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Facebook whistleblower claims may not amount to securities fraud

4 minute read

Former Facebook employee and whistleblower Frances Haugen attends a Senate Committee hearing in Washington, October 5, 2021. Matt McClain/Pool via REUTERS

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Recently, Frances Haugen revealed herself as the Facebook whistleblower who provided information to journalists regarding Facebook’s allegedly inadequate efforts to combat misinformation and other harmful content on its platforms. In doing so, she indicated that she had filed multiple whistleblower complaints with the U.S. Securities & Exchange Commission (SEC).

This of course raises the interesting, and perhaps multibillion dollar question: Regardless of whether or not Facebooks’ conduct is damaging to civil society, is it actionable securities fraud? After having read redacted copies of the whistleblower complaints that Haugen provided to Congress, I remain skeptical.

A securities enforcement action based on Haugen’s assertions would run into several obstacles.

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First, there has to be an actual misstatement of fact or omission of material fact without which other public statements would be misleading. It is one thing if Facebook claimed to have a compliance program guaranteed to ensure absolutely no misinformation or violence-promoting content was shared on their platforms. It is another if they simply said that they have implemented robust systems that they believe will, although not perfectly and in every instance, minimize the amount of that type of content.

And this appears to be largely what is asserted by the whistleblower submissions, which state that Facebook “knowingly chose to permit misinformation and violent content/groups and failed to adopt or continue measures to combat these issues.” Among other things, Haugen faults Facebook for overreliance on its users reporting problematic content, as opposed to more proactive efforts.

These claims takes this situation outside the scope of other supposedly similar cases, such as Volkswagen not disclosing its emissions testing cheating scheme, which ultimately led to billion-dollar penalties that damaged its business and, by extension, its shareholders. Facebook essentially said it was using its best efforts, and lauded itself for them, perhaps prematurely. Indeed, Ms. Haugen stated in her recent interview with 60 Minutes that she doubted staff at Facebook were “malevolent” but that their incentives were “misaligned” and there were systemic barriers to doing a better job.

Absent evidence Facebook was deliberately lying to regulators or the public about a non-existent compliance program, or proof that Facebook affirmatively recognized internally that their efforts were stopgap and scanty, it would be difficult to prove a major element of securities fraud. Unless Haugen has unequivocal emails or other documents to that effect, proving these contentions would be challenging.

What seems more likely is that there are significant questions regarding Facebook’s carelessness or lack of due diligence in routing out problematic posts. An internal staff disagreement as to the adequacy of Facebook’s efforts, or about the appropriate strategy to take against misinformation, seems an insufficient predicate for a securities fraud enforcement action.

The second, and more difficult question is whether a reasonable investor would find Facebook’s alleged misconduct material. This ultimately gets at the crux of the issue, and why a securities fraud claim might prove challenging. In essence, Facebook is accused of prioritizing its profits over the public good. Arguably, however, that is what a well-run company should be doing, and if it wasn’t doing that it might get in trouble from investors. Laws and regulations exist to ensure that corporate behavior stays within well-defined boundaries, but as long as companies are adhering to their legal obligations, maximizing profits is what society says companies should be prioritizing.

To the extent that these whistleblower complaints allege a material harm about which investors might be concerned, they set out a fairly speculative future harm:

…to the extent users become aware of the dangers that Facebook platforms present, they are likely to use the platforms less, leading to lower advertising revenues and lower profits. Second, some investors simply will not want to invest in a company that facilitates misinformation and violence on and off the internet and then engages in misstatements and omissions on the topic.

Absent any showing that the idea that this potential harm might someday become a risk is in fact a present concern for investors, any enforcement action would face significant hurdles.

Without unequivocal internal communications or other documentation conceding that public statements about addressing issues of misinformation and the promotion of violence were deliberately false, Facebook’s purported lack of diligence in policing its platforms might be a matter of social concern; but those actions — however unpalatable to some members of the public — are not likely to amount to a charge of securities fraud that the SEC will ultimately be able to prosecute successfully.

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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias. Thomson Reuters Institute is owned by Thomson Reuters and operates independently of Reuters News.

Howard Fischer is a Partner at Moses & Singer in New York in the white collar enforcement and investigations and litigation groups, where he represents targets of governmental investigations and prosecutions. Previously, he served as a Senior Trial Counsel in the New York Regional Office of the U.S. Securities & Exchange Commission, where he prosecuted multiple post-financial crisis cases (including of two people featured in the film “The Big Short”), the infamous London Whale case, and what is likely the dumbest insider trader in U.S. financial history. He has written and lectured extensively on issues relating to financial services litigation, arbitration and government investigations and enforcement. He has spoken before national and international bar associations in the United States, Europe, and Asia. Additionally, he maintains close relationships with a wide range of federal and state law enforcement and regulatory authorities, including the Securities & Exchange Commission and the Department of Justice.

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