Facebook Whistleblower’s Claims Test SEC’s Reach

The controversy over what Facebook has said about social and emotional hazards stemming from its products could become a test of the Securities and Exchange Commission's growing interest in policing corporate risks that hurt reputations more than profits. The SEC has been communicating with attorneys for Frances Haugen, the former Facebook product manager who blew the whistle on the company’s efforts to grapple with problems it played down in public, according to John Napier Tye, a lawyer representing her. But the agency is almost certain to investigate, according to Marc Fagel, a former director of the SEC’s San Francisco office. “Given how much play this has gotten, especially with the revelation that the whistleblower went to the SEC, there is no way they are not looking at this and feeling pressure to bring some sort of case,” Fagel said.  Any securities-enforcement action would likely focus on whether the company or its executives told investors one story about known business risks or trends, while concealing worse news that they shared only internally. Any misleading statements would have to be material, meaning they could be expected to influence a trading decision or a vote on a corporate proxy ballot. The issues cited by Haugen in her allegations may be material in the eyes of regulators, but they aren’t all traditional securities-fraud claims, according to lawyers.