Meta’s Facebook is urging the US Supreme Court to dismiss a federal securities fraud lawsuit over the Cambridge Analytica data breach.
The compasny argues it did not mislead investors about potential risks.
The lawsuit has been initiated by Amalgamated Bank on behalf of shareholders. It claims Facebook unlawfully withheld information about the 2015 data breach, which later resulted in significant financial losses for investors.
The Lawsuit’s Core Arguments
The lawsuit accuses Facebook of violating the Securities Exchange Act of 1934 by failing to disclose a data breach involving Cambridge Analytica.
The political consulting firm was found to have improperly accessed data from over 30 million Facebook users.
Instead of revealing the breach, Facebook allegedly portrayed the risk of data misuse as hypothetical in its business disclosures.
- Investors’ Claims: Facebook misled shareholders by omitting crucial information about the data breach in its risk disclosures, causing financial harm once the scandal was publicly exposed in 2018.
- Facebook’s Defense: The company argues its risk disclosures were forward-looking statements, not required to mention past events. Facebook contends a “reasonable investor” would interpret the warnings as general risks rather than specific incidents that had already occurred.
Supreme Court Justices Debate the Case
During the hearing, the justices expressed differing views on whether Facebook’s statements were misleading:
Justice Elena Kagan questioned Facebook’s lawyer, Kannon Shanmugam.
She asked about whether the omission of past breaches in risk disclosures could be considered deceptive. She emphasized that misleading omissions, not just false statements, are also scrutinized under securities laws.
Chief Justice John Roberts drew an analogy, suggesting that a warning about potential risks might imply those risks had already materialized.
He stated:
“If you’re leaving my house and I say, ‘You might slip on the steps,’ you wouldn’t assume it’s never happened before.”
However, some justices leaned toward Facebook’s argument.
Justice Samuel Alito supported the notion risk disclosures are inherently forward-looking, implying they may not need to reference past events explicitly.
Justice Clarence Thomas raised concerns about whether a reasonable investor might interpret the lack of reference to past breaches as an indication that no such breach had occurred.
He pressed Facebook’s lawyer on the potentially misleading nature of the disclosure.
Shanmugam maintained investors should not necessarily infer that the absence of mention of a past breach meant it had never happened, arguing that the company’s statements were standard and did not require such details.
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Background and Financial Implications
The Cambridge Analytica scandal, revealed in 2018, involved the misuse of Facebook user data during the 2016 U.S. presidential campaign.
The data breach led to widespread public backlash, U.S. government investigations, and numerous lawsuits against Facebook. As a result:
- Financial Penalties: Facebook paid $100 million to the US Securities and Exchange Commission (SEC) and a separate $5 billion fine to the Federal Trade Commission (FTC) over privacy violations related to data misuse.
- Stock Market Impact: Facebook’s stock price plummeted after media reports detailed how Cambridge Analytica had improperly harvested user data, significantly affecting shareholder value.
Lower Court Ruling and Supreme Court Review
A US district judge initially dismissed the shareholder lawsuit, siding with Facebook.
However, the Ninth US Circuit Court of Appeals in San Francisco later revived the case, allowing it to proceed.
Now, the Supreme Court’s decision could set a precedent on how businesses disclose risks and whether they must include details about past incidents.
The case is one of two key securities fraud lawsuits the Supreme Court is reviewing this month.
The outcome could reshape the legal landscape. This could potentially make it more difficult for private litigants to hold companies accountable for alleged fraud.
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Potential Impact of the Ruling
If the Supreme Court sides with Facebook, it may become harder for shareholders to sue companies over risk disclosures. This is particularly when those disclosures focus on future risks without mentioning prior incidents.
Conversely, a ruling against Facebook could impose stricter requirements on publicly traded companies to be more transparent about past events in their risk statements.
The Supreme Court currently holds a 6-3 conservative majority. It is expected to deliver its ruling by the end of June 2025.
A decision in favor of the shareholders could open the door for more litigation against companies that fail to disclose prior issues in their business risk assessments.
What’s at Stake for Facebook and Investors?
The Supreme Court’s ruling will have far-reaching implications, not only for Meta but also for how companies communicate risks to investors. Key questions remain:
- Will the court enforce stricter disclosure standards for publicly traded companies?
- How will the decision impact shareholder rights in cases of alleged securities fraud?
- Could this case set a new precedent for handling business-risk disclosures involving past incidents?
As the justices deliberate, both investors and corporate executives are closely watching for a decision that could redefine the boundaries of corporate transparency and investor protection.
