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SAN FRANCISCO (CN) — Meta on Thursday dodged a lawsuit accusing it of helping scammers promote a Chinese penny stock scheme through fraudulent ads.
Chief U.S. District Judge Richard Seeborg, Barack Obama appointee, determined the victims of the scam lacked jurisdiction, ruling that the Securities Litigation Uniform Standards Act preempts their claims, which the tech giant said amounted to a securities class action brought under state law.
Under the 1998 law, federal courts must dismiss certain securities class actions claiming a “misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security.”
“It may be that the initial effect of Meta’s fraudulent statements was to cause plaintiffs to form a trading relationship with the WhatsApp-based scammers, but the ultimate — and legally relevant — effect was to get them to buy near-worthless securities. That makes the fraudulent statements material to their trading decision,” Seeborg wrote in the decision issued just hours after a dismissal hearing.
During the hearing, Andrew Robertson of Morris Kandinov, representing the plaintiffs, had sought to distinguish Meta’s role from the misrepresentations that ultimately induced the stock purchases.
Robertson said Meta’s involvement was limited to creating the ads that lured victims into WhatsApp groups, where scammers then encouraged them to buy shares of China Liberal Education Holdings Ltd., a Chinese penny stock.
He said the plaintiffs are not arguing Meta participated in misrepresentations made within the groups or made misrepresentations about specific securities.
“Meta’s role was a very specific, albeit important, one in the scheme,” Robertson said, adding that the reported misrepresentations attributable to Meta were only “specific to the phase when victims were lured in to deal with the scammers.”
Seeborg disagreed in his ruling, echoing his statement during the hearing that the plaintiffs were trying to “have it both ways.”
“[Plaintiffs] assert Meta’s misrepresentations aided and abetted the core fraud by pushing them into scam investment groups while simultaneously maintaining that those misrepresentations were not material to their decision to purchase CLEU stock. Both cannot be true,” Seeborg wrote.
Sonal N. Mehta of Wilmer Cutler Pickering Hale and Dorr, representing Meta, had told Seeborg during the hearing that the tech giant’s motion to dismiss was a “direct consequence” of both the complaint and Seeborg’s March ruling that the plaintiffs adequately pleaded Meta materially contributed to ads used in the scheme.
Seeborg found then Meta is not immune under Section 230 of the Communications Decency Act because the plaintiffs claim the fraudulent ads were created using tools offered by Meta, including generative AI tools.
Mehta also pointed to portions of the plaintiffs’ second amended complaint describing the fraudulent ads as an “essential element” that lured victims into purchasing large amounts of the securities and as the “critical first step in the scheme.”
“If we in fact materially contributed to the advertisements, and the advertisements were material to the decision to purchase the securities, they can’t have it both ways," Mehta said. “SLUSA preempts their state law claims.”
Seeborg wrote the dismissal was without prejudice and noted the possibility of “refiling the case under federal securities laws or in some other form that is not precluded by SLUSA.”
Representatives for each party did not immediately respond to requests for comment.
The plaintiffs included users who clicked on advertisements and were added to groups on Meta-owned WhatsApp where scammers, posing as financial advisers, encouraged them to purchase shares of CLEU by predicting returns of up to 380% and promising to reimburse investors for losses.
According to the complaint, the plaintiffs were unaware the scammers secretly held hundreds of millions of shares of CLEU. When the market learned of those undisclosed holdings, the stock price collapsed, causing the plaintiffs to lose an estimated $300 million.
The plaintiffs claimed scammers used Meta’s advertising tools to target them on Instagram and Facebook with advertisements for investment clubs associated with celebrities and well-known investors, like Bank of America Merrill Lynch executive Savita Subramanian and Shark Tank’s Kevin O’Leary.
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