The U.S. Supreme Court is considering an attempt by Facebook to escape a securities fraud lawsuit

WASHINGTON: The US Supreme Court on Wednesday wrestled with a bid 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.

The justices heard arguments in Facebook’s appeal of 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 chipmaker Nvidia on Nov. 13 — that could lead to rulings that make it harder for private litigants to hold companies accountable for alleged securities fraud.

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.

The Supreme Court has a 6-3 conservative majority. Some conservative justices seemed to indicate that reasonable investors would read statements in forward-looking risk factors as outlining problems that may have occurred in the past.

“For example, if you were leaving my house and I said, ‘You might slide up the stairs,’ you wouldn’t say, ‘Well, that’s never happened before.’ Your conclusion would be: that happened and that’s why I’m giving you the warning,” conservative Chief Justice John Roberts told Kevin Russell, a lawyer for the shareholders.

But 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.”

‘ALWAYS LOOKING FORWARD’

Conservative Justice Samuel Alito asked Shanmugam, “Isn’t it true that an evaluation of risk is always forward-looking?”

“It is. And that is essentially the basis of our argument,” Shanmugam replied.

Conservative Justices Brett Kavanaugh and Neil Gorsuch asked Shanmugam whether other disclosure requirements in legal documents might be available to companies to outline the types of past events at issue in this case.

However, Roberts questioned Shanmugam about the use of other disclosure provisions.

“Is your position basically that ‘don’t worry about half-truths’” in disclosing the risk factors, “because the fundamental problem will already be exposed under other provisions?”

Thomas asked Russell what else Facebook should have mentioned in its statement.

“So I think they could have said what they said, and then said something like, ‘Such inappropriate disclosure or misuse or use of data has occurred in the past, including recently on a substantial scale,’” Russell said. “I think this would have dispelled any misconception that an event like the one at Cambridge Analytica had not occurred.”

President Joe Biden’s administration supported the shareholders in the case.

U.S. District Judge Edward Davila dismissed the lawsuit, but the San Francisco-based 9th U.S. Circuit Court of Appeals revived the lawsuit. The Supreme Court’s 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. 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 this issue.