The allegations made by Facebook whistleblowers may not constitute securities fraud
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Recently, Frances Haugen revealed herself as a Facebook whistleblower, alerting journalists to Facebook’s allegedly inadequate efforts to combat misinformation and other harmful content on its platforms. She said she had filed several whistleblower complaints with the US Securities & Exchange Commission (SEC).
This, of course, raises the interesting and perhaps billions of dollars question: Regardless of whether Facebook’s behavior harms civil society or not, is it criminal securities fraud? After reading the edited copies of the whistleblower complaints that Haugen submitted to Congress, I remain skeptical.
A security enforcement based on Haugen’s allegations would encounter several obstacles.
First, there must be an actual misrepresentation or omission of material facts, without which other public statements would be misleading. It’s a Facebook thing if asserts Having a compliance program that guarantees that absolutely no misinformation or violent content is shared on their platforms. It is another matter if they simply say that they have implemented robust systems that they do believe will, if not perfectly and in any case, minimize the amount of this type of content.
And this seems largely to be what the whistleblower posts claim that Facebook “knowingly chose to allow misinformation and violent content / groups and failed to take or continue action to combat these issues”. Haugen accuses Facebook, among other things, of relying too much on its users to report problematic content, as opposed to more proactive efforts.
These claims take this situation outside the scope of other supposedly similar cases, such as Volkswagen not disclosing its emissions testing cheat program, which ultimately resulted in billions in fines that harm its business and, by extension, its shareholders. Facebook essentially said it was doing its best and praised itself for doing it, perhaps hastily. In fact, Ms. Haugen said in her most recent interview 60 minutes that she doubted that Facebook employees were “malicious” but that their incentives were “misaligned” and that there were systemic barriers to doing better.
Without evidence that Facebook deliberately lied to regulators or the public about a non-existent compliance program, or evidence that Facebook internally acknowledged that their efforts were a stopgap and scanty, it would be difficult to identify a material element of securities fraud to prove. Unless Haugen has clear emails or other related documents, proving these claims would be difficult.
More likely, there are significant questions about Facebook’s negligence or lack of care in forwarding problematic posts. An internal disagreement among employees about the appropriateness of Facebook’s efforts or about the appropriate strategy to combat misinformation appears to be an inadequate predicate for enforcing securities fraud.
The second and more difficult question is whether a sane investor would find Facebook’s alleged wrongdoing material. This ultimately leads to the crux of the problem and why filing a securities fraud lawsuit could prove difficult. Essentially, Facebook is accused of putting its profits above the public good. But that’s probably what a well-run company should do, and if it doesn’t, it could get into trouble for investors. There are laws and regulations in place to ensure that corporate behavior stays within well-defined boundaries, but as long as companies comply with their legal obligations, profit maximization is what companies believe society should prioritize.
To the extent that these whistleblower complaints allege material damage that could affect investors, they represent fairly speculative future damage:
… if users become aware of the dangers posed by Facebook platforms, they will likely use the platforms less, resulting in lower advertising revenues and lower profits. Second, some investors will simply not want to invest in a company that promotes misinformation and violence both on and off the internet and then makes false statements and omissions on the subject.
With no evidence whatsoever that the notion that this potential harm could one day become a risk, indeed one currently Any enforcement action would face significant hurdles for investors.
Without clear internal communications or other documentation to acknowledge that public statements about handling misinformation and promoting violence were deliberately wrong, Facebook’s alleged lack of due diligence in monitoring its platforms could be a social concern; but these acts – while inedible to some members of the public – are unlikely to amount to a security fraud charge that the SEC can ultimately prosecute successfully.
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