Facebook to pay $100 million for deceptive investors concerning the risks it faced from misuse of user information

The Securities and Exchange Commission today proclaimed charges against Facebook Inc. for creating deceptive disclosures concerning the danger of misuse of Facebook user information. For over 2 years, Facebook’s public disclosures presented the danger of misuse of user information as simply theoretical when Facebook knew that a third-party developer had really misused Facebook user data.

Public firms must establish and consider the material risks to their business and have procedures designed to make disclosures that are accurate in all material respects, together with not continuing to describe a risk as theoretical when it’s in reality happened.

Facebook has agreed to pay $100 million to settle the charges.
According to the SEC’s complaint, in 2014 and 2015, the now-defunct advertising and information analytics company, Cambridge Analytica, paid an academic researcher, through an organization he controlled, to gather and transfer knowledge from Facebook to make temperament scores for about 30 million Americans.

Additionally to the temperament scores, the research worker, in violation of Facebook’s policies, additionally transferred to Cambridge Analytica the underlying Facebook user information, together with names, genders, locations, birthdays, and “page likes.” Cambridge Analytica used this data in reference to its political advertising activities.

The SEC’s complaint alleges that Facebook discovered the misuse of its users’ data in 2015, however failed to correct its existing disclosure for over 2 years. Instead, Facebook continued to inform investors that “our users’ information may be improperly accessed, used or disclosed.” (emphasis added) in line with the SEC complaint, Facebook strengthened this false impression once it told news reporters who were working on investigation of Cambridge Analytica’s use of Facebook user information that it had discovered no proof of wrongdoing. Once the corporate finally did disclose the incident in March 2018, its stock price dropped.

The complaint further alleges that during this two-year period, Facebook had no specific policies or procedures in place to assess the results of their investigation for the needs of making correct disclosures in Facebook’s public filings.

“Public firms must accurately describe the material risks to their business,” said Stephanie Avakian, Co-Director of the SEC’s enforcement Division. “As alleged in our complaint, Facebook presented the danger of misuse of user information as theoretical when they knew user data had in reality been misused. Public firms must have procedures in place to make correct disclosures concerning material business risks.”

“We allege that Facebook exacerbated its disclosure failures once it misled reporters who asked the corporate concerning its investigation into Cambridge Analytica,” said Erin E. Schneider, Director of the SEC’s San Francisco Regional office. “This gave more weight to Facebook’s misleading statements in its public filings.”

Without admitting or denying the SEC’s allegations, Facebook has agreed to the entry of a final judgment ordering a $100 million penalty and permanently enjoining it from violating Sections 17 (a) (2) and 17 (a) (3) of the Securities Act of 1933 and Section 13 (a) of the Securities Exchange Act of 1934, and Rules 12b-20, 13a-1, 13a-13, and 13a-15 (a) under it.

The SEC’s investigation was conducted by Matthew Meyerhofer and Robert Tashjian and supervised by Tracy L. Davis and Erin Schneider of the San Francisco workplace.