A Bay Area-based Facebook shareholder is suing Facebook, founder Mark Zuckerberg and the entire Facebook board for allegedly breaching their fiduciary duties by failing to prevent the millions of users’ data from being improperly shared with third parties and to inform affected Facebook users or the public markets.
Jeremiah Hallisey filed a lawsuit on Thursday in the district court for the Northern District of California. The lawsuit cites Facebook, Zuckerberg, COO Sheryl Sandberg and the board — which includes noted venture capitalists Peter Thiel and Marc Andreesen, WhatsApp CEO Jan Koum and Netflix CEO Reed Hastings — as defendants.
Represented by the San Francisco-based law firm Cotchett, Pitre & McCarthy, Hallisey — who himself is an attorney in a different law firm in San Francisco — alleges Facebook officers breached their fidicuary duties and violated part of the federal Exchange Act by not disclosing about Cambridge Analytica in its previous SEC filings.
Cambridge Analytica, a British data consulting firm used by President Donald Trump’s campaign, was thrust into the media and regulatory spotlights in both the United States and United Kingdom this past week after a whistleblower stepped forward to reveal its shadowy practices on Facebook. The whistleblower, former Cambridge Analytica employee Christopher Wylie, alleged that the firm accessed the information of 50 million Facebook users without their permission and used it to drive the politically divisive tone of the Trump campaign.
Earlier this week, British TV station Channel 4 revealed that its undercover investigation found Cambridge Analytica offered to entrap politicians by using sex and bribes in foreign countries. As a result, Cambridge Analytica’s board suspended its CEO, Alexander Nix, indefinitely.
Despite Mark Zuckerberg’s media appearance on Wednesday to apologize on behalf on Facebook after days of silence, Hallisey’s attorney Mark Molumphy said it was an inadequate response — especially since Facebook got in trouble in 2011 by the Federal Trade Commission. The FTC then acquired a consent degree to require Facebook to receive permission and to notify users before sharing their data with third parties.
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“Facebook’s apology doesn’t do much for the millions of Americans impacted by this conduct,” said Molumphy in a statement issued on Thursday night. “It also doesn’t explain why Facebook executives waited three years to inform their loyal users and shareholders of the massive breach, especially on the heels of the FTC consent decree in 2011. This action seeks accountability from those entrusted to safeguard our personal information and who seem to pay only lip service to the privacy concerns of their users.”
In addition to Hallisey’s suit, Facebook received three other lawsuits from courthouses in San Francisco and San Jose, according to the San Francisco Chronicle. Two of the cases are seeking class action status, whereas Hallisey’s is a shareholder derivative suit.
On Wednesday, Zuckerberg explained on his Facebook page that the company received certification from Cambridge Analytica and Aleksandr Kogan, a university researcher who shared his collected Facebook user data with the firm, that they deleted all improperly acquired data.
“I don’t know about you, but I’m used to when people legally certify that they are going to do something, that they do it,” said Zuckerberg in an interview with CNN later on Wednesday. “But I think this was clearly a mistake in retrospect.”
In his lawsuit, Hallisey alleged Zuckerberg, Sandberg and Koum sold nearly $1.5 billion worth of Facebook shares before the Cambridge Analytica news broke and sunk nearly $50 billion of Facebook’s market capitalization. Zuckerberg alone sold 5.4 million of his shares for more than $978 million, alleges the lawsuit.
Of the seven allegations made against Facebook and the individuals named as defendants, three were focused on federal and state violations against insider selling.
“All of the Insider Selling Defendants knew about or recklessly disregarded material, non-public information regarding the Cambridge Analytica incident and compromises to user information posed by Facebook’s inadequate internal controls described above, but nonetheless sold or otherwise disposed of Facebook common stock on the basis of that information,” alleges the lawsuit.
Beyond the lawsuit, Facebook is in hot water with the federal government. The FTC said earlier this week it will investigate whether Facebook violated the 2011 consent decree between the two. On Friday, Senators John Thune, R-South Dakota, and Bill Nelson, D-Florida, who heads the Senate Commerce Committee, called on Zuckerberg to testify before their panel. The House Energy and Commerce Committee also requested Zuckerberg testify before its panel.
“On a bipartisan basis, we believe Mr. Zuckerberg’s testimony is necessary to gain a better understanding of how the company plans to restore lost trust, safeguard users’ data, and end a troubling series of belated responses to serious problems,” wrote Thune and Nelson. “We appreciate the efforts Facebook and its employees have already made to assist our committee and will work with them to find a suitable date for Mr. Zuckerberg to testify in the coming weeks.”