Facebook whistleblower, Christopher Wylie, claims that the SEC has been overreaching in its regulation of social media companies. The issue is whether or not the SEC can regulate a company for its data collection practices.
WASHINGTON— The debate over Facebook Inc.’s statements about social and emotional dangers posed by its products may serve as a litmus test for regulators’ increasing interest in regulating business risks that harm reputations rather than earnings.
According to John Napier Tye, a lawyer representing Frances Haugen, the former Facebook product manager who blew the whistle on the company’s attempts to deal with issues it downplayed in public, the Securities and Exchange Commission has been in contact with her lawyers. The SEC refused to disclose if it is investigating Ms. Haugen’s claims, and Facebook did not reply to a request for comment.
According to Marc Fagel, a former head of the SEC’s San Francisco office, the agency is virtually likely to do so. “Given how much attention this has received, particularly after the whistleblower went to the SEC,” Mr. Fagel said, “there is no way they aren’t looking at this and under pushed to bring some kind of lawsuit.”
Since The Wall Street Journal started publishing a series of articles based in part on records obtained by Ms. Haugen, Facebook has been chastised for its targeting of young people and how it reacts to product abuse.
The Wall Street Journal reported on the company’s internal study connecting adolescent Instagram usage to anxiety and sadness. Facebook has repeatedly downplayed the social media platform’s harmful impact on teenagers in public. While Facebook hasn’t made its research publicly accessible or made it available to academics or legislators who have requested it, it did post an annotated version of two study decks in late September.
Internal papers obtained by Facebook whistleblower Frances Haugen revealed detrimental effects of the company’s goods and encouraged legislators to adopt stricter restrictions. (Bloomberg News/Stefani Reynolds)
The investigation also revealed how Facebook’s attempts to prevent drug cartels and organizations connected to human trafficking from abusing its platforms fell short. In certain underdeveloped nations, where Facebook’s user base is huge and growing, such issues were especially severe.
Any securities enforcement action would very certainly concentrate on whether the firm or its management gave investors one narrative about known business risks or trends while keeping bad news to themselves. Any false claims would have to be significant, meaning they might be anticipated to affect a trading decision or a corporate proxy vote.
According to attorneys, the problems raised by Ms. Haugen in her accusations may be relevant to regulators, but they aren’t all conventional securities-fraud claims. According to a copy obtained by the Journal, Ms. Haugen and her attorneys wrote to the SEC that Facebook made “several significant misstatements and omissions on the issue of whether Facebook and Instagram affect adolescent users” in one whistleblower report.
According to the lawsuit, Instagram’s negative effects are important to investors since a customer reaction against the program may result in lower user engagement and ad income.
“Traditionally, the SEC would not be looking at this,” said David Rosenfeld, a former senior SEC enforcement officer who now teaches law at Northern Illinois University, adding that the agency “would usually be looking at things that relate to the company’s more current financial situation.”
Without having to link claims to financial patterns, the SEC may claim that disclosures were simply deceptive.
Getty Images/SAUL LOEB/agence france-presse
The typical securities enforcement action includes allegations that a public firm manipulated its accounting or other investor-followed measures, or that it neglected to disclose important information that explained its performance. The SEC, on the other hand, may claim that representations were merely deceptive without needing to link them to financial trends. According to Mr. Rosenfeld, this strategy has broadened the types of lawsuits the SEC has filed in recent years.
For example, two years ago, Facebook agreed to pay the Securities and Exchange Commission $100 million to settle accusations that it failed to report the abuse of user data by consultancy company Cambridge Analytica. Facebook reached an agreement without confirming or rejecting the allegations.
“You might argue, ‘What does the company’s profitability have to do with these allegations of consumer data misuse?’ “However, they converted it into a legal lawsuit,” Mr. Fagel said.
The SEC’s increasing interest in sending a message about how businesses should disclose environmental, social, and governance problems is another reason for the agency to look into the Facebook allegations, according to attorneys.
According to the Wall Street Journal last month, the SEC is investigating Activision Blizzard Inc. for how it handled and publicized workplace incidents of sexual misconduct and harassment. In July, Activision said that company has engaged Wilmer Cutler Pickering Hale and Dorr LLP to examine its rules for ensuring a respectful workplace. According to the business, it is also hiring more people to examine employee complaints.
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According to securities attorneys and accountants, the near-term effect of ESG concerns on financial performance may be unclear. Longer-term consequences are more predictable: For example, climate change may disrupt a company’s supply chain or reduce demand for its goods.
Those consequences, however, are difficult to measure and speculative, according to securities experts. Companies may typically cope with such situations by issuing wide written disclosures that warn of possible future issues if business trends or regulations change.
Mr. Rosenfeld noted that one of Ms. Haugen’s recommendations to the SEC seems to be more firmly in the agency’s wheelhouse. She claimed that Facebook neglected to share internal statistics indicating “a shrinkage of the user base in key categories, including American teens and young adults” in one of her complaints.
According to the lawsuit, Facebook failed to properly predict how duplicate accounts impacted its stated user growth projections and advertising reach. According to the lawsuit, if such information became public, advertisers would be less likely to spend money on Facebook, and some investors would question its growth numbers.
“If Facebook had evidence that indicated their real numbers were considerably lower than what they were reporting or that plainly suggested they were likely to decline,” Mr. Rosenfeld said, “that is certainly the sort of stuff that should be disclosed.” “And that’s exactly the kind of thing the SEC would be interested in looking at.”
Dave Michaels can be reached at [email protected]
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