Facebook Claims Test SEC’s Reach

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Whistleblower’s allegations don’t resemble a typical securities-fraud case, but the pressure to investigate remains strong

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But according to Mark Fagel, the former director of the SEC’s San Francisco office, the agency is almost certain to do so. “Given how much play this has gotten, especially with the revelation that the whistleblower went to the SEC, there’s no way they’re not looking into it and feeling pressure to bring some sort of case.” ,” said Mr. Fagel.

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Facebook has come under criticism for targeting young people and ever since the Wall Street Journal began publishing a series of stories based on documents collected by Ms. how does it respond.

The Journal report detailed the company’s internal research that links teen Instagram use to anxiety and depression. Publicly, Facebook has consistently downplayed the social platform’s negative effects on teens. While the company has not generally made its research available to the public or to academics or lawmakers who have asked for it, Facebook published an annotated version of the two research decks in late September.

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The reporting also showed how Facebook’s efforts to prevent abuse of its platform by drug cartels and human trafficking entities fell short. Such problems were particularly acute in some developing countries, where Facebook’s user base is growing and expanding.

Any securities-enforcement action will likely focus on whether the company or its executives tell investors a story about known business risks or trends, while hiding even worse news that they only shared internally. Was. Any misleading statements must be material, meaning they can be expected to influence business decisions or a vote on a corporate proxy ballot.

According to lawyers, the issues Ms Haugen cited in her allegations may be material in the eyes of regulators, but they are not all traditional securities-fraud claims. In a whistleblower tip provided to the SEC, Ms. Hogen and her attorneys wrote that according to a copy seen by the Journal, Facebook “made a number of material misrepresentations and omissions on the question of whether Facebook and Instagram were affecting teen users.” We do”.

The complaint states that Instagram’s side effects matter to investors because consumer backlash against the product can be expected to decrease user engagement and ad revenue.

“Traditionally this isn’t the kind of thing the SEC would be looking at,” said David Rosenfeld, a former senior SEC enforcement officer now teaching law at Northern Illinois University, adding that the agency “usually Will be looking at things that go into the more current financial position of the company.”

The classic securities enforcement case usually involves a claim that a public company failed to comply with its accounting or other metrics followed by investors or to disclose key facts explaining its performance. But the SEC can allege that the disclosures were simply misleading, without linking the statements with financial trends. This strategy has expanded the type of cases brought by the SEC in recent years, Rosenfeld said.

For example, two years ago, Facebook agreed to pay $100 million to the SEC to resolve allegations that it had not disclosed misuse of user data by consulting firm Cambridge Analytica. Facebook settled without admitting or denying the claims.

“You might ask, ‘What do these disclosures of customer data abuse have to do with the profitability of the company?’ But they turned it into an enforcement action,” Mr Fagel said.

Another reason for the SEC to look into Facebook’s claims, lawyers said, is the regulator’s growing interest in sending a message about how companies should disclose environmental, social and governance issues.

In one instance, the SEC is now investigating Activision Blizzard. Inc.

The Journal reported last month on how the videogame maker handled and disclosed workplace episodes of sexual misconduct and harassment. Activision said in July that it has hired a law firm, Wilmer Cutler Pickering Hale & Door LLP, to review its policies on maintaining a respectful work environment. The company is also engaging employees to investigate the concerns of the employees.

According to securities lawyers and accountants, the near-term impact of ESG risks on financial performance could be bleak. The long-term impact is more far-sighted: climate change, for example, could damage a company’s supply chain or reduce demand for its products.

Still, those results are hard to quantify and speculate, securities attorneys said. Companies are usually able to deal with such scenarios through widely written disclosures that warn of potential future problems, if business trends or laws change.

Mr Rosenfeld said one of Ms Haugen’s tips to the SEC appears to be more clearly in the agency’s wheelhouse. In a complaint, she alleged that Facebook failed to disclose internal data showing “a narrowing of the user base in key demographics, including US teens and young adults.”

The complaint also states that Facebook did not accurately model how the duplicate accounts affected its user-growth estimates and the reach of its advertising. The complaint states that if this information is revealed, advertisers could spend less money with Facebook and some investors would be skeptical of its growth indicators.

“If Facebook had information that their actual numbers were much lower than what they reported or that clearly showed they were going to decrease, then perhaps this type of thing should be disclosed,” Mr. Rosenfeld said. said. “And this type of thing is very close to what the SEC is interested in seeing.”

Dave Michaels at [email protected]

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