The Supreme Court grappled Wednesday with what level of risk disclosures companies must share with their investors, as part of a class-action lawsuit receiving scrutiny over the political consulting firm Cambridge Analytica’s collection and use of Facebook user data during the 2016 presidential election.
The liberal wing of the court expressed concerns that Facebook wants a ruling that would allow companies to conceal crucial information from investors.
“We are also looking to misleading statements or misleading omissions,” said Justice Elena Kagan, an Obama appointee. “These forward looking statements can be misleading.”
“I don’t know if your position is appreciating the fact that … past triggering events can still lead to future harm,” said Justice Ketanji Brown Jackson, a Biden appointee.
But the conservative wing appeared troubled by what type of warning a company must give about the potential of a data leak.
“Data breaches are part of our lives these days,” said Justice Neil M. Gorsuch, a Trump appointee.
The class-action lawsuit over private securities fraud came about when a group of investors went to purchase Facebook stock between 2017 and 2018.
The price ended up dropping in 2018 after it was revealed that user data had been collected and used to benefit the presidential campaigns of Sen. Ted Cruz, Texas Republican, and eventually of former President Donald Trump.
A professor at Cambridge University developed a personality quiz for Facebook users in 2014 that collected data from more than 270,000 people and created “personality scores” that were used to study voter behaviors. He then sold the data to Cambridge Analytica, a British consulting firm.
The data aided Mr. Cruz’s and Mr. Trump’s campaigns, according to court documents.
When news outlets discovered the data leak in 2015, Facebook removed the quiz app and had the professor and Cambridge Analytica confirm in writing that the data had been purged from its systems. Stock prices did not drop initially after the news broke.
However, it was discovered in 2018 that the data was still being retained to have benefited the Trump team. Stock prices then fell in 2018 by 18%.
The investors and Amalgamated Bank argued that Facebook’s disclosure form warned that security breaches and the disclosure of data might harm the company’s business and reputation, but that the issue was posed as “merely hypothetical,” when in fact a breach had already taken place.
Attorney Kevin K. Russell, representing Amalgamated Bank, said a monumental past event happened but it was not disclosed in a way to put investors on notice.
“Reasonable investors would have thought this never happened, especially on this scale,” Mr. Russell said. “Facebook misled people into thinking that it hadn’t.”
The justices could resolve a circuit split in their ruling, which is expected by June, about what type of risk disclosures public companies must make.
The 6th U.S. Circuit Court of Appeals has said companies don’t need to disclose past risk events, while six other appellate courts have required companies to disclose past risk events if the company knows it will harm the business.
The 9th Circuit, however, ruled against Facebook in the investors’ action, requiring public companies to disclose a past event even if there’s no current threat to business.
Facebook, in its court filing, said that the 9th Circuit’s ruling will “light a beacon for class-action lawsuits.”
Attorney Kannon K. Shanmugam, representing Facebook, told the high court companies are under other requirements to update shareholders. He said the 9th Circuit ruling was an outlier.
“It would really convert these disclosures…into disclosures of laundry lists of past occurrences,” Mr. Shanmugam said.
The Biden administration is siding with Amalgamated Bank and the shareholders.
The federal government says the U.S. Securities and Exchange Commission has an interest in the case and had brought an enforcement action against Facebook in 2019 over similar concerns regarding describing particular risk factors as hypothetical.
Facebook had settled the case with the SEC for $100 million.
The case is Facebook v. Amalgamated Bank.
• Alex Swoyer can be reached at aswoyer@washingtontimes.com.
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