PROVIDENCE, R.I. (WPRI) — Rhode Island’s employee retirement system is suing Facebook CEO Mark Zuckerberg and other top executives over the Cambridge Analytica data-privacy scandal, alleging their actions caused “significant damage” to the company and long-term shareholders.
Target 12 has confirmed the Employees’ Retirement System of Rhode Island filed a derivative lawsuit earlier this month against Zuckerberg, Chief Operating Officer Sheryl Sandberg and other executives in the Court of Chancery in Delaware.
The legal challenge will remain under seal until next month, but General Treasurer Seth Magaziner in a statement offered a glimpse into its contents. The crux of his argument: decisions by Facebook executives made in the wake of the Cambridge Analytical scandal were not in the best interest of the company and its shareholders, effectively hurting Rhode Island and its $10.3 billion retirement fund.
“As Treasurer, my job is to stand up for the financial wellbeing of all Rhode Islanders, including the teachers, first responders and other community servants who depend on the Rhode Island pension fund for their retirement security,” said Magaziner, a two-term treasurer and likely Democratic candidate for governor next year.
A law firm representing Zuckerberg did not immediately respond to a request for comment.
Magaziner was broadly critical of Facebook and its relationship with Cambridge Analytica, a British tech company that obtained Facebook users’ information without their permission. The tech company used to promote various political campaigns — including former President Donald Trump’s — leading up to the 2016 presidential election.
But the state’s more narrow, legal challenge focuses specifically on Zuckerberg’s and others’ decision to pay a record-breaking $5 billion fine to the Federal Trade Commission in a subsequent settlement. Magaziner’s office declined to comment on the specific details of the state’s argument until after the seal is lifted. But derivative lawsuits are typically filed against company directors and officers when a shareholder believes their decisions may have been self-serving, or harmed the company in some other way, and those actions require redress.
The $5 billion FTC penalty assessed against Facebook in 2019 was “the largest ever imposed on any company for violating consumers’ privacy and almost 20 times greater than the largest privacy or data security penalty ever imposed worldwide,” according to the the federal regulator. But Facebook only agreed to the settlement after it was scaled down dramatically. Originally, the FTC considered fining Facebook far more money, and holding Zuckerberg personally liable for the privacy scandal, according to The Washington Post.
Critics at the time suggested the FTC buckled out of concern of the cost associated with going to court against Facebook, which made $55 billion in revenue the year earlier. The Washington Post reported the company’s annual revenue totaled nearly 200 times the budget of the FTC.
Rhode Island has been legally pursuing records tied to that settlement since September 2019, according to a court memo made public earlier this year. The reasons “included an intent to investigate wrongdoing relating to the 2019 settlement,” according to the memo. Facebook subsequently produced 30,000 pages of documents, but refused to disclose “board-level hard-copy and electronic communications concerning Facebook’s negotiations with the FTC,” according to the memo.
The court ultimately decided Facebook needed to allow inspection of the books and records in question, but what’s happened since then is unclear. Rhode Island filed its lawsuit against Zuckerberg and others on July 16, according to an online court docket, and derivative lawsuits are only filed after a shareholder makes a pre-suit demand for the company directors to take action.
The court-ordered seal on the lawsuit is slated to be lifted next month, which will reveal what type of damages Rhode Island is seeking in the matter. In theory, if the state is successful in its suit, the court could order the executives to personally pay back the company — rather than the plaintiffs directly — which could effectively increase value to shareholders.
Rhode Island currently holds 151,533 shares of Facebook, valued at about $54.2 million based on the company’s stock price at the close of trading Thursday. As of Friday, Facebook’s market cap totaled $1 trillion, according to Yahoo Finance.
“When Facebook leaders improperly allowed user data to fall into the hands of bad actors trying to influence elections in support of Donald Trump and others, they not only put our democratic system of government at risk, they also put shareholder capital at risk,” Magaziner said.