The US Supreme Court tried to strike down Facebook’s attempt at meta on Wednesday federal securities fraud lawsuit Brought by shareholders who accused the social media platform of misleading them misuse of its user data,
The judges heard arguments in Facebook’s appeal against a lower court ruling allowing the 2018 class action led by Amalgamated Bank to proceed. It is one of two cases facing them this month — the other involving artificial intelligence chip maker Nvidia — that could make it harder for private plaintiffs to hold companies responsible for alleged securities fraud.
The plaintiffs accused Facebook of misleading investors by violating the Securities Exchange Act of 1934, a federal law that requires publicly traded companies to disclose their business risks. He claimed the company unlawfully withheld information from investors about a 2015 data breach involving a British political consulting firm. Cambridge Analytica that affected over 30 million Facebook users,
The Supreme Court has a 6-3 conservative majority. Some conservative judges indicated that reasonable investors would read statements made in forward-looking risk-factor disclosures as outlining issues that may have occurred in the past.
“For example, if you’re leaving my house and I say, ‘You might slip on the stairs,’ you wouldn’t say, ‘Well, that’s never happened before.’ Your guess would be: This has happened and that’s why I’m warning you,” Conservative Chief Justice John Roberts told Kevin Russell, a lawyer for shareholders.
But conservative Justice Clarence Thomas pressed Facebook lawyer Kannan Shanmugam to ask whether the company’s risk statements were misleading.
Thomas said, “The problem is that a reasonable person could look at the statement and assume that, because it only talks about this loss or the future possibility of this event occurring, that it never happened. “
“So why wouldn’t anyone reading this believe that it never happened?” Thomas asked.
Shanmugam responded, “We do not think any sensible person would draw this conclusion from such a statement. Where a statement says that ‘if something happens, it could cause harm’ – I do not think that is a necessary basis for that statement that the event never happened.
Facebook shares fell Following 2018 media reports that Cambridge Analytica had improperly used Facebook user data collected in connection with Donald Trump’s successful presidential campaign in 2016. The lawsuit seeks unspecified monetary damages to recoup the lost value of Facebook stock held by investors.
The issue is whether Facebook broke the law when it failed to detail the prior data breach in subsequent business-risk disclosures, and instead described the risk of such events as entirely hypothetical.
Facebook argued in a Supreme Court brief that it did not need to disclose that its warning about the risk had already come into effect because “a reasonable investor” would consider the risk disclosure a forward-looking statement.
Liberal Justice Elena Kagan told Shanmugam, “When we think about these questions, we’re not just looking at lies or outright false statements.” “We are also monitoring misleading statements or misleading omissions.”
‘Always a visionary’
Conservative Justice Samuel Alito asked Shanmugam, “Isn’t it always prudent to evaluate risks? Isn’t this inherently visionary? When you want to know what risk you face, you also want to know what your risk is in the future, right?”
“It is. And that’s basically the basis of our argument here,” Shanmugam responded.
Conservative Justices Brett Kavanaugh and Neil Gorsuch asked Shanmugam whether there might be other disclosure requirements available in regulatory filings for companies outlining past events in this case.
However, Roberts questioned Shanmugam on the use of other disclosure provisions.
“Is your position in disclosing risk factors basically ‘don’t worry about half-truths,’ “because the core problem is already going to be revealed under other provisions?”
Thomas asked Russell what else Facebook should have provided in its statement.
“So I think they could have said what they said, and then said something like, ‘This kind of inappropriate disclosure or misuse or use of data has happened in the past as well, including recently on a large scale,'” Russell said. “I think it would have dispelled the misconception that something like Cambridge Analytica didn’t happen.”
President Biden’s administration supported shareholders in the case.
US District Judge Edward Davila dismissed the lawsuit in 2021, but the San Francisco-based 9th US Circuit Court of Appeals revived it in 2023 in a 2-1 decision. The Supreme Court’s decision is expected by the end of June.
The Cambridge Analytica data breach prompted a US government investigation into Facebook’s privacy practices, various lawsuits, and congressional hearings. Meta Chief Executive Mark Zuckerberg questioned by MPs,
The Securities and Exchange Commission brought an enforcement action against Facebook over the matter in 2019, which the company settled for $100 million. Facebook separately paid a $5 billion fine to the Federal Trade Commission over the Cambridge Analytica issue.
