The U.S. Supreme Court on Wednesday began hearing arguments in a securities fraud lawsuit brought by Facebook shareholders, who allege the social media giant misled them about how it manages sensitive user data. The case, filed as a class action by Amalgamated Bank in 2018, could ultimately raise the legal bar for shareholders seeking to hold companies accountable for alleged securities fraud, according to Reuters.

The lawsuit centers on allegations that Facebook, now operating as Meta Platforms Inc., withheld critical information about a data breach involving British political consultancy Cambridge Analytica. The breach, which dates back to 2015, reportedly exposed the personal data of more than 30 million Facebook users, some of which was allegedly used in connection with Donald Trump’s 2016 presidential campaign. The shareholders argue that Facebook is targeting the Securities Exchange Act of 1934, which requires transparency for listed companies about risks that could affect their business, according to Reuters.

Meta appealed to the Supreme Court after a 2023 ruling by the San Francisco-based 9th US Circuit Court of Appeals allowed the lawsuit to proceed. The court’s decision marks one of two high-profile securities cases before the Supreme Court this month. The other involves Nvidia, an AI chip maker, which is facing similar accusations of misleading investors. If the Court rules in favor of Meta and Nvidia, it could set a precedent that complicates the path for private litigants seeking to hold companies accountable for alleged fraud, potentially reshaping the future of securities litigation in the United States.

During Wednesday’s hearing, Facebook lawyer Kannon Shanmugam argued that the company’s statements about the risks of data misuse were forward-looking, rather than concessions from past incidents. However, the judges asked pointed questions that questioned Facebook’s position. In particular, Judge Clarence Thomas questioned whether Facebook’s risk disclosures were indeed misleading by failing to mention a breach that had already occurred, noting that “a reasonable person could look at the statement and assume” that the risk was purely hypothetical.

In response, Shanmugam argued that a hypothetical assessment of risk did not imply that a previous incident had not occurred. “We don’t think a reasonable person would draw that inference from a statement of this nature,” he argued, stressing that Facebook’s disclosure statement was not intended to imply that a data breach had never occurred.

Facebook’s shares took a hit after media attention in 2018 over the Cambridge Analytica scandal, which led to widespread scrutiny, U.S. government investigations and congressional hearings. According to the plaintiffs, the company’s failure to disclose the violation earlier negatively impacted shareholder value and prompted these legal actions to obtain financial compensation. At the heart of the case is the allegation that Facebook misrepresented the likelihood of user data being used unlawfully, even though a breach had already occurred.

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Highlighting another crucial element in the case, Justice Elena Kagan emphasized the distinction between outright falsehoods and potentially misleading omissions. “We also look for misleading statements or misleading omissions,” Kagan said, underscoring that disclosures can still mislead investors even without being an outright lie.

The lawsuit, which was initially dismissed in 2021 by U.S. District Judge Edward Davila, was revived in a 2-1 decision by the 9th Circuit Court. Judge Margaret McKeown, writing for the majority, argued that Facebook’s portrayal of the risk of data misuse as hypothetical was misleading as the breach had already occurred, according to Reuters. The legal debate over such revelations extends beyond Facebook, with Nvidia also seeking Supreme Court intervention in a similar case involving cryptocurrency sales reporting.

Both cases underscore the Supreme Court’s evolving approach to securities regulation and investor protection. In recent years, the Court has limited the powers of the U.S. Securities and Exchange Commission (SEC), the federal agency charged with overseeing securities fraud. Now, the judges’ decisions in these cases could further limit private plaintiffs’ ability to sue companies for alleged securities law violations, placing high standards on proof of corporate wrongdoing.

The stakes for Meta and Nvidia are significant: a ruling that raises the bar for private securities lawsuits could protect companies from a wave of shareholder claims, especially in sectors like technology, where risks associated with data, privacy and emerging markets are increasingly be scrutinized.

Source: Reuters