Derivative Lawsuit Targets Zuckerberg, Facebook Brass Over Privacy Breaches
The 193-page filing said that Mark Zuckerberg, Sheryl Sandberg, Peter Thiel and three other board members had presided over "one of the worst examples of privacy abuse in the age of social media" and committed "pervasive breaches" of their fiduciary duties in the name of short-term profits.
May 01, 2019 at 05:08 PM
4 minute read
A Facebook investor Wednesday accused Mark Zuckerberg and other top executives of insider trading and blamed them for a series of high-profile privacy scandals that have jolted the company's stock and exposed it to billions of dollars in fines and legal liability.
The derivative lawsuit, filed in Delaware Chancery Court, comes just one week after the Menlo Park, California-based social media giant said it expected to pay a fine of up to $5 billion for violating a Federal Trade Commission consent decree that required Facebook to enact better protections for user data.
The 193-page filing said that Zuckerberg, Sheryl Sandberg, Peter Thiel and three other board members had presided over “one of the worst examples of privacy abuse in the age of social media” and committed “pervasive breaches” of their fiduciary duties in the name of short-term profits.
According to the complaint, Facebook's directors and officers had concealed widespread wrongdoing from shareholders and violated multiple disclosure laws, leading to massive investor losses and a slew of class actions against the company. All the while, it said, company insiders had reaped hundreds of millions of dollars in personal profits by offloading their Facebook shares on an unsuspecting investing public.
The controversies, the filing said, had shaken the confidence of advertisers, which represent Facebook's main stream of revenue, leading some to question the company's public statements or to pull their ads from Facebook's platforms altogether.
“Facebook's long-term financial health will suffer lasting damages as a result of the individual defendants' wrongful conduct,” attorneys for plaintiff Robert A. Feuer wrote.
“Despite a number of such incidents throughout the years that Facebook has been in existence, the board has failed to properly advise Facebook users of privacy risks or take action to protect the company from the fallout of privacy breaches,” they said. “In fact, the board has actively ignored early warnings signs of trouble to the company's detriment.”
A spokeswoman for Facebook said that any trades Zuckerberg made were to fund philanthropic efforts through predetermined plans that adhered to federal securities rules.
“This lawsuit is without merit,” the spokesperson said in a statement.
Last March, Facebook lost $50 billion in market capitalization after it was publicly revealed that the business and political consulting firm Cambridge Analytica had accessed the private information of as many as 87 million Facebook users without their consent in 2015. Feuer's Ciardi Ciardi & Astin and Greenfield & Goodman attorneys said Facebook's leaders were aware of the Cambridge Analytica debacle as early as 2015 but hid the story from investors for three years.
The complaint alleged that Zuckerberg then “deceptively downplayed” the problem as limited to a single, rogue company that had flouted its privacy policies.
The FTC confirmed last year that it was investigating Facebook's privacy policies and whether the company was complying with a 2011 consent decree for allegedly deceiving its users by saying that they could control access to the information they provided to Facebook. Under the agreement, Facebook was required to give users clear notice and obtain express consent before allowing information to be shared with other applications.
On April 24, the company said in its first-quarter earnings report that it expected a loss of between $3 billion and $5 billion associated with the ongoing matter.
“The matter remains unresolved, and there can be no assurance as to the timing or the terms of any final outcome,” Facebook said last week.
According to the complaint, Feuer made a written demand last June that the board consider pursuing its own litigation, but never heard back from the company. A subsequent letter to Zuckerberg received no response, the filing said.
Feuer is represented by Albert A. Ciardi III and Walter W. Gouldsbury III of Ciardi Ciardi & Astin in Philadelphia and Daniel K. Astin and Joseph J. McMahon Jr. in the firm's Wilmington office. Richard D. Greenfield of Greenfield & Goodman in New York is also representing the plaintiff.
An online docket-tracking service did not list counsel for the Facebook directors and officers.
The case, captioned Feuer v. Zuckerberg, has not yet been assigned to a judge.
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