U.S. Supreme Court examines Facebook’s securities fraud case

The U.S. Supreme Court reviewed arguments on Wednesday in Meta’s appeal to dismiss a securities fraud lawsuit against Facebook, filed by shareholders who allege the platform misled investors about its handling of user data.

The class action, led by Amalgamated Bank, claims Facebook withheld information about a 2015 data breach involving Cambridge Analytica, affecting over 30 million users. The question at hand is whether Facebook violated the Securities Exchange Act by failing to disclose this breach while presenting the risk of data misuse as merely hypothetical.

Conservative Chief Justice John Roberts suggested that disclosures could imply past occurrences. “For example, if you’re leaving my house and I say, ‘You might slip on the steps,’ you wouldn’t say, ‘Well, that’s never happened before.’ Your inference would be: that has happened and that’s why I’m giving you the warning,” Roberts stated. Meanwhile, Justice Clarence Thomas questioned if Facebook’s statements could mislead investors by presenting data misuse solely as a future risk, asking, “Why wouldn’t one be able to read this and assume that it never happened?”

Facebook’s attorney, Kannon Shanmugam, argued that a reasonable investor would interpret such statements as forward-looking: “We don’t think that a reasonable person would draw that inference from a statement of this variety. Where a statement says ‘if something occurs, harm may follow from that’—I don’t think it’s a necessary premise of that statement that the event has never occurred.”

The 9th U.S. Circuit Court of Appeals previously revived the lawsuit after a district court dismissed it. The plaintiffs seek compensation for lost stock value following the 2018 revelation of the Cambridge Analytica breach, which also triggered government investigations.

In 2019, Facebook settled with the SEC for $100 million and paid the FTC a $5 billion fine. The Court’s decision, expected by June 2024, could influence standards for corporate disclosures in securities fraud cases, with another related case involving Nvidia set for review on Nov. 13.