The United States Supreme Court will deliberate over a crucial case on Meta's Facebook on Wednesday, Nov.6. This is as the social media company is calling for the dismissal of a lawsuit of federal securities fraud led against it by its shareholders.
The claims stated in the suit are based on how Facebook has fooled its investors regarding the application of its user data and with reference to the case in connection with the Cambridge Analytica scandal. This class action lawsuit, along with a similar case related to artificial intelligence chipmaker Nvidia, might just set precedents that make it much more difficult for private investors to bring securities fraud claims against companies.
The Cambridge Analytica Scandal and Shareholder Lawsuit
In 2018, the lead defendant filing a class-action lawsuit argued that Facebook had committed fraud under the Securities Exchange Act of 1934 since it misled investors, as per USA Today.
The plaintiffs argue that when Facebook rejected to make any public notice concerning the case in 2015 of involvement between the company and the British political consulting firm about the harvesting of the data of over 30 million users on the platform.
The app used these for the successful presidential campaign by then-candidate Donald Trump in the 2016 presidency. By then, Facebook made a deliberate falsehood.
The news broke in 2018. This led to a considerable fall in Facebook's share prices. Investors believe that it is a violation of federal securities law since it withholds critical information that affects stock performance. The claim seeks monetary compensation for a drop in the value of the stocks experienced by investors after the scandal.
Did Facebook Mislead Investors?
At the heart of this Supreme Court review is whether Facebook's failure to disclose the previous data misuse was a violation of securities laws.
Shareholders claim that Facebook depicted data misuse as a theoretical risk rather than acknowledging the fact that the risk had already materialized. However, Facebook claims that it was not under a legal obligation to disclose the previous breach since its disclosures were meant to be forward-looking.
Based on Facebook's legal team's arguments as Reuters finds, "a reasonable investor" would interpret this kind of risk disclosure with regard to future events as opposed to past incidents. Furthermore, they argue there was no requirement to actually provide risk disclosures of specific prior events in a manner that was strictly tied and related to ongoing business risks.
Previous Court Rulings and Expected Outcome
In 2021, U.S. District Judge Edward Davila dismissed the case, giving Facebook an upper hand. Conversely, in 2023, the case was brought back to court by the 9th U.S. Circuit Court of Appeals in a 2-1 vote, allowing the lawsuit to proceed. Facebook appealed at the Supreme Court, which is most likely to produce a judgment by June 2024.
Consequences in Securities Fraud Cases and on Big Tech
This is a case of great interest because it has the potential to redefine standards for liability in securities fraud, especially as applied to major corporations. The decision could determine just how transparent companies must be in disclosing events that can have an impact on their stock performance.
A ruling by the Supreme Court in favor of Facebook would make it far more difficult for private litigants to bring corporations into court over allegations of securities fraud.
The Cambridge Analytica scandal led to shareholder suits but also investigations by U.S. government agencies. The SEC took an enforcement action against Facebook in 2019, imposing a settlement of $100 million. The Federal Trade Commission levied a separate $5 billion penalty against Facebook related to privacy violations tied to the scandal.
Nvidia's Case and Future of Securities Litigation
The Supreme Court will also listen to, on Nov. 13, a similar case involving chipmaker Nvidia. A class action alleges that the company lied about how much of its revenues came from the cryptocurrency industry.
These cases follow Supreme Court decisions that have sequentially limited the authority of the SEC to enforce its powers of enforcement in matters of fraud in securities. It presents a trend towards the prohibition of regulatory and legal restraints against corporate interests.
