In re Facebook, Inc. Secs. Litig., 2019 U.S. Dist. LEXIS 166027 (N.D. Cal. Sept. 25, 2019):
Plaintiffs are persons who purchased shares of Facebook common stock between February 3, 2017 and July 25, 2018 (the "Class Period"), who believe that Mark Zuckerberg, Sheryl K. Sandberg, and David M. Wehner, collectively Defendants, made materially false and misleading statements and omissions in connection with the purchase and sale of Facebook stock. See Consolidated Complaint ("Compl.") ¶ 1, Dkt. 86. They allege that Defendants violated Section 10(b), 20(a), and 20A of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated thereunder because Defendants made guarantees that the Cambridge Analytica, and related data-privacy scandals, would not impact Facebook stock while knowing this to be false. Specifically, Plaintiffs focus on Defendants' statements and omissions "concerning Facebook's privacy and data protection practices" and their impact on Facebook's [*5] stock price during two time periods: March and July 2018.
Defendants have filed a motion to dismiss the lawsuit arguing that Plaintiffs have not, and cannot, meet Rule 9(b)'s heightened pleading requirements for securities fraud and instead allege "an overarching hindsight theory." Motion to Dismiss ("Mot.") at 2, Dkt. 93. Defendants make four main arguments all centered around Plaintiffs' inability to meet the elements of securities fraud. First, Defendants argue Plaintiffs have not pled an actionable misstatement or omission because they have not identified any false statements. Defendants argue the 36 "actionable" statements or omissions Plaintiffs raise are, in fact, neither actionable nor fraudulent because Plaintiffs make no attempt to plead that Defendants lied or mislead investors. As explained infra Section III.C.1.a., as to all the allegations, only Statement 22 is actionable.
Second, Defendants argue Plaintiffs have not pled a strong inference of scienter because Plaintiffs do not (1) relate the alleged misstatements to any conduct establishing scienter or (2) show facts that the Defendants knew the challenged statements were false. Further, Defendants contend that Plaintiffs offer [*6] only conclusions without alleging any specific facts to support these conclusions. As explained infra Section III.C.2. the one actionable Statement, Statement 22 lacks scienter because Plaintiffs do not allege with sufficient particularity that Defendant Sandberg made the statement knowing it was false.
Third, Defendants contend that Plaintiffs fail to plead loss causation since Defendants had already warned investors of a potential stock decline and cannot trace any corrective disclosure to the stock price's drop. Finally, Defendants argue that Plaintiffs cannot show reliance based on a "fraud-on-the market" theory because the Cambridge Analytica scandal was already known a year before the start of the putative class action and so the market already reacted to the data breach. The Court does not reach these arguments because it GRANTS the Motion to Dismiss on alternative grounds.
Accordingly, the Plaintiffs do not adequately plead a securities fraud violation. Here, it is Plaintiffs' burden to point to plausible and particular facts tending to show fraudulent behavior by Defendants. Without such a showing, Plaintiffs cannot survive the higher evidentiary pleading standard enumerated [*7] in Rule 9 of the Federal Rules of Civil Procedure. See Fed. R. Civ. Pro. 9(b). Thus, for the reasons below, Defendants' Motion to Dismiss is GRANTED.
A. Factual Background1
Facebook was founded by Mark Zuckerberg who is now the Chief Executive Officer ("CEO") of the company. Compl. ¶ 28. Sheryl Sandberg is the Chief Organization Officer ("COO") and David Wehner is the Chief Financial Officer ("CFO") of Facebook. Id. ¶¶ 30-31. Facebook is a social-media networking website that allows users to create profiles and share information about themselves to their "community." Id. ¶ 37. The platform also enables third-party developers' applications or websites ("apps") to access users' information. Id. ¶¶ 45-46. Importantly before 2015, a user could consent to an app developer gaining access to their personal data and the personal data of his or her friends (referred to herein as "third-party consent"). Id. ¶ 46.
1. Relevant Agreements
Before 2015, Facebook's policies allowed users to share information about their friends with third-party app developers, i.e. "third-party consent." Id. ¶¶ 46, 82. Defendants subsequently announced that they would overhaul Facebook's privacy practices to better protect user data and would tell people if their data was shared with Cambridge Analytica. Id. ¶ 18. Specifically, in 2014, Facebook stated that changes would "dramatically limit the Facebook information apps could access," and "turn[ed] off users' ability to provide access to their friend's personal data." Id. ¶¶ 79, 251, 266(b), 280. However, in April 2018, it was revealed that Defendants still permitted third parties to access user data, known as "whitelisting." Id. ¶¶ 19, 140.
Facebook-App Developer Agreements. Third-party app developers must agree to Facebook's Platform Policies before offering apps on Facebook. ¶¶ 176, 301. This limits the use and collection of user data and requires developers to explain what type of information they will collect and how it will be used. Id. The policy prohibits developers from [*9] selling, licensing, or purchasing user data and from transferring data to advertisers or data brokers. Id. ¶ 301(c).
2. Relevant Events Allegedly Showing Material Misstatements or Omissions
Aleksandr Kogan and Cambridge Analytica. In 2013, Kogan, a professor and data researcher at Cambridge University, developed an app called "thisisyourdigitallife." Id. ¶ 80-81. This app was a personality quiz; users were told that the results would be used only for academic purposes. Id. ¶ 81. Around 270,000 people installed the app and consented to the sharing of their data. Id. ¶¶ 81-82. Due to Facebook's privacy policies, app developers were able to access data about "thisisyourdigitallife" user's Facebook friends. Id.
The December 2015 The Guardian Article and Defendants' Response. In December 2015, The Guardian reported that Kogan, through his company Global Science Research ("GSR"), sold information collected through the "thisisyourdigitallife" app to Cambridge Analytica, violating Facebook's policies. Id. ¶¶ 7, 150, 232, 280. This article indicated that Cambridge Analytica developed voter profiles using the data of tens of millions of Facebook users, which were then used for political purposes. Id. ¶¶ 80-81. Once news of the data leak broke, Defendants sent [*10] Cambridge Analytica a letter asking it to delete the data and provide confirmation of deletion. Id. ¶¶ 9, 90, 92, 96, 98, 150-51, 176. Defendants made no efforts to verify Cambridge Analytica's assurances that the data was deleted, investigate the extent of the use or distribution of data, or verify that the data had been deleted. Id. ¶ 9.
Reemergence of the Cambridge Analytica Story in 2018. On March 17, 2018, three years after the original Cambridge Analytica story broke, The New York Times and The Guardian reported that Defendants delayed acting to address the Cambridge Analytica data breach and that data had not been deleted but was used in connection with President Donald Trump's campaign. Id. ¶¶ 150, 153-54. These reports allegedly contradicted Defendants' representations of data protection, specifically the fact that user data could still be accessed by developers without user's knowledge or consent, i.e., whitelisting. Id. ¶ 14, 19. Facebook did, however, immediately suspend Cambridge Analytica, its parent company, and Cambridge Analytica employees from the Facebook platform. Id. ¶ 150.
In response to the stories, Facebook's common stock dropped nearly 7% on Monday, March 19, [*11] 2018, the first trading day after the news broke. Id. By March 27, 2018, the stock was trading as low as $152/share, a drop of nearly 18% in value from its price before the stories broke. Id. ¶ 15. The Securities and Exchange Commission ("SEC") began investigating "whether Facebook adequately warned investors that developers and other third parties may have obtained users' data without their permission or in violation of Facebook policies." Id. ¶ 16.
Facebook's First Quarter 2018 Earnings Report ("1Q18") and the GDPR. On April 25, 2018, Defendants released a favorable first quarter earnings report, 1Q18, which showed that user growth was unaffected by the continued Cambridge Analytica scandal. Id. ¶ 21. The report had quarterly revenue, earnings, and daily and monthly active user growth exceeding analyst expectations. Id. ¶¶ 21, 186, 188, 190, 270-71. Although a "handful" of advertisers had "paused spend" with Facebook after the Cambridge Analytica news, Defendants reported that this did not appear to reflect a "meaningful trend." Id. ¶ 274. Defendants also told investors that it anticipated expenses to increase year-over-year by "50% [to] 60%," because of the "significant investments [*12] [Facebook was] making in areas like safety and security" and due to increased hiring. Id. ¶ 275. The stock price climbed more than 9% following the release of this report. Id. ¶ 21. By July, Facebook's stock price was trading well above $200 per share. Id.
The new European privacy legislation, the General Data Protection Regulation2 (the "GDPR"), became effective the month after 1Q18 was released. Defendants addressed the possible impact of this legislation during the investor call. Id. ¶ 276. Defendants claimed that compliance with the GDPR would not be an issue because Facebook was almost compliant. Id. ¶ 20. On this call, however, Defendants noted that it was "early and difficult to know . . . in advance" the business implications of the GDPR and anticipated that Facebook's European daily and monthly user base could "be flat to slightly down." Lutz Ex. 11, at 8, 23, Dkt. 95. Defendants noted that there was potential for impact and that they would monitor it closely. Id.
Facebook's Second Quarter 2018 Earnings Report ("2Q18"). The stock price increase ended on July 25, 2018 when Defendants released 2Q18, which showed a decline in total revenues. Id. ¶ 21. [*13] There, Defendants reported a significant decline in user-metrics in Europe, zero user growth in the United States, decelerating worldwide growth of active users, lower than expected revenue and earnings, and ballooning expenses affecting profitability. Id. As a result, the common stock price dropped nearly 19% on July 26, 2018, resulting in a single-day loss of approximately $100 billion in market capitalization. Id. ¶ 23. By July 30, 2018, the price of stock had fallen by 21%, shedding around $112 billion in market capitalization. Id.
Defendants attributed the user growth slowdown to the effects of the "GDPR rollout, consistent with the outlook we gave on the Q1 call," but noted that the "vast majority of people [had continued] opting in to . . . third-party data use." Lutz Ex. 12 at 7, 18. Defendants maintain that this is consistent with their premonition during the Q1 call that there would be a "decline" in European users. Motion to Dismiss at 9, Dkt. 93.
Defendants' Sale of Facebook Stock. During the Class Period, Defendant Zuckerberg sold approximately 30,000 Facebook shares for proceeds of more than $5.3 billion, while Sandberg sold $389 million worth and Wehner $21 million worth [*14] during the same period. Compl. ¶ 13. These included large sales during the first quarter of 2018—more than triple what Defendants sold in the last quarter of 2017—before the 2Q18 report was released. Id.
3. Alleged Misstatements/Omissions
Plaintiffs allege Defendants made a total of 36 materially misleading statements or omissions in press releases, SEC filings, earnings calls, and public remarks at conferences. The Court has arranged these statements chronologically and by source and bolded/italicized the relevant part of the statement. December 20153 Statements to The Guardian
"[M]isleading people or misusing their information is a direct violation of our policies and we will take swift action against companies that do . . . ."
"[I]ncluding banning those companies from Facebook and requiring them to destroy all improperly collected data."
"We use the information we have to help verify accounts and activity, and to promote safety and security on and off of our Services, such as by investigating suspicious activity or violations of our terms or policies."
"We work hard to protect your account using [*15] teams of engineers, automated systems, and advanced technology such as encryption and machine learning."
"These partners must adhere to strict confidentiality obligations in a way that is consistent with this Data Policy and the agreements we enter into with them."
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