WASHINGTON – The Supreme Court appeared skeptical that companies should be required to include past events in their risk disclosure statements during oral arguments for Facebook, Inc. v. Amalgamated Bank Wednesday.
The case considers whether a risk disclosure is misleading if it fails to disclose that a warned risk has occurred in the past. Shareholders in Facebook, Inc., now known as Meta Platforms, Inc., allege that the company misled investors in its 2016 Securities and Exchange Commission filing because the risk of data misuse was described as hypothetical when Facebook knew that it had occurred in the past.
In 2015, the public learned that Cambridge Analytica, a political consulting firm, improperly obtained data from over 30 million Facebook users. Cambridge Analytica agreed to delete the data, although Meta later learned that it had not. When that became public, Meta’s stock price plummeted, harming investors.
The respondents argue that Meta should have disclosed that the data breach occurred when it listed data breaches as a potential risk factor in Item 105 of its 10-K filings to the SEC. Lauren A. Ormsbee, co-counsel for an amicus brief supporting the plaintiffs, said that a ruling in favor of Meta could incentivize companies to hide materialized risks from investors.
“Investors, for the large part of the US economy, are people in unions and in pensions — teachers, firemen, police officers,” Ormsbee said. “So an adverse ruling here would have a real world impact on a vast majority of Americans if companies are told: ‘You get to hide information about the risks that are ongoing from undisclosed events that have occurred in your company.’”
The Ninth Circuit ruled 2-1 in favor of investors. During oral arguments, many justices initially also seemed critical of Meta.
Justice Elena Kagan said that while the disclosure statements were not overtly false, they could mislead investors.
“It’s not a black-and-white thing, but it’s clearly misleading,” Kagan said. “When we look at these statements, we’re not looking only for lies.”
Still, many justices ultimately seemed wary of the feasibility of requiring businesses to include past events in their risk disclosure statements.
Kagan and Justice Neil Gorsuch questioned how to determine when past events should be included in risk disclosures and whether that would encourage less specific disclosures.
At the suggestion of Kannon Shanmugam, the attorney representing Meta, Justice Clarence Thomas asked respondents what additional information they believe should have been included in Meta’s filing.
In response, Kevin Russell, the attorney representing the respondents, provided an example of a one-sentence statement detailing that a sizable breach of user data had occurred recently. In response, Shanmugam argued that this information was already in the public domain at the time the risk disclosure was filed.
Shanmugam also argued that a ruling in favor of the respondents could create a precedent that companies must list all past events. Ted Allen, Vice President of Policy and Advocacy at the Society for Corporate Governance, said this could ultimately make disclosures less helpful to investors.
“If the Supreme Court upholds the Ninth Circuit’s rationale, or most of it, then you probably will see longer and longer risk disclosures, and longer and longer 10-K filings — which already are significantly longer than they were 23 years ago,” Allen said.
Justice Brett Kavanaugh and Chief Justice John Roberts also suggested that the issue may be best resolved by the SEC, which supported the investors during oral arguments. Kavanaugh suggested they add a requirement to list specific ongoing risks, rather than turning to the courts.
“Why does the judiciary have to walk the plank on this?” Kavanaugh asked.
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