Meta Investor Suit Gives Justices Opening to Redefine Risk Talk

The US Supreme Court will tackle an issue next term that has split appeals courts and frustrated securities lawyers when it considers a multibillion-dollar shareholder lawsuit against Meta Platforms Inc., in a case that could reframe how companies tell investors about their business risks.

Meta stands accused of misleading investors about its data-harvesting scandal involving Cambridge Analytica. The justices have agreed to review a Ninth Circuit decision to let the case proceed.

The high court appears poised to set a uniform standard for how public companies talk about past events when disclosing business risks in securities filings. Plaintiffs are zeroing in on risk disclosures in lawsuits against companies after damaging news, defense lawyers say.

“The Supreme Court’s decision will give clarity to litigants, but it will also give clarity to public issuers who are having to draft the risk disclosures,” said Skadden, Arps, Slate, Meagher & Flom LLP litigation partner Virginia Milstead, who has defended companies in securities fraud suits. “It has a practical application beyond its effect in litigation.”

Finding a Path

Investors sued Meta, known then as Facebook Inc., in 2018 following reports that British consulting firm Cambridge Analytica harvested personal data from millions of Facebook users, providing it to Sen. Ted Cruz (R-Texas) and later Donald Trump during their 2016 presidential campaigns.

Investors said Meta quickly confirmed Cambridge Analytica had private information after a 2015 report by The Guardian, but kept its findings secret. The revelations about the scandal contributed to two price drops that cost the company more than $200 billion in market capitalization, according to the suit.

Investors pointed to various statements by Meta and its executives as being false or misleading, including one in the company’s 2016 annual report where it warned that data breaches and improper disclosure of user data “could harm our reputation” and negatively impact its business.

That statement could be misleading because it presented the risks as hypothetical, even though the misuse of users’ data already happened, the US Court of Appeals for the Ninth Circuit ruled last year. A dissenting judge argued there was nothing to suggest Meta already knew its reputation was harmed when it made the statement.

The ruling deepened a three-way split among the circuit courts, according to Meta, whose Supreme Court bid was supported by business and industry groups, including the US Chamber of Commerce, as well as some legal scholars.

On one end of the spectrum is the Cincinnati, Ohio-based Sixth Circuit, which said in a case involving Yum! Brands Inc. that “cautionary statements” about food safety issues in the company’s risk factors weren’t actionable.

The Ninth Circuit, on the West Coast, is one the other end, as illustrated by Meta’s case. It requires companies to disclose past instances where a risk materialized, even if those events don’t currently pose a threat of business harm, Meta argued.

Other circuit courts have adopted a middle ground, requiring companies to disclose past events only if they know the risk will harm the business. The Second Circuit in New York, for example, said in a 2021 decision that “cautionary words about future risk cannot insulate from liability an issuer’s failure to disclose that the risk has, in fact, materialized in the past and is virtually certain to materialize again.”

The shareholders suing Meta accused the company of mischaracterizing the Ninth Circuit’s ruling, and argue it aligns with other circuits. Regardless, instructions from the Supreme Court about disclosing past events will be helpful, attorneys said.

“Deciding this case will tell us what to do with risk factors like that,” said Saul Ewing LLP partner Vanessa Schoenthaler, who helps companies draft disclosures. “We’ll know which path to take.”

Others suggested the case could be a chance for the Supreme Court to make a broader statement about risk factor disclosures, including what risks should be disclosed, and how.

“This potentially could have an impact on a topic that a bunch of us securities lawyers have wrestled with for quite some time,” David Kaufman, co-chair of Thompson Coburn LLP’s corporate and securities practice group, said.

Sharks in the Harbor

The SEC since 2005 has required companies to describe factors that would make an investment speculative or risky. The agency in recent years tweaked its rules, including changes meant to make the disclosures more readable.

Defense lawyers argue the Ninth Circuit’s ruling has distorted the purpose of risk factors, requiring companies to list a litany of past events.

“The risk factor sections of SEC filings aren’t supposed to be a tell-all of the company’s past, present, and future,” Skadden litigation partner Mark Foster said.

The Meta investors argue it’s reasonable to think that negative events are material, and should be disclosed, when they present a real risk to the company’s bottom line, even if the harm hasn’t yet been inflicted or its extent isn’t entirely clear.

But the Washington Legal Foundation in an amicus brief argued Congress provided a safe harbor for forward-looking statements in the 1995 Private Securities Litigation Reform Act. WLF said the Ninth Circuit’s ruling flips that provision on its head, creating fodder for lawsuits whenever new events occur.

“In some ways, it’s sort of like letting sharks into the safe harbor,” Foster said. “Sharks belong out in the ocean. They don’t belong swimming in the harbor.”

Companies apprehensive about securities fraud suits may err on the side of being overinclusive and bury shareholders in irrelevant information, legal scholars and a former SEC official said in another amicus brief.

That’s inconsistent with the SEC’s 2020 amendments and bad for investors, they argue.

“Investors’ access to important information about public companies can be reduced if the companies and their lawyers are so fearful of litigation that you have to look through a 500-page document full of irrelevant information,” said Indiana University professor Matthew Turk, who teaches business law and was part of the amicus brief.

The case is Facebook v. Amalgamated Bank, U.S., No. 23-980.