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Facebook, Inc. v. Amalgamated Bank, No. 23-980, 2024 WL 2883752 (June 10, 2024).
Decision below: In Re Facebook, Inc. Sec. Litig., 87 F.4th 934 (9th Cir. 2023).
Oral argument is scheduled for November 6, 2024.
Issue: Whether, under the PSLRA’s heightened pleading standard, shareholders adequately pleaded falsity as to the challenged risk statements in which Facebook stated that improper third-party harvesting of its users’ data was purely a hypothetical risk even though it had already materialized.
In 2018, news broke that Cambridge Analytica had improperly harvested personal data from millions of unwitting Facebook users and retained the data beyond Facebook’s control. Despite knowing for two years of the misconduct, Facebook failed to inform its affected users and allowed certain third parties to access users’ Facebook friends’ data without their consent. In re Facebook, Inc. Sec. Litig., 87 F.4th 934, 941 (9th Cir. 2023), cert. granted in part sub nom. Facebook, Inc. v. Amalgamated Bank, No. 23-980, 2024 WL 2883752 (June 10, 2024). In its 2016 risk disclosures to shareholders, Facebook stated that improper third-party harvesting of its users’ data was merely a hypothetical risk even though it had already materialized. Id. at 944. Facebook’s executives further made various statements assuring users that they fully controlled their data on Facebook and that no third party would be able to access the data without their consent. Id. at 942. In the wake of the Cambridge Analytica scandal, Facebook’s stock plummeted losing more than $200 billion in market capitalization. Id. at 941. The shareholders’ securities class action against Facebook under the PSLRA ensued.
The shareholders alleged that although Facebook knew Cambridge Analytica had improperly accessed and used Facebook users’ data, Facebook represented in its 2016 10-K filing with the U.S. Securities and Exchange Commission (SEC) that only a hypothetical risk of improper third-party misuse of Facebook users’ data could harm Facebook’s business and reputation. The trial court held that the shareholders failed to plead falsity, a required element of their lawsuit, as to the challenged risk statements because Cambridge Analytica’s misconduct was public knowledge at the time they were made. In re Facebook, Inc. Sec. Litig., No. 5:18-CV-01725-EJD, 2021 WL 6000058, at *6 (N.D. Cal. Dec. 20, 2021).The court further found that while the SEC filing warned of risks of harm to Facebook’s business, the shareholders failed to allege that Cambridge Analytica’s misconduct was causing such harm when the statements were made. Id. at *7.
The U.S. Court of Appeals for the Ninth Circuit reversed, holding that “the shareholders adequately pleaded falsity as to the statements in Facebook’s 2016 10-K that represented the risk of third parties improperly accessing and using Facebook users’ data as purely hypothetical.” In re Facebook, Inc. Sec. Litig., 87 F.4th at 949. Since Facebook was aware of Cambridge Analytica’s misconduct before 2017, its statements about risk management directly contradicted what Facebook knew when it filed its 2016 10-K with the SEC. Id. The Ninth Circuit further held that “[t]he mere fact that Facebook did not know whether its reputation was already harmed when filing the 10-K, does not avoid the reality that it created an impression of a state of affairs that differed in a material way from the one that actually existed.” Id. at 950 (internal citations omitted).
The Supreme Court is set to decide whether a company’s risk disclosures are false or misleading under the PSLRA when they do not disclose that a risk has already materialized.
WHAT’S AT STAKE
Investors and pension funds rely on the accuracy of risk disclosures filed by corporations with the SEC in making investment decisions. When publicly traded corporations fail to disclose material information in their risk disclosures, investors stand to lose billions of dollars of the value of their shares. The failure to disclose material information in SEC filings adversely impacts older adults by reducing the value of the holdings in their retirement accounts.
Private securities litigation class actions benefit investors and retirement savers by bringing to light instances of securities fraud committed by corporations and their executives. Should the Supreme Court further enhance the pleading requirements for alleging falsity and “scienter” (a defendant’s knowledge that an action is wrongful and intent to act anyway) under the PSLRA, investors and pension funds would have to surmount additional hurdles in bringing securities fraud class actions.
Stefan Shaibani, SShaibani@aarp.org
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