Northern District of California Partially Dismisses Investor Suit Against Meta, but Claims Survive Challenging Statements About Consistent Application of Community Standards and Effect of Instagram on Youth

In this issue

• Northern District of California Partially Dismisses Investor Suit Against Meta, but Claims Survive Challenging Statements About Consistent Application of Community Standards and Effect of Instagram on Youth
• Northern District of California Rejects Investors’ Attempt to Paint Tesla’s Bullish Statements About Automated Driving Technology as Fraud
• Southern District of New York Denies Motion to Dismiss Investor Suit Against Amgen Based on Failure to Specifically Disclose Potential for $10.7 Billion Liability to the IRS
• SEC Enters Consent Order With Former CEO Who Falsified Reports and Lied to Auditors
• Delaware Court of Chancery Dismisses Derivative Suit Against Directors and Officers of FibroGen Based on Alleged Fraudulent Disclosures About Failed Drug Candidate

Northern District of California Partially Dismisses Investor Suit Against Meta, but Claims Survive Challenging Statements About Consistent Application of Community Standards and Effect of Instagram on Youth

On September 30, 2024, the US District Court for the Northern District of California granted in part and denied in part a motion to dismiss a complaint against Meta Platforms and certain of its officers alleging violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5. Many of the challenged statements in this action concerned Meta’s content moderation and the alleged prevalence of hate speech on Facebook, a topic addressed by The Wall Street Journal in a series of articles published in 2021 titled “The Facebook Files,” relaying information from a former Meta data scientist turned whistleblower. Specifically, the plaintiffs alleged that Meta and its officers made misrepresentations regarding (1) Meta’s commitment to holding all users to the same standards, despite Meta’s “cross-check” program allegedly exempting certain influential users from its community standards; (2) changes to Meta’s algorithm and content moderation to help users have more “meaningful social interactions” and to decrease harmful content, while harmful content and misinformation allegedly proliferated; and (3) minimal harm to young users by Instagram integrated into its platform, despite alleged internal research showing that Instagram caused or worsened mental health for young users. The plaintiffs also alleged that the defendants overstated Meta’s growth rate by failing to disclose the number of duplicate accounts.

The court found inactionable opinion statements by Meta executives expressing personal views about Meta’s investment in safety and security, and announcing the “success” of efforts to make a “big shift” to help users have more “meaningful social interactions,” because the plaintiffs failed to allege that the statements were false and that the speakers did not believe them to be true. In contrast, the court found that claims that Facebook does not amplify ideas that users disagree with and that there was no causal link between social media and polarization were potentially actionable as factual assertions “capable of objective verification” and not “opinion statements.”

The court ruled that certain alleged misrepresentations regarding Meta’s enforcement of community standards and its algorithm and content moderation efforts were inactionable “corporate puffery,” meaning they were too generalized and did not describe a “specific and testable characteristic” of Meta’s platform. This included Meta’s statements that it took “significant steps” to fight disinformation, that it believed it did more than others in the industry on safety and security, and that it focused on “trust and safety” and improving privacy. However, the court held that other verifiable statements by Meta and its officers suggesting specific actions that Meta took and rules that it implemented or enforced were not mere puffery. For example, the court deemed potentially actionable Meta’s statements that “it has never had a general rule that is more permissive for content posted by political leaders,” that it removed content that violated its standards, and that it did not have special protections for any groups.

The court rejected the plaintiffs’ attempt to use selective quotes from unidentified internal Meta documents cited in The Wall Street Journal articles to plead falsity, holding that the “fail[ure] to allege who drafted ... received ... [or] reviewed” the documents or “what the reports entailed” does not meet the requisite heightened pleading standard. Conversely, the court held that the plaintiffs adequately pleaded falsity of statements downplaying negative impacts of Instagram on young users through allegations that Meta had extensive internal research showing harm caused by Instagram to teenagers.

With respect to scienter, the court held that scienter could be inferred where the plaintiffs pleaded that the defendant making the challenged statement (1) had “hands-on involvement in the decision-making process” at issue or (2) directly addressed a specific issue or data in a statement that suggested awareness of the referenced issue or data, particularly in connection with a government inquiry. However, allegations that the defendants merely had access to internal data or reports were not enough to support an inference that the defendants were aware of the information contained in the data or reports.

Notably, this case shows that statements on topics that are ostensibly subjective opinions may nonetheless be actionable if they are capable of verification based on hard facts. This decision also provides insight into how courts may examine companies’ communications regarding efforts to protect customers and avoid harm to the public. Companies making optimistic statements concerning such efforts should be prepared to support any facts included in such statements.

Northern District of California Rejects Investors’ Attempt to Paint Tesla’s Bullish Statements About Automated Driving Technology as Fraud

On September 30, 2024, the US District Court for the Northern District of California dismissed a class action against Tesla, Inc., and its CEO, Elon Musk, alleging violations of Section 11 of the Securities Act, Sections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5, based largely on Musk’s statements—including through tweets—concerning Tesla’s development timeline, safety, and the capabilities of its autonomous-driving technology.

As a threshold matter, the court held that a prior SEC settlement barring Tesla from violating Rule 13a-15 did not prohibit Tesla from relying on the statutory safe harbor for forward-looking statements. It explained that although the safe harbor does not protect statements made by an issuer within three years after it was subject to an order barring future violations of an antifraud provision of the securities laws, Rule 13a-15 is not an antifraud provision because it does not reference the speaker’s state of mind; rather, it provides for disclosure controls and procedures. Thus, the court deemed the challenged statements about the projected timeline for achieving autonomous-driving technology and future expectations about safety to be forward-looking statements under the statutory safe harbor, which were inactionable because they were accompanied by meaningful cautionary language or because the plaintiffs failed to allege that Musk knew his statements were false when made.

Next, the court held that many of the alleged misrepresentations about the safety and progress of Tesla’s autonomous vehicle program were too vague to be relied upon by an investor and therefore were nonactionable corporate puffery. For example, the court held that statements that autonomous vehicles were “absurdly safe” or “superhuman” were not objectively verifiable. In contrast, the court declined to find mere corporate puffery if the statements were objectively verifiable and addressed a specific aspect of Tesla’s operation, including statements that safety “bears out in the statistics,” citing the “objective numbers” of the low probability of injury, and stating “it’s really hard to have a serious injury in a Tesla ... it’s quite rare.”

Ultimately, the court found that even the statements falling outside of the safe harbor protections were inactionable because the plaintiffs failed to allege that they were false or misleading. The court disregarded allegations of research showing deficiencies with Tesla’s autonomous-driving technology and articles about crashes because they were not contemporaneous with the challenged statements and did not contradict statements that the technology was safer than regular human driving. It similarly held that confidential witness statements that Tesla’s autopilot department knew Musk’s statements about the viability of the technology were “exaggerations” were too vague to show that the statements were false or misleading.

The court further held that scienter was not pleaded. Confidential witnesses either lacked personal knowledge of the matters at issue or did not offer information that showed the defendants’ knowledge of contradictory information when making the statements. Moreover, Musk’s “access to information” about the matters at issue and his “detail-oriented management style” was not enough to connect Musk with information that he learned that would render his statements false or misleading. Finally, the court held that Musk’s purported history of fraud, including reference to a 2018 tweet about securing funding to take Tesla private, was irrelevant.

This opinion provides comfort for companies making optimistic good-faith estimates concerning product development timelines and expectations, particularly when those estimates are accompanied by cautionary language. However, this case also illustrates that informal communications like social media posts, which often are not accompanied by cautionary language, may receive the same scrutiny as formal earnings calls and SEC filings.

Southern District of New York Denies Motion to Dismiss Investor Suit Against Amgen Based on Failure to Specifically Disclose Potential for $10.7 Billion Liability to the IRS

On September 30, 2024, the US District Court for the Southern District of New York granted in part and denied in part a motion to dismiss a putative class action against Amgen, Inc. (Amgen), and certain of its officers and directors alleging violations of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder.

This action arose following an IRS investigation and audit into Amgen’s “aggressive” accounting practices from 2010 to 2015, namely its practice of shifting Amgen’s US profits to subsidiaries with lower tax rates in Puerto Rico (a practice called “transfer pricing”). Amgen’s use of transfer pricing allegedly helped the consolidated entity benefit from an extremely low effective tax rate, which in turn drastically increased the company’s net income prior to and during the class period. After yearslong examinations, the IRS determined that Amgen underpaid taxes for those six years by $8.7 billion and imposed $2 billion in penalties. While Amgen had previously disclosed the IRS audit and warned generically that it could have a substantial impact on the company, when it disclosed that the IRS sought to recover $10.7 billion (more than an entire year of the company’s profits), Amgen’s stock price plummeted.

The court concluded that the plaintiffs plausibly alleged that the defendants’ failure to disclose the specific amount of potential liability the company faced from the IRS could have misled Amgen investors by failing to sufficiently apprise them of the severity of the risks Amgen faced. Equating this to a child telling his parents that he had “dessert” when he actually ate the “whole cake,” the court explained that “[g]iven the sheer size of the potential liability Amgen was facing, Defendants’ vague characterizations of the amounts the IRS was seeking as ‘significant’ and ‘substantial’ and potentially ‘material’ rendered its disclosure of the tax dispute neither ‘clear’ nor ‘complete.’” The court further concluded that the plaintiffs’ allegations that Amgen’s officers (1) were aware of the full extent of liability; (2) signed Amgen’s quarterly filings (which included various financial disclosures); and (3) addressed the IRS dispute publicly were sufficient to allege a strong inference of scienter regarding the alleged omission.

Conversely, the court rejected the plaintiffs’ contention that Amgen’s statements in the “Contingencies” section of its Form 10-Qs and 10-Ks that certain legal proceedings “[had not] progressed sufficiently … to enable [Amgen] to estimate a range of possible loss” for recognition as a loss contingency was materially misleading in light of the IRS dispute. It reasoned that these statements were not clearly related to the IRS dispute and, paired with Amgen’s disclosures that the IRS proposed “significant” or “substantial” adjustments, meant that in context, “no reasonable investor could thus have been left with the impression that the IRS was not seeking a quantifiable amount of relief.”

This case emphasizes that when a company speaks on an issue, it must speak fully and completely, particularly where the omission concerns a significant, known financial impact on the business.

SEC Enters Consent Order With Former CEO Who Falsified Reports and Lied to Auditors

On September 16, 2024, the SEC charged former officers and a former director of Kubient, Inc. (Kubient), a cloud-based digital advertising platform, with fraud and other securities law violations in connection with an alleged scheme to overstate and misrepresent revenue in connection with two public offerings. The SEC brought civil charges against Kubient’s CEO, CFO, and audit committee chair. The Department of Justice announced similar charges in a parallel action against the company’s CEO in the Southern District of New York.

According to the SEC’s complaints, in the lead-up to Kubient’s initial public offering, its then president and chairman who later became CEO, caused Kubient to falsely inflate its revenues by $1.3 million by fabricating records of services Kubient did not provide. Specifically, in late 2019, Kubient represented that it entered into two transactions worth $1.3 million whereby it would beta test its lead product, Kubient AI (KAI), on its customers’ data in exchange for that data. The SEC alleges that these transactions were never consummated but that Kubient’s president and chairman fabricated data analysis reports to create the impression that the transactions had in fact been consummated. He then circulated those analyses to Kubient’s audit committee chair and CFO in support of Kubient’s falsified financials. When Kubient’s audit committee chair and CFO learned that the transactions had not been consummated and the reports had been falsified, they did not correct Kubient’s financial statements and instead perpetuated the lie to Kubient’s auditors. Kubient in turn went on to raise $33 million in its initial and follow-on offerings using materials that touted the success of the KAI product and represented falsified revenues. All three individuals (the president and chairman, the audit committee chair, and the CFO) were charged with securities fraud.

On October 10, 2024, the US District Court for the Southern District of New York entered into a consent judgment with respect to only one defendant, the president and chairman, who agreed to be enjoined from further violations of the securities laws. The issues of whether he must pay a disgorgement or civil penalty or be subject to a bar prohibiting him from serving as a director or officer of a public company remain outstanding. No other officers have entered into consent judgments, and litigation continues.

This is a stark reminder that liability may extend to officers and directors who fail to correct or otherwise investigate obvious indicia of fraud.

Delaware Court of Chancery Dismisses Derivative Suit Against Directors and Officers of FibroGen Based on Alleged Fraudulent Disclosures About Failed Drug Candidate

On October 2, 2024, the Delaware Court of Chancery (Vice Chancellor Sam Glasscock III) dismissed a stockholder derivative suit asserting breaches of fiduciary duty against officers and directors of FibroGen, Inc. (FibroGen), a biopharmaceutical company, holding that the plaintiffs failed to plead that they were excused from making a pre-suit demand on the board before initiating the lawsuit. While the focus of the opinion is on demand futility, to make that determination, the court had to evaluate whether the plaintiffs pleaded sufficient facts from which the court could infer that a majority of the board members breached their duty of loyalty based on alleged misreporting of data from Phase 3 clinical trials of a drug ultimately rejected by the FDA.

The court explained that to allege that a majority of the directors faced a substantial risk of liability for a bad-faith disclosure violation (and thus that demand would be futile), would require allegations of specific facts indicating that the directors’ actions or inactions were in bad faith — i.e., a conscious disregard of their duties. Such allegations would have to include facts showing that (1) the directors “prepared” the challenged language or were “directly responsible for the misstatements or omissions;” (2)that the statements were false or misleading; and (3) that the directors knew the statements were false or misleading, or intended that they be misleading. Here, the court held that there were no allegations that any independent director played a role in making any of the allegedly misleading statements and, therefore, the plaintiffs failed to allege demand futility. This was true even for statements in Form 10-Ks signed by the directors because that alone was not enough to show that the directors caused or consented to the alleged misstatements or that they knew the challenged statements were false or misleading.

The court also rejected the notion that failing to correct misleading statements (or negligence) was enough to constitute bad faith. It also held that allegations that the directors ignored purported “red flags” was not enough, explaining that “[e]ven if a reasonable Board may have acted differently,” that does not support a claim of disloyalty to the company.
This decision continues the Court of Chancery’s guidance that such litigation is an “asset” of the corporation, and the decision of whether to deploy that asset is typically a matter for the board to determine. In such cases, the plaintiff will face a relatively high burden to allege “particularized facts” showing that the demand board could not make an independent decision as to whether to file suit. It is important to ensure that there are sufficient independent directors capable of properly considering a pre-suit demand.

This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee similar outcomes.