Judge Sides With Facebook In Investor Lawsuit Over Privacy

Facebook has defeated an investor lawsuit stemming revelations that the social networking platform allowed outside companies, including data consultancy Cambridge Analytica, to obtain personal information from as many as 87 million people.

In a decision issued last week, U.S. District Court Judge Edward Davila ruled that the allegations in the complaint, even if true, wouldn't support the conclusion that Facebook engaged in securities fraud.

The lawsuit, brought on behalf of investors who purchased stock between February 3, 2017 and July 25, 2018, alleged that Facebook misrepresented the extent to which it protected users' privacy.

Davila ruled that even if Facebook made misleading statements, the investors who sued hadn't connected those statements to economic harm. Davila's dismissal is without prejudice, meaning that the investors can reformulate their claims and bring them again.

The lawsuit stemmed from revelations about Facebook's data-sharing practices -- including the high-profile Cambridge Analytica scandal, which also sparked a $5 billion fine by the Federal Trade Commission, and a class-action lawsuit on behalf of consumers.

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In March of 2018, it became widely known that the defunct consultancy obtained data about millions of Facebook users. Cambridge Analytica reportedly received the data from researcher Aleksandr Kogan, who got the information in 2014 through the personality-quiz app "thisisyourdigitallife."

Only 270,000 Facebook users downloaded Kogan's app, but he was able to gather data about up to 87 million of those people's contacts.

When Kogan's app scraped the data, Facebook allowed developers to glean information about users' friends, subject to their privacy settings. Facebook's terms of service prohibited developers from sharing that information.

In 2015, Facebook said it stopped allowing developers to access data about users' friends.

But in June of 2018, several months after news of Cambridge Analytica broke, reports emerged that Facebook had also “whitelisted” certain outside companies, allowing them to access information about users' friends.

The investors who sued flagged dozens of allegedly misleading statements by the company and its executives, including broad statements like users “control what they share” and “no one is going to get your data that shouldn’t have it.”

While the lawsuit alleged that Facebook and its executives made numerous false statements about privacy matters, including those relating to Cambridge Analytica, Davila said the only statements that could support a securities fraud lawsuit related to Facebook's whitelisting practices.

For instance, Facebook Chief Operating Officer Sheryl Sandberg said in a 2017 earnings call: “We built our services around transparency and control.”

That statement could support a cause of action, Davila said, because it isn't consistent with Facebook's whitelisting practices.

“If plaintiffs’ allegations are true, Facebook was not built around transparency and control,” he wrote. “The secret whitelisting practice is antithetical to defendants’ statements that Facebook is built around 'transparency and control.' In other words, if Facebook shared user data, as is alleged, then the service is neither transparent nor focused on user control.”

But Davila also said the investors hadn't shown how the statements about whitelisting caused any economic loss.

“Having determined that the only viable theory of falsity ... is that Defendants mislead investors as to their privacy policies based on their alleged whitelisting practices, the relevant timeframe is stock sales from February 3, 2017 to June 3, 2018 (which is when the whitelisting was revealed),” Davila wrote. “Plaintiffs allege no facts from which the court can infer the stock price fell in June 2018.”

In March of 2018, immediately following the public reports about Cambridge Analytica, Facebook lost $50 billion in market cap. The stock price recovered, but dropped again by $119 billion at the end of July. (The company's stock has since rebounded to around $260 a share, giving the company a market cap of around $742 billion -- up from around $509 billion in late July of 2018.)

Davila has given the investors until September 23 to amend their claims and bring them again.

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