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Zuckerberg Sued Over Privacy Scandals, Alleged Insider Trades (1)

May 1, 2019, 3:25 PMUpdated: May 1, 2019, 5:04 PM

Mark Zuckerberg and Facebook Inc.‘s other top executives have been hit with a lawsuit accusing them of insider trading and blaming them for the privacy scandals that have rocked the social media giant and its stock value since 2016.

The shareholder complaint was filed May 1 in Delaware Chancery Court against Zuckerberg, Sheryl Sandberg, Peter Thiel, and three other Facebook board members. It comes about a week after the company announced it expected to pay a fine of up to $5 billion for violating a Federal Trade Commission consent decree requiring better privacy safeguards.

The 193-page filing claims Zuckerberg and the other executives have sacrificed the company’s reputation and long-term prospects by mishandling the personal data of tens of millions of users and then lying about it.

“The allegations contained herein, taken together, represent one of the worst examples of privacy abuse in the age of social media,” the suit says.

According to the complaint, Zuckerberg, Sandberg, and another board member also violated securities laws and their duties to shareholders by cashing out “massive amounts” of their personal Facebook stock while urging investors to vote against corporate governance measures aimed at enhancing privacy oversight.

In addition to inflicting long-term damage, the rolling revelations have cratered the company’s stock, causing “substantial, ongoing and escalating harm to Facebook,” the lawsuit claims.

Because Facebook’s reputation with advertisers is its main source of value, the scandals—and the legal exposure resulting from all the class actions they have led to—represent a major threat to the company and its shareholders, the suit says.

In addition to the massive FTC fine, the complaint cites news reports that Cambridge Analytica, a data mining company hired by the Trump campaign, accessed the private information of nearly 90 million users without their consent in 2015 and 2016.

The company lost $50 billion in market value in the first two days after the Cambridge Analytica story broke, and later suffered the worst single-day loss in stock market history after announcing weak earnings weighed down by its privacy scandals.

Facebook’s top brass were aware of the Cambridge Analytica story as early as 2015 but concealed it from users and shareholders for nearly three years, the suit says. When Zuckerberg testified to Congress about the scandal, he “deceptively downplayed” its significance, falsely blaming “a single, rogue company” for skirting Facebook’s policies, according to the complaint.

In fact, Zuckerberg was later forced to admit Facebook gave “dozens of companies” access to private user data, it says.

The complaint also points to reports that emerged in March about Facebook’s practice of demanding email passwords from millions of users and then leaving that data online in unencrypted, readable form. The suit cites numerous other privacy violations, including some that have exposed the company to potential nine-figure penalties in Europe.

A Facebook spokesperson said all of Zuckerberg’s trading in Facebook stock had been done through plans set up under Securities and Exchange Commission Rule 10b5-1. The rule allows company insiders to avoid insider trading allegations by establishing formal plans to sell a predetermined number of shares at a preset time.

“This lawsuit is without merit,” the spokesperson said.

Cause of Action: Breach of fiduciary duty; insider trading.

Relief: An order requiring Facebook to reform its corporate governance procedures and data privacy practices; “extraordinary equitable or injunctive relief,” including the imposition of a constructive trust restricting Facebook’s assets; restitution, disgorgement, damages, costs, fees, and interest.

Attorneys: Plaintiff Robert A. Feuer is represented by Ciardi Ciardi & Astin and Greenfield & Goodman.

The case is Feuer v. Zuckerberg, Del. Ch., No. 2019-0324, complaint filed 5/1/19.

To contact the reporter on this story: Mike Leonard in Washington at mleonard@bloomberglaw.com

To contact the editors responsible for this story: Jo-el J. Meyer at jmeyer@bloomberglaw.com; Nicholas Datlowe at ndatlowe@bloomberglaw.com