Justices Consider Arguments on Investor Claims of Misleading Disclosures in Landmark Privacy Case
Facebook has petitioned the U.S. Supreme Court to dismiss a high-stakes securities fraud lawsuit filed by shareholders accusing the social media giant of withholding critical information about its data misuse by Cambridge Analytica. The case, which could redefine corporate disclosure obligations, is part of a broader examination by the court of how federal securities laws apply to company statements about potential business risks.
Background of the Fraud Suit
The securities fraud lawsuit, led by Amalgamated Bank, was initially filed in 2018 after Facebook’s data practices came under scrutiny. Plaintiffs allege that Facebook violated the Securities Exchange Act by failing to notify investors of a 2015 data breach that allowed Cambridge Analytica, a British consulting firm, to harvest the personal information of over 30 million Facebook users. The company, they argue, portrayed the risk of such a breach as hypothetical in subsequent disclosures, allegedly misleading investors about the company’s data security vulnerabilities.
Supreme Court Debate: Forward-Looking Statements or Omission of Facts?
Facebook’s legal team argued that risk disclosures should be understood as forward-looking, suggesting that reasonable investors would interpret them as outlining potential—not necessarily past—risks. Representing Facebook, attorney Kannon Shanmugam stated, “a reasonable investor would understand risk disclosures to be forward-looking statements,” which is fundamental to the company’s defense.
Justice Samuel Alito seemed to agree, asking if risk evaluations should indeed be interpreted as future-looking, which Shanmugam confirmed. However, Justice Clarence Thomas raised concerns, questioning if such statements could be inherently misleading by suggesting the event had not yet happened.
Justice Elena Kagan further emphasized the importance of accurate representations in corporate statements, noting that misleading omissions could misinform investors. The justices’ deliberations focused on whether companies can be required to report past events in “forward-looking” statements or if omissions are permissible under federal law.
Lower Court Rulings and the Path to the Supreme Court
The case had been dismissed by a U.S. District Court judge before the Ninth Circuit Court of Appeals revived it, allowing the lawsuit to proceed. The Supreme Court’s decision could either reinforce or limit the standards for corporate disclosure requirements, especially in cases where past events present ongoing business risks.
Implications of the Cambridge Analytica Scandal
The Cambridge Analytica breach, involving the misuse of user data during Donald Trump’s 2016 presidential campaign, not only sparked this lawsuit but also led to a $100 million settlement with the U.S. Securities and Exchange Commission (SEC) and a separate $5 billion penalty by the Federal Trade Commission (FTC). The case, among the most significant privacy-related legal battles in recent years, underscores the financial and reputational impacts of data misuse for technology companies.
