Facebook, Directors Attempt to Dismiss Shareholder Securities and Privacy Suit

Facebook shareholders filed suit in 2018 against certain Facebook officers and directors, alleging they breached their fiduciary duty and misrepresented information about Facebook’s failure to protect sensitive data for 50 million users. Facebook was subject to an SEC investigation and a $100 million penalty; as a result of the scandal, Facebook lost $100 billion in value. Facebook filed a reply memorandum in support of the motion to dismiss the plaintiff’s first amended consolidated complaint.

Facebook said the plaintiffs failed to meet the requirement for pleading that they were excused from making a demand to Facebook’s Board of Directors before the suit was filed. Facebook argued that the plaintiffs’ “distortion of the demand futility standard [in stating that ‘directors do not need to be impartial for the identical reason’, which can ‘only go so far’] must be rejected,” adding that the “demand is not futile” because Mark Zuckerberg “is a controlling stockholder”; and it is “not futile under an independence theory” or a “substantial likelihood of liability theory.” Instead, they claimed that plaintiffs do not “establish that demand is futile as to the Section 10(b) claims.” Facebook argued plaintiffs’ insider trading claims “fail to establish demand futility” and that “demand is not excused for claims not asserted in this action.” Facebook states that if the court does not dismiss this action that it should be stayed.

The individual defendants also filed a reply memorandum in support of their motion to dismiss. They argue that plaintiffs do not state a Section 14(a) claim, thus failing to allege a material misstatement or omission and failing to allege that proxy statements at issue in the case were an “essential link” for “any loss-generating corporate action.” They also state that plaintiffs fail to plead “a materially false or misleading statement,” “scienter for any defendant,” “reliance,” and “loss causation.”

Defendants also filed a partial opposition to plaintiffs’ request for judicial notice “of excerpts of Facebook’s SEC filings…which Plaintiffs seek in an improper attempt to cure their deficient insider trading allegations.” Facebook noted that while SEC filings are typically subject to judicial notice “because their accuracy can be ‘readily determined’ from reliable sources,” they said the plaintiffs have sought judicial notice “in an improper attempt to insert additional, new allegations that appear nowhere in the First Amended Consolidated Shareholder Derivative Complaint.”

The suit is ongoing in the Northern District of California. Plaintiffs are represented by Cotchett, Pitre & McCarthy. Defendants are represented by Gibson, Dunn & Crutcher.