“Defendants engaged in this misconduct to conceal Facebook’s true condition from the investing public and to support the artificially inflated prices of the Company’s common stock,” read the Ohio Employees Retirement System’s (OERS) $100 billion class action lawsuit against Meta, formerly called Facebook, filed on November 12 at the US District Court of Northern California.
According to the lawsuit, which has been viewed by MediaNama, the OERS accuses Meta of misleading investors and profiting off inflated stock prices, based on disclosures by whistleblower Frances Haugen. The lawsuit, filed on behalf of all Meta shareholders, alleges that the company violated the US Securities Exchange Act in the class period i.e period for which damages are sought between April 29, 2021 and October 21, 2021. This period comes between Facebook’s trading day after its first-quarter earnings call and the day WSJ’s last story on leaked documents was published.
Haugen’s disclosures in October drew a lot of attention towards Meta’s practices in matters of user safety, integrity investments, etc but primarily for misleading the investors. This is the first instance of the company facing legal actions since Haugen came out with the documents.
Key arguments made in the class action suit
The lawsuit named Meta CEO Mark Zuckerberg, Chief Financial Officer David M. Wehner, and Global Vice President Nick Clegg and stated that all Facebook employees and their families are exceptions to the class action. While the damages incurred by the shareholders are currently pegged at $100 billion in the lawsuit, the total payout could be more as the OERS wants Meta to pay interest on the amount and cover legal costs.
Violation of Securities Exchange Act: The lawsuit said that Meta employed devices of fraud, deceived shareholders by not correcting misleading statements, and didn’t disclose true information to keep the company’s stock prices high, leading to losses among the plaintiffs. It also said that since the executives named in the suit were high-level employees with day-to-day information about the company and power to correct its public statements, they are liable.
Company liable for statements: The lawsuit said that the company would be held liable as “the speaker knew the statement was false or misleading and the statement was authorized and/or approved by an executive officer of Facebook who knew that the statement was false.” The statements being referred to here are Facebook’s claims that it was investing in user safety, integrity, etc. which, the lawsuit alleges, misled investors.
Presumption of reliance: To address legal requirements for ascertaining if any miscommunication by a company did have an impact (called Presumption of Reliance) on shareholders, the lawsuit cited precedence from the Affiliated Ute citizens of Utah vs United States. “All that is necessary is that the facts withheld be material in the sense that a reasonable investor might have considered them important in making investment decisions,” it said. Since Meta did not disclose important information that could impact investments, it’s proven that Facebook communications did have an impact on shareholders’ investments, the lawsuit argued.
What specific issues does the lawsuit raise?
The lawsuit extensively cites documents made available by Frances Haugen to news organisations as well as to the US Securities Exchange Commission (SEC). These were the issues it raised which allegedly led to damages for shareholders.
1. Facebook user metric inflation
The lawsuit refers to WSJ’s report citing internal documents that showed Facebook’s user metrics were unreliable and artificially inflated to raise the issue that this made its metrics ‘less trustable’ and was misleading to advertisers. The documents had flagged that Facebook had a higher number of users with multiple accounts.
2. Targetting children
“Facebook’s willingness to target vulnerable children further demonstrates just how desperate Facebook had become in the face of declining user growth and engagement,” the lawsuit said on internal documents showing Facebook taking significant steps to attract pre-teens. Further, the lawsuit cited WSJ’s reports on Instagram harming teenagers’ mental health and Facebook’s plan to roll out Instagram Kids, to say that the company viewed pre-teens as “a valuable but untapped audience despite knowing that those products have a toxic effect on the well-being of their most vulnerable’.
3. Xcheck program
The lawsuit referred to WSJ’s report that showed Facebook was not equally applying its standards to all users and also lied to the Oversight Board about the extent of the issue. The internal documents showed that under a system called ‘Xcheck’ or ‘Crosscheck’ millions of high profile users were exempt from some or all of Facebook’s rules.
4. News feed problem
The lawsuit referred to another report that showed that Facebook had adopted an algorithm that promoted misinformation, toxicity, and violent content to promote its business interests. Researchers had flagged it as a liability but Facebook had still adopted it as it got users to keep returning to the app and helped sell advertisements, as per the report.
5. Policies in developing countries
The lawsuit referred to internal documents that showed that Facebook employees had raised red flags about how the company’s platforms are used in some developing countries, but its response in many instances was inadequate or non-existent. These red flags included recruitment of hitmen, promotion of human trafficking, violence, exacerbation of ethnic divides, etc.
6. Failure in managing content
The lawsuit referred to a WSJ report on internal documents showing that Facebook failed to control the content on its platform, including its public promise of checking health misinformation during the pandemic.
7. Prioritising profit over user safety
The lawsuit referred to Haugen’s interview to CBS News where she said that the company ‘chooses profit over user safety’, failed to control inflammatory content in the aftermath of the 2020 elections leading to the January 6 Capitol riots, and was ‘worse off’ on safety features than other big tech companies.
It claimed that each of these developments led to a total loss of 14% of the company’s share price or more than $150 billion in the company’s capitalisation.
Also read:
- How Facebook deals with hate speech is being misrepresented, whistleblower reveals
- Facebook Files: US senators grill company in hearing on teens and mental health
- Oversight Board asks Facebook to clarify exceptions for high profile users
- Facebook contract workers violated user privacy, an investigation revealed
- Who is Rajiv Aggarwal, Facebook India’s new director of public policy?
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