AMALGAMATED BANK V. FACEBOOK, INC., No. 22-15077 (9th Cir. 2023)Annotate this Case
In this case, the plaintiffs, who are shareholders of Facebook, Inc., brought a securities fraud action against the company and its executives, alleging that they made materially misleading statements and omissions about the risk of improper access to Facebook users' data, Facebook's internal investigation into the actions of Cambridge Analytica, and the control Facebook users have over their data. The United States Court of Appeals for the Ninth Circuit affirmed in part and reversed in part the decision of the District Court for the Northern District of California.
The Circuit Court held that the shareholders adequately pleaded falsity as to the challenged risk statements in Facebook's 2016 Form 10-K. The court held that these statements were materially misleading because Facebook knew at the time of filing that the risk of improper third-party misuse of Facebook users' data was not hypothetical, but had already occurred.
As to the statements regarding Facebook's investigation into Cambridge Analytica, the court affirmed the district court's decision, holding that the shareholders failed to plead scienter, or intent to defraud.
Lastly, the court held that the shareholders adequately pleaded loss causation as to the statements assuring users that they controlled their data on the platform. The court found that the shareholders had adequately pleaded that the March 2018 revelation about Cambridge Analytica and the June 2018 revelation about Facebook's whitelisting policy were the first times Facebook investors were alerted that Facebook users did not have complete control over their own data, causing significant stock price drops.
The case was remanded to the district court for further proceedings.
Court Description: Securities Fraud. The panel filed (1) an order denying a petition for panel rehearing and a petition for rehearing en banc; and (2) an amended opinion affirming in part and reversing in part the district court’s dismissal of a securities fraud action against Facebook, Inc., and three of its executives, and remanding for further proceedings.
Cambridge Analytica improperly harvested personal data from millions of unwitting Facebook users and retained copies of the data beyond Facebook’s control. Facebook had known of Cambridge Analytica’s misconduct for over two years and failed to inform affected users, and Facebook surreptitiously allowed certain whitelisted third-party apps to access users’ Facebook friend data without the users’ friends’ consent. Facebook shareholders filed suit, alleging that the defendants violated Sections 10(b), 20(a), and 20A of the Securities Exchange Act of 1934 and Rule 10b-5 by making materially misleading statements and omissions regarding the risk of improper access to Facebook users’ data, Facebook’s internal investigation into Cambridge Analytica, and the control Facebook users had over their data.
The panel held that, under the heightened standard of the Private Securities Litigation Reform Act, the shareholders adequately pleaded falsity as to the some of the challenged risk statements. The panel followed In re Alphabet Sec. Litig., 1 F.4th 687 (9th Cir. 2021), which held that falsity allegations were sufficient to survive a motion to dismiss when the complaint plausibly alleged that a company’s SEC filings warned that risks “could” occur when, in fact, those risks had already materialized. The panel concluded that the shareholders adequately pleaded falsity as to the statements warning that misuse of Facebook users’ data could harm Facebook’s business, reputation, and competitive position, and the district court erred by dismissing the complaint as to those statements. The panel concluded, however, that the district court correctly dismissed the challenged statements regarding the risk of security breaches and the risk of the public not perceiving Facebook’s products to be “useful, reliable, and trustworthy.” The panel left to the district court on remand whether the shareholders could satisfy the other elements of the claims with respect to risk statements.
The panel held that the shareholders did not adequately plead facts giving rise to a strong inference of scienter as to the Cambridge Analytica investigation statements, and the panel affirmed the district court’s dismissal as to these statements.
The panel held that the shareholders adequately pleaded loss causation as to some of the user control statements. The panel affirmed the dismissal of the statements related to Facebook’s goals of transparency and control, and a June 2018 whitelisting revelation as a standalone claim. The panel reversed the dismissal as to other statements related to Facebook stock price drops.
Concurring in part and dissenting in part, Judge Bumatay joined the majority in holding that the shareholders failed to sufficiently allege a falsity in Facebook’s Cambridge Analytica investigation statements. He also joined the majority in holding that the shareholders did allege a falsity and loss from the user control statements, but only as those statements relate to Facebook’s practice of “whitelisting.” He disagreed with the majority on two fundamental points. In his view, the shareholders failed to sufficiently allege that Facebook’s risk factor statements in its public filings were fraudulent, and they did not show that Facebook’s user control statements were false based on the Cambridge Analytica revelations.
This opinion or order relates to an opinion or order originally issued on October 18, 2023.