United States: Northern District of California Dismisses Putative Class Action Lawsuit Against Social Media Company for Failure to Adequately Allege Scienter, Causation of Loss
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On December 20, 2021, the United States District Court for the Northern District of California dismissed an alleged class action lawsuit against a social media company and some of its executives under the Securities Exchange Act. In re Facebook, Inc. Sec. Litigation, no. 5:18-CV-01725-EJD, 2021 WL 6000058 (ND Cal. 20 Dec. 2021). The plaintiffs alleged that the company made false statements about a data breach and about users’ control over their data. The Court previously dismissed the plaintiffs’ two previous complaints, but granted leave to represent themselves. Addressing Plaintiffs’ Third Amended Complaint, the Court held that Plaintiffs still failed to sufficiently allege science for the data breach allegations and loss causation for the user data control allegations, and therefore dismissed the action without leave to reply.
Regarding the data breach allegations, the plaintiffs alleged that the company made false or misleading statements regarding the risks it faced after the data breach and the results of an investigation conducted by the company. Identifier. at 3. The Court pointed out that the complaint itself alleged that the entity responsible for the data breach certified that it had deleted the misappropriated data; the plaintiffs therefore had to establish why the defendants should have known that the certifications were false. Identifier. The Court found that the plaintiffs’ additional allegations — that the company had “embedded” three employees in a political campaign associated with the use of the breach data — were still insufficient to establish scienter, as they did not alleged facts showing that the “” employees either knew the certification was false or that they had raised such a concern with company executives.
Identifier. at 4 o’clock. Additionally, the court dismissed plaintiffs’ attempt to establish scienter based on allegations that a company investigation uncovered additional information about the continued misuse of user data associated with the data breach. , because the complainants did not sufficiently connect company officials with the investigation or any specific facts. information revealed by the investigation.
Identifier. at 5.
With respect to the disputed statements regarding users’ control over their data – which the plaintiffs claimed were untrue because the company allegedly continued to provide access to users’ data to certain third parties – the Court explained that the plaintiffs had failed to establish causation of the losses because the alleged drop in the company’s stock price came more than a month after the company’s alleged data access practices came to light publicly. Identifier. at 7 O’clock. Based on this time lag, the Court held that the plaintiffs failed to establish the necessary connection between the alleged corrective disclosure and the decline in the company’s stock price. Identifier.
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