"In re Facebook, Inc. Securities Litigation"

Background

The plaintiffs were people who purchased Facebook common stock between February 3, 2017, and July 25, 2018. They alleged that Facebook, Inc., and executive defendants Mark Zuckerberg, Sheryl K. Sandberg, and David W. Wehner made materially false or misleading statements and omissions about Facebook’s privacy and data-protection practices. The claims arose under Sections 10(b), 20(a), and 20A of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5.

The third amended complaint presented two principal theories. First, the plaintiffs alleged that the defendants falsely described the risks and results of Facebook’s response to the Cambridge Analytica data breach while knowing that Cambridge Analytica continued using misappropriated user data. Second, they alleged that Facebook’s statements that users had control over their data were misleading because Facebook’s “whitelisting” practice allowed certain applications to continue accessing user data.

The court had previously dismissed two earlier complaints. In the prior orders, it found deficiencies involving falsity, scienter, and loss causation. Scienter means the required wrongful state of mind, such as an intent to deceive or deliberate recklessness. The court gave the plaintiffs one final opportunity to amend. It also struck portions of the third amended complaint and stated that it would not consider opinions by Dr. Cain in paragraphs 722 through 724 or other material relying on those opinions.

Legal standard

A Rule 12(b)(6) motion tests whether a complaint states a legally sufficient claim. In a securities-fraud case, the complaint must plausibly allege a material misrepresentation or omission, scienter, a connection to the purchase or sale of a security, reliance, economic loss, and loss causation. Loss causation means that the alleged fraud foreseeably caused the plaintiff’s financial loss.

The Private Securities Litigation Reform Act and Federal Rule of Civil Procedure 9(b) impose heightened pleading requirements. The complaint must identify each misleading statement, explain the facts supporting the belief that it was misleading, and plead particular facts creating a strong inference of scienter. The inference of fraudulent intent must be at least as compelling as competing nonfraudulent explanations.

Cambridge Analytica theory

The plaintiffs tried to establish scienter by alleging that three Facebook employees were embedded in the Trump campaign and therefore knew that Cambridge Analytica continued using the misappropriated data. The court found that this theory required several unsupported assumptions: that the employees knew about Cambridge Analytica’s earlier deletion certifications, recognized that “psychographic” material came from the misappropriated data, understood that its use violated Facebook’s policies, reported the conduct to senior executives, and that the executives knew the certifications were false.

The court concluded that the complaint did not allege facts showing that the embedded employees knew about the certifications, alerted the executive defendants, or knew enough about the data use to establish that the executives should have known the certifications were false. General allegations that the Trump campaign was important to Facebook’s advertising revenue, that the executives participated in a related meeting, or that an investigation team knew information did not establish the executives’ actual knowledge or deliberate recklessness. The court therefore held that the plaintiffs had not adequately pleaded scienter for statements about the Cambridge Analytica breach.

Whitelisting theory

The court had previously found that the plaintiffs adequately alleged falsity, scienter, materiality, and reliance concerning Facebook’s whitelisting practices. The remaining deficiency was loss causation. The plaintiffs alleged a stock-price loss on July 26, 2018, more than a month after the whitelisting practice was revealed on June 3, 2018.

The court held that the plaintiffs had not pleaded a sufficient connection between the whitelisting disclosure and a stock-price decline. Because the third amended complaint did not establish that the disclosure caused the alleged loss, the whitelisting theory still failed to plead loss causation.

Sections 20(a) and 20A

The plaintiffs’ claims under Sections 20(a) and 20A depended on a primary violation of Section 10(b) or Rule 10b-5. Because the court determined that the Section 10(b) and Rule 10b-5 claims failed, it also granted the defendants’ motion to dismiss the Sections 20(a) and 20A claims.

Disposition

The court granted the defendants’ motion to dismiss the third amended complaint in its entirety. It dismissed the plaintiffs’ claims without leave to amend, finding that the plaintiffs had already received multiple opportunities to correct the pleading deficiencies and that further amendment would be futile. The order was signed by Judge Edward J. Davila.