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Lower court let suit led by Amalgamated Bank ( AMAL ) proceed

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Supreme Court to hear similar Nvidia ( NVDA ) case on Nov. 13

(Adds comments during arguments by Justices Thomas and Kagan,

and Facebook's attorney)

By John Kruzel

WASHINGTON, Nov 6 (Reuters) - The U.S. Supreme Court

began hearing arguments on Wednesday in a bid by Meta's

Facebook to scuttle a federal securities fraud lawsuit brought

by shareholders who accused the social media platform of

misleading them about the misuse of its user data.

Facebook appealed a lower court's decision allowing the 2018

class action led by Amalgamated Bank ( AMAL ) to proceed. It is

one of two cases coming before them this month - the other one

involving artificial intelligence chipmaker Nvidia ( NVDA ) -

that could lead to rulings making it harder for private

litigants to hold companies to account for alleged securities

fraud.

The arguments were ongoing.

The plaintiffs accused Facebook of misleading investors in

violation of the Securities Exchange Act, a 1934 federal law

that requires publicly traded companies to disclose their

business risks. They claimed the company unlawfully withheld

information from investors about a 2015 data breach involving

British political consulting firm Cambridge Analytica that

affected more than 30 million Facebook users.

Conservative Justice Clarence Thomas pressed Kannon

Shanmugam, the lawyer for Facebook, on whether the company's

risk statement was misleading.

"The problem is that the reasonable person could look at the

statement and assume that, because it only talks about future

probabilities of this harm or this event occurring, that it

never occurred," Thomas said.

"So why wouldn't one be able to read this and assume that it

never happened?" Thomas asked.

Shanmugam replied, "We don't think that a reasonable person

would draw that inference from a statement of this variety.

Where a statement says 'if something occurs, harm may follow

from that' - I don't think it's a necessary premise of that

statement that the event has never occurred."

Facebook's stock fell following 2018 media reports that

Cambridge Analytica had used improperly harvested Facebook user

data in connection with Donald Trump's successful U.S.

presidential campaign in 2016. The suit seeks unspecified

monetary damages in part to recoup the lost value of the

Facebook stock held by the investors.

At issue is whether Facebook broke the law when it failed to

detail the prior data breach in subsequent business-risk

disclosures, and instead portrayed the risk of such incidents as

purely hypothetical.

Facebook argued in a Supreme Court brief that it was not

required to reveal that its warned-of risk had already

materialized because "a reasonable investor" would understand

risk disclosures to be forward-looking statements.

"When we think about these questions, we're not looking only

to lies or complete false statements," liberal Justice Elena

Kagan told Shanmugam. "We're also looking to misleading

statements or misleading omissions."

U.S. District Judge Edward Davila dismissed the lawsuit in

2021 but the San Francisco-based 9th U.S. Circuit Court of

Appeals in a 2-1 ruling revived it in 2023.

"The problem is that Facebook represented the risk of

improper access to or disclosure of Facebook user data as purely

hypothetical when that exact risk had already transpired," Judge

Margaret McKeown wrote in the 9th Circuit decision.

A ruling by the Supreme Court is expected by the end of

June.

The Cambridge Analytica data breach prompted U.S. government

investigations into Facebook's privacy practices, various

lawsuits and a U.S. congressional hearing at which Meta Chief

Executive Mark Zuckerberg was grilled by lawmakers.

The U.S. Securities and Exchange Commission in 2019 brought

an enforcement action against Facebook over the matter, which

the company settled for $100 million. Facebook paid a separate

$5 billion penalty to the U.S. Federal Trade Commission over the

Cambridge Analytica issue.

The Supreme Court on Nov. 13 is due to hear arguments in

Nvidia's ( NVDA ) similar appeal to avoid a securities class action

accusing it of misleading investors about how much of its sales

went to the volatile cryptocurrency industry.

The Supreme Court in prior rulings has limited the authority

of the SEC, the federal agency that polices securities fraud.

Its rulings in the Facebook and Nvidia ( NVDA ) cases now could make it

more difficult for private litigants to hold companies liable

for such conduct.