruling that would make it more difficult for private litigants to hold the company accountable for securities fraud charges.
The debate continued.
The plaintiffs accused Facebook of misleading investors by violating the Securities Exchange Act of 1934, a federal law that requires public companies to disclose business risks. They claimed the company unlawfully failed to disclose information to investors about a 2015 data breach involving a British political consulting firm. Cambridge Analytica affected over 30 million Facebook users.
Conservative Supreme Court Justice Clarence Thomas pressed Facebook’s lawyer, Kannon Shanmugam, on whether the company’s risk statements were misleading.
“The problem is that a reasonable person could look at the statement and assume it never happened because it only talks about the future probability of this harm or event occurring,” Thomas said.
“So why can’t you just read this and assume it never happened?” Thomas asked.
Shanmugam answered: “We do not believe that a reasonable person would draw such an inference from these various statements. There is a statement that says, ‘If something happens, damage may follow,’ but I don’t think it is a necessary premise for that statement that the incident never occurred.”
Facebook stock price falls Following media reports in 2018 that Cambridge Analytica used improperly collected Facebook user data in connection with Donald Trump’s successful 2016 presidential campaign. The lawsuit seeks unspecified monetary damages, in part to recover the lost value of Facebook stock held by investors.
The question is whether Facebook violated the law when it failed to detail previous data breaches in subsequent business risk disclosures and instead portrayed the risk of such incidents as purely hypothetical.
Facebook argued in its Supreme Court brief that it did not need to disclose that the risks it warned about had already materialized because a “reasonable investor” would understand the risk disclosures to be forward-looking statements.
“When we think about these questions, we are not just looking at lying or completing misrepresentations.” Liberal Justice Elena Kagan told Shanmugam. “We are also investigating misleading statements or misleading omissions.”
‘Always future-oriented’
Conservative Justice Samuel Alito asked Shanmugam: “Isn’t risk assessment always forward-looking? Isn’t that inherently futuristic? “When you want to know what risks you face, you want to know what your future risks are, right?”
“that. And this is essentially what forms the basis of our argument here,” Shanmugam responded.
Conservative justices Brett Kavanaugh and Neil Gorsuch asked Shanmugam whether companies could be subject to different disclosure requirements in regulatory filings to account for the kinds of past events at issue in the case.
But Conservative Chief Justice John Roberts questioned Shanmugam about the use of other disclosure provisions.
Regarding the disclosure of risk factors, he said, “Basically, our position is, ‘We are not worried about half-truths,’ because the basic issues will already be disclosed in accordance with other provisions.”
Thomas asked Kevin Russell, a lawyer representing shareholders, what more Facebook should have provided in its statement.
“So I think they could have said what they said and then said, ‘These inappropriate disclosures, misuses or uses of data have occurred in the past, including recently,’” Russell said. “I think it would dispel the misconception that something like what happened with Cambridge Analytica didn’t happen.”
U.S. District Judge Edward Davila dismissed the 2021 lawsuit, but the San Francisco-based 9th Circuit Court of Appeals revived the 2023 lawsuit in a 2-1 ruling. The Supreme Court’s ruling is expected to be issued by the end of June.
The Cambridge Analytica data breach led the U.S. government to conduct an investigation into Facebook’s privacy practices, file various lawsuits, and hold congressional hearings. Meta CEO Mark Zuckerberg was beaten by lawmakers..
In 2019, the Securities and Exchange Commission filed an enforcement lawsuit against Facebook over the issue, which the company settled for $100 million. Facebook separately paid a $5 billion fine to the Federal Trade Commission over its Cambridge Analytica issues.
On November 13, the Supreme Court will hear arguments on a similar appeal aimed at avoiding a securities class action that accuses Nvidia of misleading investors about how much of its revenue was invested in the volatile cryptocurrency industry.