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Facebook’s claims prove SEC’s reach

WASHINGTON – Controversy over what Facebook Inc. has said about the social and emotional dangers stemming from its products could become evidence of the growing interest of regulators in policing corporate risks that damage reputation rather than profits.

The Securities and Exchange Commission has been reaching out to lawyers for Frances Haugen, the former Facebook product manager who blew the whistle about the company’s efforts to deal with issues she downplayed in public, according to John Napier Tye, an attorney. that represents it. Facebook did not respond to a request for comment and the SEC declined to confirm whether it is investigating Ms. Haugen’s allegations.

But the agency almost certainly will, according to Marc Fagel, a former director of the SEC’s San Francisco office. “Given how much this has been played on, especially with the revelation that the whistleblower went to the SEC, there is no way they won’t see this and feel pressured to bring some kind of case,” Fagel said.

Facebook has come under fire for its youth orientation and how it responds to misuse of its products since The Wall Street Journal began publishing a series of stories based in part on documents compiled by Haugen.

The Journal report details internal company research linking teenagers’ Instagram use to anxiety and depression. In public, Facebook has consistently downplayed the negative effects of the social platform on teens. While the company has generally not made its research public or available to academics or lawmakers who have requested it, Facebook in late September released an annotated version of two research decks.

Facebook whistleblower Frances Haugen detailed the internal documents she gathered that show the negative impacts of the company’s products and urged lawmakers to consider stricter regulations. Photo: Stefani Reynolds / Bloomberg News

The report also showed how Facebook’s efforts to curb the misuse of its platforms by drug cartels and entities linked to human trafficking fell short. Such problems were particularly acute in some developing countries, where Facebook’s user base is large and expanding.

Any stock execution action would likely focus on whether the company or its executives told investors a story about known risks or business trends, while hiding worse news that they only shared internally. Any misleading statement would have to be material, meaning it could be expected to influence a business decision or a vote on a corporate proxy ballot.

The issues Ms. Haugen cited in her allegations may be significant in the eyes of regulators, but they are not all traditional securities fraud claims, according to attorneys. In a complaint notice provided to the SEC, Ms. Haugen and her attorneys wrote that Facebook made “multiple material errors and omissions on the question of whether Facebook and Instagram impact teen users,” according to a copy seen by the Journal.

The complaint says that Instagram’s side effects are important to investors because a consumer backlash against the product could be expected to reduce user engagement and ad revenue.

“Traditionally, this is not the kind of thing the SEC would be looking at,” said David Rosenfeld, a former senior SEC official who now teaches law at Northern Illinois University, adding that the agency “would normally be looking at. things that go to the most current financial situation of the company ”.

The SEC can claim that the disclosures were simply misleading, without having to link the statements to financial trends.


SAUL LOEB / france-press agency / getty images

The classic case of securities enforcement generally involves claims that a public company tampered with its accounting or other metrics tracked by investors or failed to disclose the key facts that explained its performance. But the SEC can claim that the disclosures were simply misleading, without having to link the statements to financial trends. This tactic has expanded the types of cases the SEC has filed in recent years, Rosenfeld said.

Two years ago, for example, Facebook agreed to pay $ 100 million to the SEC to resolve allegations that it did not disclose the misuse of user data by consultancy Cambridge Analytica. Facebook reached a settlement without admitting or denying the claims.

“You might ask, ‘What do these disclosures of customer data misuse have to do with the profitability of the business?’ But they turned it into an enforcement action, ”Fagel said.

Another reason for the SEC to scrutinize Facebook’s claims, the lawyers said, is the regulator’s growing interest in sending a message about how companies should disclose environmental, social and governance issues.

In one example, the SEC is now investigating Activision Blizzard INC.

on how the video game maker handled and disclosed episodes of sexual misconduct and harassment in the workplace, the Journal reported last month. Activision said in July that it hired a law firm, Wilmer Cutler Pickering Hale and Dorr LLP, to review its policies to maintain a respectful work environment. The company is also adding staff to investigate employee concerns, he said.


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The short-term impact of ESG risks on financial performance can be confusing, according to lawyers and securities accountants. The longer-term impact is more predictable: climate change, for example, could damage a company’s supply chain or reduce demand for its products.

Still, those results are difficult to quantify and speculative, securities attorneys said. Typically, companies can deal with these scenarios through broad written disclosures that warn of potential future problems if business trends or laws change.

One of Haugen’s advice to the SEC appears to be more directly in the agency’s wheelhouse, Rosenfeld said. In a complaint, it alleged that Facebook failed to disclose internal data showing “a shrinking user base in significant demographics, including American teens and young adults.”

The complaint also said Facebook had not accurately modeled how the duplicate accounts affected its reported user growth estimates and the scope of its advertising. If that information were to come to light, advertisers could spend less money on Facebook and some investors would doubt its growth metrics, according to the complaint.

“If Facebook had information that their actual numbers were much lower than what they report or that it clearly showed that they were going to decline, that’s probably the kind of thing that should be disclosed,” Rosenfeld said. “And that sort of thing is much closer to what the SEC would be interested in investigating.”

Write to Dave Michaels at [email protected]

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