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Shareholders of tech and social media giant Meta, have sued for more than $8 billion in in fines and legal reimbursements, in relation to an alleged privacy scandal at Mark Zuckerberg’s Facebook, as per reports.
The action is based on relevations that data of millions of Facebook users was accessed by now defunct political consultant Cambridge Analytica, and alleges that around 11 executives — including Mark Zuckerberg himself and former Chief Operating Officer (COO) Sheryl Sandberg — indulged in insider trading and used the company to conduct illegal data harvesting, while the board failed to oversee the social media giant’s operations.
Interestingly, Cambridge Analytica worked for Donald Trump’s successful US presidential campaign in 2016.
Spokespeople for Meta did not immediately respond to queries, Bloomberg and Reuters said.
Meta, Facebook’s privacy ‘scandal’: What happened?
The report said that the Meta shareholders, comprised largely of union pension funds, alleged that Mark Zuckerberg and Sheryl Sandberg “ran the company as an illegal data harvesting operation”, while the board “completely ignored their duty to oversee the company”.
The claimants want reimbursement of over $8 billion in fines and legal costs from executives to Meta, which was paid to settle the 2012 privacy agreement violation to the United States Federal Trade Commission (FTC).
Trail in the Facebook ‘privacy scandal’ began at a Delaware court on July 16 (Wednesday), and is scheduled to last until July 25 (next Friday), according to a Reuters report. Notably, the case is being heard by Chancellor Kathaleen St. J McCormick — the judge who rejected Tesla CEO Elon Musk’s $55 billion pay package, as per a Bloomberg report.
Among the defendants in the case are, venture capitalist and current board member Marc Andreessen; and former board members Peter Thiel, Palantir Technologies co-founder, and Reed Hastings, co-founder of Netflix.
Behind-the-scenes details: From FTC settlement, to insider trading and more…
- According to the Bloomberg report, “behind-the-scenes” details emerged during the hearing, which showed that Facebook paid at least $7 billion in settlement cost to the FTC in 2019.
- Appearing in court on July 16, Jeffrey Zients, a company director at the time, and later former US President Joe Biden’s chief of staff, deposed that the board asked its lawyers to approach the FTC with a proposal and was “willing to pay billions of dollars” except agreeing to hold founder Mark Zuckerberg personally responsible.
- He added that “there wasn’t any indication” that Mark Zuckerberg was involved with the Cambridge Analytica leak.
- Future witnesses in the weeks-long trial include Zuckerberg (some time next week), Sandberg, Andreessen (expected to appear on July 17), and Thiel.
Zuckerberg’s much-anticipated testimony is expected next week. The case is unusual because it’s the first time that director-oversight claims involving a public company have gone to trial in Delaware Chancery Court, the premier venue for business disputes in the US. Other cases have been dismissed or settled.
A group of pension funds who hold Meta shares allege Zuckerberg and Sandberg led Facebook to violate a 2012 Federal Trade Commission order covering data-sharing practices. Facebook directors also are accused of failing to properly monitor the platform’s adherence to that order, according to court filings. Investors also accuse Zuckerberg of insider trading.
The insider-trading claims prompted Zuckerberg to demand his stock-trading strategies be kept under seal in the trial. The tech titan moved to shield the price thresholds that trigger his automatic sales. The public can understand the allegations without that highly confidential information, he said in a court filing.
In early 2018, Facebook executives admitted Cambridge Analytica had been allowed to improperly gather data about tens of millions of the company’s users. Zuckerberg later apologized, acknowledging Facebook must better safeguard users’ information. A year later, the FTC announced the settlement over violations of the order under which Facebook would pay the $5 billion fine. Investors, including pension funds, filed suit in the wake of that order.
The case was filed as a derivative lawsuit, one that allows investors to sue company executives or board members on behalf of the company itself. Any recovery will go back to the company rather than any individual shareholder.
Zuckerberg, the 41-year-old CEO and chairman of Meta’s board, controls about 61% of the company’s voting power through a dual-class share structure, effectively granting him sole control over the board composition and corporate strategy — past, present and future. Repeated investor efforts to raise concerns about corporate governance have fallen flat due to his concentrated voting power.
The trial is being overseen by Chancellor Kathaleen St. J. McCormick – the same judge who rejected Tesla Inc. CEO Elon Musk’s $55 billion pay package. That ruling and a handful of others — part of a court crackdown on insider conflicts of interest — prompted several companies to shift their states of incorporation to Nevada and Texas, including Tesla and Bill Ackman’s Pershing Capital. They cited alleged judicial bias against tech leaders such as Musk and Zuckerberg.
The wave of exits from Delaware, which funds more than a quarter of its budget with billions in corporate fees, led to a major overhaul of the state’s best-in-class corporate laws earlier this year. The changes were drafted by an expert panel that included former judges now practicing law at firms linked to Musk and Zuckerberg, including one involved in the Cambridge Analytica case.
Meta officials have publicly said they are weighing whether to yank their incorporation papers out of Delaware, which is the corporate home to more than 60% of Fortune 500 companies. Firms come to Delaware to get access to chancery court, where sophisticated business judges hear cases without juries.
Last week, a venture capital firm co-founded by Meta director Andreessen cited a creeping pattern of uncertainty about how the law applies to startups and tech firms to explain its decision to relocate to Nevada.
The case is IN RE Facebook Inc. Derivative Litigation, 2018-0307, Delaware Chancery Court (Wilmington).
(With inputs from Bloomberg and Reuters)
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