Three securities actions were recently filed in the Northern District of California alleging securities fraud in connection with the reported Facebook data privacy breach, which allegedly adversely affected the company’s stock price to the detriment of its shareholders. Two are class actions with similar Exchange Act claims, and the third is a shareholder derivative claim alleging that the company misappropriated its users’ data.
Hallisey v. Zuckerberg. This shareholder derivative complaint was filed on March 22 and seeks relief under both federal and state law. The complaint notes that on March 17, 2018, the New York Times and the Guardians Observer reported that Cambridge Analytica, a data firm retained to assist the Trump election campaign, had accessed and retained information of 50 million Facebook users without their permission and informed consent.
According to the complaint, the allegedly misappropriated user data was collected through the called "thisisyourdigitallife" app. In collaboration with Cambridge Analytica, the app developer Global Science Research allegedly convinced Facebook users to open the app to take a personality test with the collected data to be used for academic purposes, but this was not the case. The plaintiff claims that Facebook and its board of directors should have been more vigilant to such practices and even had been informed previously about the risks associated with the company’s platform and policies.
Since these revelations, the plaintiff notes that, Facebook has been "under fire" from various parties including government officials and is now facing government inquiries in the both United States and Europe regarding its user privacy and data sharing practices.
Specifically, the plaintiff claims that the defendants violated Section 14(a) and Rule 14a-9 under the Exchange Act and breached their fiduciary duties by causing Facebook to file a materially misleading proxy statement in 2017 for, among other things, failing to disclose the Cambridge Analytica incident. The plaintiff also claims that certain defendants sold their Facebook stock while in possession of material non-public information and that demand should be excused because the board’s conduct did not constitute a valid exercise of business judgment, the defendants face a substantial likelihood of liability in this action, and because the board "admittedly" lacks independence.
Casey v. Facebook. This securities class action, also filed on March 22, is based on the same underlying conduct as alleged in Hallisey. The plaintiff here alleges that during the class period, February 3, 2017, through March 19, 2018, inclusive, the defendants made misleading statements regarding the company’s business operations and the strength of its financial prospects while concealing significant weaknesses concerning its core business, including in its SEC filings.
Specifically, the defendants allegedly made false and/or misleading statements and/ or failed to disclose that the company violated its own purported data privacy policies by allowing third parties to access the personal data of millions of Facebook users without the users’ consent; that discovery of this conduct would foreseeably subject the company to heightened regulatory scrutiny; and, as a result, Facebook’s public statements were materially false and misleading at all relevant times, were in violation of Section 10(b) and Rule 10b-5 under the Exchange Act, and that the defendants are also liable under Section 20(a) as control persons in this alleged scheme to defraud investors.
The plaintiff pleads loss causation, claiming that when the effects of alleged misrepresentations made to the market were revealed in press reports, the price of the company’s securities significantly declined, causing investors’ losses; fraud on the market when class members suffered damage by relying on the integrity of the market price of Facebook securities; and that there is no applicable safe harbor for these alleged misstatements.
Yuan v. Facebook. This securities class action makes similar claims to those in the Casey complaint and during the same class period. It was filed on March 20. Specifically, the plaintiff here alleges that the defendants made materially false and misleading statements during the class period on securities filings with respect to user data, including non-specific disclosers of potential vulnerabilities when specifics were known yet concealed from investors in violation of Section 10(b) and Rule 10b-5 under the Exchange Act. The plaintiff also alleges a similar control persons claims against the defendants based on the same conduct.
Attorneys: Mark C; Molumphy (Cotchett, Pitre & McCarthy, LLP) for Jeremiah F. Hallisey. Alfred G. Yates, Jr. (Law Office Of Alfred G. Yates Jr. PC) for Robert Casey. Jennifer Pafiti (Pomerantz LLP) for Fan Yuan.
Companies: Facebook, Inc.
MainStory: TopStory CorporateGovernance CorpGovNews GCNNews DirectorsOfficers FiduciaryDuties FraudManipulation Proxies CaliforniaNews
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