Facebook is facing immense scrutiny from Congress and the media over allegations it hid evidence of the social network’s negative effects and misuse…
Facebook is facing immense scrutiny from Congress and the media over allegations it hid evidence of the social network’s negative effects and misuse. Ultimately, the company’s harshest (and most costly) critic may be the Securities and Exchange Commission (SEC).
As has been widely reported in the media, whistleblower Frances Haugen, a former Facebook employee, claims that Facebook has been less than forthcoming about the potential harms associated with its platform. In addition to releasing thousands of internal company documents to the media, Haugen has testified before Congress and filed for whistleblower protection with the SEC.
SEC Whistleblower Program
As discussed in greater detail in prior articles, the Dodd-Frank Act directed the SEC to establish a new whistleblower award program. It aims to encourage whistleblowers to report alleged misconduct to the agency through monetary awards and enhanced protections against retaliation.
Section 21F provides that, pursuant to regulations adopted by the SEC, a monetary award must be paid to any eligible whistleblower who provides the SEC with original information about a securities law violation that leads to the SEC’s success in obtaining a monetary order of more than a million dollars in an SEC judicial or administrative enforcement action (“covered action”). If an eligible whistleblower qualifies for an award, the SEC must pay an award that is at least 10%, but no more than 30%, of the amount of the monetary sanctions collected in the SEC enforcement action. As of September 2021, the SEC’s whistleblower program has paid more than $1 billion in awards to 207 whistleblowers, including over $500 million in the fiscal year 2021 alone.
The Dodd-Frank Act also expanded the protections for whistleblowers and broadened the prohibitions against retaliation. Under the SEC’s rules, the agency is empowered to take legal action against employers who have retaliated against whistleblowers, which generally means that employers may not discharge, demote, suspend, harass, or in any way discriminate against an employee in the terms and conditions of employment who has reported conduct to the SEC that the employee reasonably believed violated the federal securities laws.
Potential Enforcement Action Against the SEC
Since Gary Gensler took over as SEC Chair, the agency has taken a more aggressive stance when it comes to protecting and rewarding whistleblowers. As a result, the agency will likely take a hard look at the information Haugen has provided. Should the SEC find that Facebook violated federal securities laws, an enforcement action carrying a sizable penalty is likely.
The crux of Haugen’s allegations is that Facebook failed to adequately disclose known business risks. According to reports, the tips provided to the SEC include information that Facebook failed to disclose how significantly Facebook and Instagram negatively impact teenage users. Other information Haugen provided involved Facebook’s efforts to curb the misuse of its platform by drug cartels, traffickers and other criminal elements.
In order to result in liability, any misleading statements would have to be material, meaning that “there is a substantial likelihood that a reasonable shareholder would consider it important” in making his investment decision.” While false statements or omissions about the company’s financial condition or performance will almost always satisfy this bar, the Facebook case will be interesting to watch, as it largely involves reputational risks.
Facebook’s Claims Related to the Disclosure of Internal Company Documents
While Facebook may not retaliate against Haugen for reporting alleged misconduct to regulators like the SEC, whistleblower protections may not apply to the documents she provided to the media. Accordingly, the social media company could file suit against Haugen for providing its internal company documents to the press, with potential claims including trade secret misappropriation and breach of a nondisclosure agreement. While Facebook has indicated that it is keeping its legal options open, it is unclear if the social media giant will pursue such claims, particularly in light of the potential public relations fallout.
If you have questions, please contact us
If you have any questions or if you would like to discuss the matter further, please contact me, Thomas Herndon, Jr., or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.
Does Your Homeowners Insurance Provide Adequate Coverage?
Your home is likely your greatest asset, which is why it is so important to adequately protect it. Homeowners insurance protects you from the financial costs of unforeseen losses, such as theft, fire, and natural disasters, by helping you rebuild and replace possessions that were lost While the definition of “adequate” coverage depends upon a […]
Understanding the Importance of a Non-Contingent Offer
Making a non-contingent offer can dramatically increase your chances of securing a real estate transaction, particularly in competitive markets like New York City. However, buyers should understand that waiving contingencies, including those related to financing, or appraisals, also comes with significant risks. Determining your best strategy requires careful analysis of the property, the market, and […]
Fred D. Zemel Appointed Chair of Strategic Planning at Scarinci & Hollenbeck, LLC
Business Transactional Attorney Zemel to Spearhead Strategic Initiatives for Continued Growth and Innovation Little Falls, NJ – February 21, 2025 – Scarinci & Hollenbeck, LLC is pleased to announce that Partner Fred D. Zemel has been named Chair of the firm’s Strategic Planning Committee. In this role, Mr. Zemel will lead the committee in identifying, […]
Novation Agreement Process: Step-by-Step Guide for Businesses
Big changes sometimes occur during the life cycle of a contract. Cancelling a contract outright can be bad for your reputation and your bottom line. Businesses need to know how to best address a change in circumstances, while also protecting their legal rights. One option is to transfer the “benefits and the burdens” of a […]
What Is a Trade Secret? Key Elements and Legal Protections Explained
What is a trade secret and why you you protect them? Technology has made trade secret theft even easier and more prevalent. In fact, businesses lose billions of dollars every year due to trade secret theft committed by employees, competitors, and even foreign governments. But what is a trade secret? And how do you protect […]
What Is Title Insurance? Safeguarding Against Title Defects
If you are considering the purchase of a property, you may wonder — what is title insurance, do I need it, and why do I need it? Even seasoned property owners may question if the added expense and extra paperwork is really necessary, especially considering that people and entities insured by title insurance make fewer […]
No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.
Sign up to get the latest from our attorneys!
Explore What Matters Most to You.
Consider subscribing to our Firm Insights mailing list by clicking the button below so you can keep up to date with the firm`s latest articles covering various legal topics.
Stay informed and inspired with the latest updates, insights, and events from Scarinci Hollenbeck. Our resource library provides valuable content across a range of categories to keep you connected and ahead of the curve.
Facebook Controversy Sheds Light on SEC Whistleblower Program
Author: Scarinci Hollenbeck, LLC
Facebook is facing immense scrutiny from Congress and the media over allegations it hid evidence of the social network’s negative effects and misuse…
Facebook is facing immense scrutiny from Congress and the media over allegations it hid evidence of the social network’s negative effects and misuse. Ultimately, the company’s harshest (and most costly) critic may be the Securities and Exchange Commission (SEC).
As has been widely reported in the media, whistleblower Frances Haugen, a former Facebook employee, claims that Facebook has been less than forthcoming about the potential harms associated with its platform. In addition to releasing thousands of internal company documents to the media, Haugen has testified before Congress and filed for whistleblower protection with the SEC.
SEC Whistleblower Program
As discussed in greater detail in prior articles, the Dodd-Frank Act directed the SEC to establish a new whistleblower award program. It aims to encourage whistleblowers to report alleged misconduct to the agency through monetary awards and enhanced protections against retaliation.
Section 21F provides that, pursuant to regulations adopted by the SEC, a monetary award must be paid to any eligible whistleblower who provides the SEC with original information about a securities law violation that leads to the SEC’s success in obtaining a monetary order of more than a million dollars in an SEC judicial or administrative enforcement action (“covered action”). If an eligible whistleblower qualifies for an award, the SEC must pay an award that is at least 10%, but no more than 30%, of the amount of the monetary sanctions collected in the SEC enforcement action. As of September 2021, the SEC’s whistleblower program has paid more than $1 billion in awards to 207 whistleblowers, including over $500 million in the fiscal year 2021 alone.
The Dodd-Frank Act also expanded the protections for whistleblowers and broadened the prohibitions against retaliation. Under the SEC’s rules, the agency is empowered to take legal action against employers who have retaliated against whistleblowers, which generally means that employers may not discharge, demote, suspend, harass, or in any way discriminate against an employee in the terms and conditions of employment who has reported conduct to the SEC that the employee reasonably believed violated the federal securities laws.
Potential Enforcement Action Against the SEC
Since Gary Gensler took over as SEC Chair, the agency has taken a more aggressive stance when it comes to protecting and rewarding whistleblowers. As a result, the agency will likely take a hard look at the information Haugen has provided. Should the SEC find that Facebook violated federal securities laws, an enforcement action carrying a sizable penalty is likely.
The crux of Haugen’s allegations is that Facebook failed to adequately disclose known business risks. According to reports, the tips provided to the SEC include information that Facebook failed to disclose how significantly Facebook and Instagram negatively impact teenage users. Other information Haugen provided involved Facebook’s efforts to curb the misuse of its platform by drug cartels, traffickers and other criminal elements.
In order to result in liability, any misleading statements would have to be material, meaning that “there is a substantial likelihood that a reasonable shareholder would consider it important” in making his investment decision.” While false statements or omissions about the company’s financial condition or performance will almost always satisfy this bar, the Facebook case will be interesting to watch, as it largely involves reputational risks.
Facebook’s Claims Related to the Disclosure of Internal Company Documents
While Facebook may not retaliate against Haugen for reporting alleged misconduct to regulators like the SEC, whistleblower protections may not apply to the documents she provided to the media. Accordingly, the social media company could file suit against Haugen for providing its internal company documents to the press, with potential claims including trade secret misappropriation and breach of a nondisclosure agreement. While Facebook has indicated that it is keeping its legal options open, it is unclear if the social media giant will pursue such claims, particularly in light of the potential public relations fallout.
If you have questions, please contact us
If you have any questions or if you would like to discuss the matter further, please contact me, Thomas Herndon, Jr., or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.
Let`s get in touch!
Sign up to get the latest from the Scarinci Hollenbeck, LLC attorneys!
