What Frances Haugen’s SEC complaint means for the rest of tech

Haugen argues Facebook misled investors by failing to disclose its platforms' harms. If the SEC bites, the rest of tech could be next.

Frances Haugen

The question is whether the SEC will find the contents of Haugen's complaint relevant to investors' interests.

Photo: Matt McClain-Pool/Getty Images

Whistleblowers like former Facebook staffer Frances Haugen have pretty limited options when it comes to actually seeking redress for the harms they've observed and documented. There's no federal privacy law in the U.S. to speak of, Section 230 protects platforms for online speech and companies like Facebook are under no obligation to share any information with lawmakers, or anyone else, about what's happening on their sites.

But there is one agency that not only governs all publicly-traded companies, including in tech, but also offers whistleblowers like Haugen the opportunity for a payout: the Securities and Exchange Commission.

It's little wonder then that, since coming forward with allegations about Facebook's negative impact on everything from teen mental health to democracy itself, Haugen and her legal team have sought to push forward a different kind of legal strategy. In a lengthy SEC complaint, Haugen argues that Facebook has repeatedly lied to and misled investors about its role in the Jan. 6 Capitol riot, its removal of hate speech, its role in human trafficking and its impact on teens, among other things. The complaint juxtaposes Facebook executives' often sunny or defensive public statements about their work with more dire descriptions Haugen collected through internal records and research.

Now, the question is whether the SEC will view any of that information as relevant to investors' interests. And if they do, the next question is: What does that mean for all the other tech platforms that fail to tell investors everything they know about their own ugly underbellies?

"Other companies with similar risks would be ill-advised to put their heads in the sand. The opposite is true," said Jacob Frenkel, who worked in the SEC Division of Enforcement for 10 years and is now chair of securities enforcement at law firm Dickinson Wright. "They really should be highly sensitized to these issues and review their own disclosures for completeness and accuracy."

Protocol reached out to the SEC, Facebook and Haugen, as well as her lawyers. None responded to a request for comment.

Tech companies' risk disclosure statements already manage to be both maddeningly vague and excruciatingly long — and they're only getting more so. The year Facebook went public, the risk factors listed in its annual 10-K SEC filing stretched 17 pages. The same section in 2020's report was about double that and is loaded with broad catch-all clauses that warn loosely of "additional risks and uncertainties that we are unaware of, or that we currently believe are not material."

When determining what to disclose, companies tend to follow the SEC's own evolving guidance, Frenkel said. The agency has, for instance, given companies notice of their duty to disclose cybersecurity risks and risks posed by climate change. This summer, the SEC levied its first fine against a company for failing to disclose cyber risk. But, Frenkel said, by that point, the SEC had already made its view on cyber risk abundantly clear for years. "The SEC does not want to and should not be bringing actions where there is not adequate guidance to the marketplace about potential risk," Frenkel said.

The SEC did fine Facebook $100 million in 2019 in response to the Cambridge Analytica scandal, arguing that Facebook had presented the risk of data misuse as a "hypothetical" to investors, when, in reality, it already had knowledge of Cambridge Analytica's misuse of Facebook data. But that, too, was an enforcement action related to cyber risk.

Haugen's complaint falls into a different bucket of what Frenkel categorizes as "reputational concerns," which is to say, the idea that a company's diminished reputation may end up actually costing it in terms of growth and long-term value. That's largely what Haugen's complaint hinges on, but Frenkel said the SEC has yet to clearly articulate that as a risk companies must disclose.

Profits over public good

It's not that the SEC hasn't had time to consider it. Lawyers at the firm Kohn, Kohn & Colapinto have been filing SEC whistleblower complaints since at least 2017 against Facebook that make much the same case. The complaints argue that Facebook has failed to disclose everything from wildlife trafficking to terrorism on its platform, creating substantial risk for the company and its investors. Steve Kohn, the firm's founding partner and a whistleblower attorney, estimates the firm has filed dozens of complaints in those years, none of which have translated into enforcement so far. "Everything we've done is anonymous and confidential, and the SEC does not inform us and will not inform us of the status of any of our inquiries," Kohn said.

Kohn, however, is optimistic that the public nature of Haugen's complaint could be a turning point. "One of the issues with our complaint was materiality. Was what we're saying and alleging going to have a material impact on Facebook?" Kohn said. "The answer, I think now, is yes, because of what [Haugen] filed and the ongoing ramifications and decline of stock value."

Haugen's disclosures and documentation have certainly captured more public attention than any prior complaints. But experts say there are other obstacles in the way of her argument, namely her frequent insistence that Facebook has put profits before public good. It's a talking point that's ripe for Congress — but less so to the SEC, said Howard Fischer, former senior trial counsel at the SEC who is now a partner at Moses & Singer. "The claim that a company prioritizes profits for its investors is not exactly a good fit for securities laws," Fischer said. "Arguably that's what a company should be doing."

It's a mistake to view the SEC as an all-purpose watchdog for corporate misconduct, Fischer said. Its role instead "is to police companies that are within its jurisdiction, violating specified statutes that the SEC has authority to enforce."

While both Frenkel and Fischer believe it's unlikely the SEC would bring enforcement action against Facebook in response to Haugen's claims, that doesn't mean the agency needs to stay silent on the matter either, particularly given the publicity surrounding it. One option would be to issue what's called a report of investigation. "That is not an enforcement action, but it says: 'Here's what our concerns are,'" Frenkel said.

That would be something that Facebook and other companies could then use as a rough guide to govern future disclosures. "All these companies that have platforms that otherwise enjoy certain First Amendment and other liability protections will revisit whether those disclosures are adequate," Frenkel said. "Many likely will find they're satisfied with their existing disclosures."

Still, industry advocates are wary of the SEC broadening its mandate in this way, warning that tech companies could start watering down their disclosures with more expansive language and pausing the internal investigations that might lead to findings worth disclosing.

"The value of looking in the mirror is learning what you need to improve. If the SEC requires you to catalog every flaw you see in that mirror, it could disincentive companies from looking in the mirror in the first place," said Adam Kovacevich, founder of industry lobbying group Chamber of Progress, which is backed by Facebook, Twitter and Google. "I do think companies would start to include the kitchen sink in their disclosure statements, out of a desire to cover all their bases."

The bigger question, though, is who that would help. If Haugen's goal is to protect consumers, then taking her concerns to an agency whose job is to protect investors is an odd choice, says Frenkel, who said Haugen's complaint "really belongs at the FTC."

Facebook critics seem to hope that if the company won't respond to user pressure, it might well respond to investor pressure. The problem is, investors have rarely shown an interest in holding Facebook accountable for the harms that make it into the news. It's investors, after all, who have driven the company's share price higher and higher, even in the face of mounting scandals and a list of risk factors that grows longer by the quarter. It's investors who, in 2019 when Facebook announced its record-breaking $5 billion FTC fine, sent the company's stock soaring, relieved that Facebook only had to pay $5 billion for the Cambridge Analytica debacle.

And it's investors who, when the SEC came through with its own $100 million fine months later, barely even blinked.

Ben Brody contributed reporting to this story.



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