Facebook’s $5 Billion Fine a Win for Zuckerberg, Suit Says (1)

Rhode Island sued Facebook Inc. in Delaware, saying it needs corporate records to investigate whether the company negotiated a larger-than-necessary $5 billion fine—the Federal Trade Commission’s largest ever— because the FTC agreed not to hold CEO Mark Zuckerberg accountable.

“Facebook’s negotiators treated personal consequences for Zuckerberg as a red line,” the Chancery Court lawsuit says. “The tech giant’s internal briefing materials reflected its willingness to cease settlement talks and send the matter to court, if necessary, to protect their executive.”

Those materials and other communications—including privileged legal documents—are necessary to probe claims the company knowingly overpaid the FTC by $2 billion or more in exchange for what news reports called “other concessions,” according to the complaint. “The most critical concession: a lack of personal consequences for Zuckerberg.”

A Facebook spokesman called the suit meritless Wednesday.

“After months of negotiations, we reached an agreement with the FTC that is in the best interests of the company and our community,” the spokesman said.

The complaint invokes a Delaware law giving shareholders generous inspection rights if they credibly suspect mismanagement or self-dealing by a corporate board. Rhode Island is invested in Facebook through its public employee retirement system.

The FTC’s two Democratic members dissented in “blistering” terms from the deal, which resolved claims stemming from Facebook’s sale of user information to Cambridge Analytica, a data mining firm employed by the Trump campaign. The dissenting commissioners called blanket immunity for top Facebook executives “dubious,” “highly unusual,” and “a departure from FTC precedent,” as cited by the complaint.

The heavily redacted suit was made public Feb. 17 after being filed under seal Feb. 12. It comes about nine months after a Delaware judge ordered Facebook to turn over documents related to Cambridge Analytica so investors could pursue allegations that its board looked the other way.

Such cases are notoriously difficult to win under a landmark Delaware Supreme Court ruling. But the new records suit will let Rhode Island go after lower-hanging fruit, according to the complaint.

If Facebook’s directors agreed to overpay the FTC in exchange for personal benefits, their actions are allegedly subject to a much more shareholder-friendly standard of review.

Other high-profile board members who likely got off easy include Sheryl Sandberg and Peter Thiel, the suit says.

Cause of Action: Section 220 of the Delaware General Corporation Law.

Relief: An order requiring the company to turn over relevant books and records; costs and fees.

Attorneys: Rhode Island is represented by Heyman Enerio Gattuso & Hirzel LLP and Block & Leviton LLP.

The case is Emps. Ret. Sys. of R.I. v. Facebook, Inc., Del. Ch., No. 2020-0085, complaint unsealed 2/17/20.