What to Expect When Cambridge Analytica Files for Bankruptcy
Cambridge Analytica's decision to shutter its business amid the unfolding controversy surrounding its use of user data obtained from Facebook Inc. could mean that bankruptcy proceedings are soon headed for a Manhattan federal courtroom.
May 04, 2018 at 05:32 PM
4 minute read
Cambridge Analytica's decision to shutter its business amid the unfolding controversy surrounding its use of user data obtained from Facebook Inc. could mean that bankruptcy proceedings are soon headed for a Manhattan federal courtroom.
However, the case could bring with it a string of headaches for creditors of the London-based consulting firm, as they try to recover against the company's estate, two University of Chicago Law School bankruptcy professors warned this week.
Cambridge Analytica and its parent SCL Elections Ltd. announced Wednesday that they had begun insolvency proceedings in the U.K. after being “vilified” for actions the companies said were above-board and common in the “political and commercial arenas.” Cambridge Analytica said parallel proceedings will “soon be commenced” in the U.S. Bankruptcy Court for the Southern District of New York.
The announcement followed weeks of allegations that Cambridge Analytica improperly obtained the private data of 87 million Facebook users to create sophisticated psychological and political profiles. Cambridge Analytica, which is largely funded by billionaire and GOP donor Robert Mercer, is said to have had tied with President Donald Trump's 2016 campaign.
Cambridge Analytica denied any wrongdoing related to the data breach.
The company has since been targeted—along with Facebook—in a series of lawsuits over the alleged misuse of data. But Cambridge Analytica's expected bankruptcy threatens to complicate those proceedings and raise a host of new issues, as well.
According to the two experts, the main task for a bankruptcy judge will be to determine the total amount of the company's assets and the value of the outstanding claims against it.
“The basic problem … is this may be a case where the denominator is very large and the numerator is very small,” said Douglas Baird, professor and former dean of the University of Chicago Law School. “You can't get blood from a stone.”
Cambridge Analytica, a Delaware limited liability company, is a private firm, and Baird cautioned that he had no knowledge of its finances. The firm would be required to submit information regarding its corporate structure and an assessment of its assets and liabilities when it files for bankruptcy.
Anthony Casey, also a bankruptcy expert at the University of Chicago Law School, said that he expected any pending cases against Cambridge Analytica to be stayed and the claims folded into the bankruptcy proceedings, where a judge would conduct a “mini-trial” to determine the value for pro rata distribution.
Facebook also faces the possibility of being dragged into the bankruptcy case, if the company is determined to be jointly and severally liable for the alleged wrongdoing, either under the tort law or any contract it may have had with Cambridge Analytica.
However, depending on Facebook's preference of forum, that may not be a bad option.
“They're going to have to litigate the issue in a court. They may have to litigate it in bankruptcy court,” Casey said, noting the U.S. District Court for the Southern District of New York's reputation as a “sophisticated” court. “They may prefer that to other courts,”
Cambridge Analytica's estate, for its part, may decide that it has claims against Facebook, which it could then pursue in a bid to increase the assets available for distribution. The estate could also potentially target the company's own directors, on the theory that they knew about the alleged wrongdoing or violated some duty they had to the company.
“It's claims going out and claims going in,” Casey said.
However, it is not clear whether there is any evidence to support either of those scenarios, the scholars said.
If the pool turns out to be too small for Cambridge Analytica's creditors to fully recover against the state, investors could sue the company's individual directors for breaches of duty to the company, or they could target SCL, Cambridge Analytica's parent company, in a long-shot bid to pierce the corporate veil.
As of Friday evening, Cambridge Analytica had not yet filed for bankruptcy in New York.
The U.K.'s Information Commissioner's Office, an independent regulatory body, said this week that it would continue investigating Cambridge Analytica and SCL, despite the companies' decision to wind down its affairs.
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