The US Supreme Court hears that Facebook is trying to escape a securities fraud lawsuit

WASHINGTON: The US Supreme Court on Wednesday began hearing arguments in an effort by Meta’s Facebook to quash a federal securities fraud lawsuit brought by shareholders who accused the social media platform of misleading them about the misuse of its user data.

Facebook appealed a lower court’s decision that allowed the 2018 class action led by Amalgamated Bank to proceed. It’s one of two cases before them this month — the other involving chip maker Nvidia — that could lead to rulings that make it harder for private litigants to hold companies accountable for alleged securities fraud.

The arguments were on.

Prosecutors accused Facebook of misleading investors in violation of the Securities Exchange Act, a 1934 federal law that requires publicly traded companies to disclose their business risks. They alleged that the company unlawfully withheld information from investors about a 2015 data breach involving British political consultancy Cambridge Analytica and affecting more than 30 million Facebook users.

Conservative Justice Clarence Thomas pressed Facebook’s lawyer Kannon Shanmugam on whether the company’s risk statement was misleading.

“The problem is that a reasonable person could look at the statement and assume that because it only speaks to the future likelihood of this damage or this event, it never happened,” Thomas said.

“So why couldn’t you read this and assume it never happened?” Thomas asked.

Shanmugam replied: ‘We do not think that any reasonable person would draw that inference from a statement of this nature. If a statement says, “If something happens, harm may result” – I don’t think that’s a necessary premise. that statement that the event never happened.”

Facebook’s shares fell following 2018 media reports that Cambridge Analytica had used unlawfully collected Facebook user data in connection with Donald Trump’s successful 2016 US presidential campaign. The lawsuit seeks, in part, unspecified monetary damages to compensate for lost value of the Facebook shares held by investors. .

The question is whether Facebook broke the law by failing to detail the earlier data breach in subsequent corporate risk disclosures, and instead portraying the risk of such incidents as purely hypothetical.

Facebook argued in a Supreme Court brief that it was not required to disclose that the risk it had warned about had already materialized because “a reasonable investor” would understand risk disclosures as forward-looking statements.

“When we think about these questions, we’re not just looking at lies or outright false statements,” liberal Justice Elena Kagan told Shanmugam. “We also look for misleading statements or misleading omissions.”

U.S. District Judge Edward Davila dismissed the lawsuit in 2021, but the San Francisco-based 9th U.S. Circuit Court of Appeals revived the lawsuit in 2023 in a 2-1 ruling.

“The problem is that Facebook portrayed the risk of improper access to or disclosure of Facebook user data as purely hypothetical, when that exact risk had already occurred,” Judge Margaret McKeown wrote in the 9th Circuit ruling.

A Supreme Court ruling is expected at the end of June.

The Cambridge Analytica data breach prompted a U.S. government investigation into Facebook’s privacy practices, several lawsuits and a hearing in the U.S. Congress during which Meta CEO Mark Zuckerberg was questioned by lawmakers.

The U.S. Securities and Exchange Commission brought an enforcement action against Facebook over the case in 2019, which the company settled for $100 million. Facebook paid a separate $5 billion fine to the US Federal Trade Commission over the Cambridge Analytica issue.

The Supreme Court will hear arguments on November 13 in Nvidia’s similar appeal to prevent a securities class action, accusing the company of misleading investors about how much of its revenue went to the volatile cryptocurrency industry.

The Supreme Court has limited the authority of the SEC, the federal agency that oversees securities fraud, in previous rulings. The company’s rulings in the Facebook and Nvidia cases could make it more difficult for private litigants to hold companies liable for such conduct.