405 F.Supp.3d 809
N.D. Cal.2019Background:
- Plaintiffs are purchasers of Facebook stock between Feb 3, 2017 and July 25, 2018 who allege Zuckerberg, Sandberg, and Wehner made materially false/misleading statements about Facebook’s privacy and data-protection practices tied to Cambridge Analytica and related events.
- In 2013 Aleksandr Kogan’s app harvested friend data via Facebook’s platform; The Guardian reported in 2015 that Kogan sold data to Cambridge Analytica; Facebook sought deletion and received certifications but did not verify deletion.
- March 2018 press accounts renewed scrutiny that Cambridge Analytica data had been used for political purposes and that Facebook delayed action; Facebook stock dropped sharply in March 2018; SEC investigated.
- April 25, 2018 Facebook reported strong 1Q18 results and downplayed material impact from Cambridge Analytica; GDPR compliance and expense increases were discussed; stock rose. On July 25, 2018 disappointing 2Q18 results and user-growth weakness triggered a ~19% one-day stock decline.
- Plaintiffs identified 36 challenged statements/omissions across privacy policies, SEC filings, posts and earnings calls; the court found only one statement (Sandberg’s Axios remark: “no one is going to get your data that shouldn’t have it… you are controlling who you share with” — Statement 22) actionable on falsity grounds but held plaintiffs failed to plead scienter.
- The court granted defendants’ motion to dismiss the consolidated complaint with leave to amend, identifying deficiencies under the PSLRA and Rule 9(b).
Issues:
| Issue | Plaintiffs' Argument | Defendants' Argument | Held |
|---|---|---|---|
| Actionable misstatements/omissions (privacy, notice, deletion, consent) | Statements and policies misled investors about Facebook’s data controls, notification practices, and enforcement (including that victims would be told and data would be deleted). | Many statements were non-actionable: puffery, forward-looking with meaningful cautionary language, or not false when made; plaintiffs failed to plead contemporaneous falsity for most statements. | Only Statement 22 (Sandberg’s Axios comment about control/no one getting data who shouldn’t) was pled with sufficient particularity to be potentially false; all other challenged statements dismissed for failure to plead falsity. |
| Forward-looking / risk-disclosure / puffery | Risk disclosures and GDPR assurances omitted that risks had already materialized or that Facebook was not GDPR-ready; optimistic statements concealed real problems. | Risk warnings were generic, appropriately cautious, and any forward-looking statements were protected by the PSLRA safe-harbor; optimistic language is non-actionable puffery. | Statements about GDPR impact and many earnings-call/optimistic statements were inactionable (safe-harbor or puffery); risk disclosures not shown to have already materialized when made. |
| Scienter (intent or deliberate recklessness) | Allegations of executive regret, witness accounts, widespread privacy practices (e.g., whitelisting), and the FTC consent decree support a strong inference that defendants knew statements were false. | Plaintiffs rely on hindsight, non-contemporaneous warnings, and generalized corporate knowledge; no particularized facts show Sandberg or others knew Statement 22 was false when made. | Plaintiffs failed to plead a strong inference of scienter for Statement 22 (and thus for any §10(b)/Rule 10b-5 claim). Motion to dismiss granted on scienter grounds. |
| Reliance, loss causation, and secondary claims (§20(a), §20A) | Market relied on defendants’ statements; July stock drop tied to concealed facts; control-person and insider-trading claims follow from primary violation. | Market was already aware of Cambridge Analytica; plaintiffs cannot show corrective disclosure or reliance; secondary claims depend on primary §10(b) violation. | Court did not reach reliance/loss-causation in depth because primary §10(b) claim failed; §20(a) and §20A dismissed as derivative of the dismissed primary claims. |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (pleading standard—conclusory allegations insufficient)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) (comparative analysis for scienter and "strong inference" standard)
- Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981 (9th Cir. 2009) (PSLRA falsity and particularity requirements in Ninth Circuit)
- Dura Pharm., Inc. v. Broudo, 544 U.S. 336 (2005) (plaintiff’s burden to plead loss causation and specify misleading statements under PSLRA)
- Basic Inc. v. Levinson, 485 U.S. 224 (1988) (materiality and omissions under Rule 10b-5)
- Metzler Inv. GmbH v. Corinthian Colleges, Inc., 540 F.3d 1049 (9th Cir. 2008) (PSLRA’s exacting falsity requirements)
- Brody v. Transitional Hosp. Corp., 280 F.3d 997 (9th Cir. 2002) (statement misleading only if it creates a materially different impression)
- In re VeriFone Sec. Litig., 11 F.3d 865 (9th Cir. 1993) (forward-looking statements and falsity require contemporaneous falsity)
- In re Cutera Sec. Litig., 610 F.3d 1103 (9th Cir. 2010) (PSLRA safe-harbor for forward-looking statements)
- Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27 (2011) (materiality analysis of omitted risk information)