Facebook is facing legal assaults from the Federal Trade Commission over antitrust concerns and broad criticism from lawmakers who say they are newly interested in long-stalled legislation that would curb the social media giant’s power. But Facebook whistleblower Frances Haugen’s strategy of turning to the Securities and Exchange Commission may represent the most potent threat to the company, experts in securities law said.
Haugen, whose appearances this week on “60 Minutes” and before a Senate subcommittee generated a firestorm of publicity, said she used thousands of pages of internal company documents to argue to the SEC that the company misled investors about what it knew about the ills attributed to its social network. “A lot of what Facebook is doing isn’t illegal because they hid the information that politicians would have needed to create regulations that addressed it,” she told The Washington Post. “But you can’t lie to your investors.”
The SEC is likely to give those allegations serious weight, experts in securities law said. They point to a confluence of factors lining up against Facebook: Haugen’s revelations, which formed the basis of a series in the Wall Street Journal, have generated some urgency for regulators to respond; the SEC under chair Gary Gensler is converting whistleblower complaints into agency action at a record clip; and Gensler has made a priority of improving corporate disclosures, a matter that lies at the heart of Haugen’s complaints.
“The SEC under Chair Gensler has signaled a very strong enforcement stance, and the chairman has also been a big supporter of the whistleblower program since he took the helm,” said Jane Norberg, who headed the SEC’s whistleblower program until April and is now a partner at Arnold & Porter, a law firm that specializes in business regulation. “So whistleblower allegations are something the SEC is taking very seriously.”
Like whistleblower Frances Haugen, these Facebook employees warned about the company’s problems for years. No one listened.
Haugen, a former Facebook data scientist, argues in her complaints that the company misrepresented to investors the role its products play in stoking hate speech, stirring political violence at home and abroad, and exacerbating mental health problems among teenagers, among others, according to CBS News, which said it had obtained copies.
Stephen Kohn, founding director of the National Whistleblower Center, said the question for the agency is whether a “reasonable investor,” reading the company’s disclosures, would be “fully aware of its potential liabilities.”
Facebook, in a filing with the agency earlier this year, noted for investors that “the nature of our business exposes us to claims related to defamation, dissemination of misinformation or news hoaxes, discrimination, harassment, intellectual property rights, rights of publicity and privacy, personal injury torts, laws regulating hate speech or other types of content.” It has included that language in annual reports to the SEC since 2017.
Kohn — who has helped organize an earlier series of whistleblower complaints to the SEC alleging Facebook knowingly hosts communications facilitating illegal activity including human and drug trafficking — does not believe the disclosures will protect the company against Haugen’s complaints. “This is still gravely deficient,” he said. “The whistleblower’s allegations have sufficient specificity also tied to Facebook’s algorithms and the conscious decision-making of its executives that has not been disclosed here.”
The SEC declined to comment. An agency spokesperson noted the agency does not remark “on the existence or nonexistence of a possible whistleblower submission.”
But payouts under the agency’s whistleblower program are evidence of a heightened interest in such submissions. Formed a decade ago in the wake of the financial crisis, the program’s total awards surpassed $1 billion last month, more than half of which was distributed over the past 12 months. The agency doled out $146 million in a pair of whistleblower rewards last month alone.
Facebook remains defiant following Haugen’s revelations and testimony. In a note to company employees posted online Tuesday, Facebook CEO Mark Zuckerberg said he doesn’t “recognize the false picture of the company that is being painted.” He added that while the company is “committed to doing the best work we can,” at some point Congress is “the right body to assess trade-offs between social equities.”
But some lawmakers identified a role for regulators, too. Sen. Richard Blumenthal (D-Conn.), who chairs the Senate Commerce subcommittee on consumer protection that convened the Tuesday hearing, said the SEC and the FTC should be probing “a number of the deceptive and misleading claims that have been made to the public, to consumers, to investors.”
The social network ran afoul of those regulators two years ago over allegations of privacy violations and misleading disclosures to investors. The FTC, following a 16-month investigation touched off by the Cambridge Analytica scandal, slapped Facebook with a $5 billion fine, the largest in U.S. history for a privacy violation. It argued the company deceived users about the access it granted app developers, advertisers and others to their personal data. And the SEC separately imposed a $100 million fine on the company for failing to inform investors about its privacy infractions.
In its complaint against Facebook at the time, the agency also noted the company’s misleading statements to the news media about its knowledge of the privacy breach reinforced its deceptive filings with the agency. That underlined that the SEC looks at all of the company’s communications, including what executives say publicly and what its spokespeople tell the media, in assessing whether it has been candid on sensitive matters. The agency’s focus on disclosure has only intensified under Gensler’s leadership this year, Norberg said.
If the SEC pursues a case against Facebook stemming from Haugen’s allegations, it is likely to focus on securing another major fine, said Donald Langevoort, who teaches securities regulation at Georgetown Law. “It reads well in the newspaper,” he said.
Whether it will be large enough to compel reforms inside a company that reported $29.1 billion in profit last year is another matter. “It’s difficult when you’re dealing with a company as big as Facebook,” Langevoort said. “The fine that would cause it to suffer real pain is awfully big, and it may be beyond the reach of even an impassioned SEC.”
Haugen, meanwhile, is seeking whistleblower protection from the SEC, according to her lawyers, but it remains unclear whether she is shielded from potential retaliation by her former employer. Facebook executives have pledged not to come after Haugen for testifying before the Senate while leaving open the possibility of taking legal action against her for leaking to the media.
Cat Zakrzewski contributed to this report.