Facebook on Wednesday was sued for allegedly violating federal securities laws in the first of what's likely to be many such claims arising from internal documents revealed by former employee and whistleblower Frances Haugen.
Less than a day earlier, Facebook reportedly told its employees in an internal email to "preserve internal documents and communications since 2016," due to its expectation of regulatory scrutiny and litigation.
The lawsuit [PDF], which also names CEO Mark Zuckerberg and CFO David Wehner as defendants, was filed in the Eastern District of New York. It contends that the company and its executives over the past five years repeatedly made false and misleading statements to investors, citing news reports that have emerged since mid-September about the apparent divergence between the company's public communication and its internal discussions.
That's when the Wall Street Journal published the first of nine articles based on material provided by Haugen, whose tranche of company documents and testimony have left Facebook scrambling to defend itself as other news organizations have delved into what's become known as The Facebook Papers.
The complaint, which aspires to be certified as a class action on behalf of those who bought Facebook securities, argues that antisocial network:
- misrepresented its user growth;
- should have disclosed how much growth came from duplicate accounts;
- "did not provide a fair platform for speech" by giving VIPs special treatment;
- failed to adequately respond to drug cartels, human traffickers, and violent organizations;
- and actively tried to woo pre-teens.
By not being forthright with investors about such matters, the complaint argues that Facebook violated the Securities Exchange Act of 1934.
The complaint, brought by shareholder Wee Ann Ngian, recounts statements Haugen made to the press about how Facebook incentivizes hate, which shows up in company metrics as increased interaction.
"Haugen said Facebook's algorithm optimizes for content that generates engagement," the complaint says. "That's led to publishers, 'realizing that if they produce more content that is angry and divisive and polarizing, they’ll get more views,' in her words."
And what's been revealed about Facebook's operations, the court filing says, has harmed investors.
- Facebook's greatest misses: The five nastiest bits from recent leaks
- Antitrust battle latest: Google, Facebook 'colluded' to smash Apple's privacy protections
- Twitter's machine learning algorithms amplify tweets from right-wing politicians over those on the left
- Facebook sues scraper who sold 178 million phone numbers and user IDs
"As a result of the October 3 and 4 revelations, Facebook’s share price dropped $16.78 per share, or approximately 4.9 per cent, from closing at $343.01 on October 1, 2021, the prior trading day, to close at $326.23 on October 4, 2021," the complaint says. "From the first WSJ article published on September 13, 2021, to the final disclosure on October 4, 2021, Facebook share prices fell by $55.45, or over 14 per cent, damaging investors."
The US Security and Exchange Commission has refused to say whether it is investigating Facebook, but according to the New York Times, at least nine whistleblower complaints have been lodged with the agency against the company.
Facebook did not immediately respond to a request for comment.
And more to come
During the company's earnings call, Zuckerberg attributed the "revenue headwinds" in part to Apple's iOS privacy controls and addressed what he referred to as "the recent debate about our company" by implying that critical reports treated Facebook unfairly.
"Good faith criticism helps us get better," he said [PDF]. "But my view is that what we're seeing is a coordinated effort to selectively use leaked documents to paint a false picture of our company."
Nonetheless, the sort of reporting that Facebook considers unfair keeps coming: The Associated Press on Wednesday said Facebook in March last year ignored, or delayed implementing changes proposed by employees to curtail the spread of anti-vaccine content.
And a review of the allegations arising from The Facebook Papers – which indicate that Facebook has failed to responsibly police election misinformation, QAnon conspiracies, famous people, incitements to violence, human trafficking, malicious posting of child nudity to trigger account shutdowns, and hate content – suggests the company has a lot of challenges to address.
It's also struggling to hire enough engineers to meet internal demand.
Zuckerberg during the earnings call argued that "polarization started rising in the US before I was born" and that "independent research shows that many countries around the world have flat or declining polarization, despite similar social media use there."
"The reality is, if social media is not the main driver of these issues, then it probably can't fix them by itself either," he said.
No one is arguing that social media has to fix the monetization of hate on its own – the government clearly wants to help and now private citizens are looking to lend a hand by litigating or turning away from social media.
But the reality is that Facebook is the main driver of these issues as they're expressed on the company's platform. ®