Facebook Controversy Sheds Light on SEC Whistleblower Program

Facebook Controversy Sheds Light on SEC Whistleblower Program

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.