IN the COURT of CHANCERY of the STATE of DELAWARE EMPLOYEES' RETIREMENT SYSTEM of RHODE ISLAND, and CITY of WARWICK RETIREMENT
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EFiled: Aug 06 2021 03:33PM EDT Transaction ID 66828179 Case No. Multi-Case IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE EMPLOYEES’ RETIREMENT SYSTEM OF : RHODE ISLAND, and CITY OF WARWICK : RETIREMENT SYSTEM, : : Plaintiffs, : : v. : C.A. No. 2021-0617-JRS : (Consolidated into MARK ZUCKERBERG, SHERYL SANDBERG, : C.A. No. 2018-0307-JRS) MARC ANDREESSEN, PETER THIEL, and : PALANTIR TECHNOLOGIES INC., : ORIGINAL FILED: : July 16, 2021 Defendants, : : PUBLIC VERSION and : FILED: : August 6, 2021 FACEBOOK, INC., : : Nominal Defendant. : VERIFIED STOCKHOLDER DERIVATIVE COMPLAINT Table of Contents I. INTRODUCTION ............................................................................................. 1 II. PARTIES ........................................................................................................... 9 III. RELEVANT NON-PARTIES .........................................................................12 IV. SUBSTANTIVE ALLEGATIONS .................................................................14 A. Zuckerberg Founded And Controls Facebook .............................................14 B. Privacy Is Facebook’s Core Compliance Issue ............................................15 i. Privacy Has Always Been Facebook’s “Top Priority” And Greatest Compliance Problem ...........................................................................16 ii. Facebook Consistently Warns That The Loss Of User Trust Is A Key Risk Factor ..........................................................................................23 iii. Facebook Internally Recognizes Privacy As Its Core Compliance Issue .....................................................................................................27 C. Zuckerberg and Sandberg are Hands-On Managers Involved in Every Key Decision at Facebook ...................................................................................29 D. Zuckerberg and Sandberg Knew That It Was Critical For Facebook To Avoid Violating Users’ Privacy Rights In Their Quest To Monetize User Data ...............................................................................................................38 E. Facebook Entered Into The First FTC Agreement .......................................47 F. Zuckerberg and Sandberg Affirmatively Misled Users About Facebook’s Data Sharing .................................................................................................51 G. Zuckerberg and Sandberg Knew That Facebook’s Privacy Program Was Inadequate And Failed To Keep The Board Informed .................................63 H. Under Zuckerberg and Sandberg’s Watch, Cambridge Analytica Stole Data From Tens of Millions Of Facebook Users ..................................................84 I. Palantir Played A Significant Role In The Cambridge Analytica Breach ...94 i J. Zuckerberg and Sandberg Downplayed The Cambridge Analytica Problem After Initial Reports in 2015 ......................................................................102 K. Zuckerberg and Sandberg Continued Their Coverup In The Wake of New Reporting About Cambridge Analytica ......................................................110 i. At the Direction of Zuckerberg and Sandberg, Facebook Misled Journalists ..........................................................................................111 ii. Zuckerberg Lied To Congress ...........................................................113 L. The Company’s Stock Price Collapsed And Users Filed Suit ...................117 M. Repeat Offenders: Management’s Bad Behavior Continued .....................119 N. In The Wake Of The Cambridge Analytica Bombshell, FTC Staff Trained Their Sights On Zuckerberg .......................................................................123 O. The Board Told Management To Offer The FTC An Express Quid Pro Quo: Facebook Will Overpay If Zuckerberg Gets Off The Hook .............135 P. The Board Belatedly Established A Special Committee With A Weak Mandate, Conflicted Member, and Conflicted Counsel .............................138 Q. Negotiations Continued ..............................................................................141 R. Facebook Agreed To A Record-Setting Fine .............................................150 S. The FTC Settlement Was Unfair ................................................................157 V. DEMAND FUTILITY ...................................................................................164 A. Zuckerberg Has A History Of Pushing Out Directors And Senior Officers Who Demonstrate Independence................................................................164 B. A Majority Of The Board Could Not Give Disinterested And Independent Consideration To A Demand ......................................................................169 i. Zuckerberg ..........................................................................................169 ii. Sandberg .............................................................................................170 iii. Alford ..................................................................................................173 ii iv. Houston ...............................................................................................176 v. Kimmitt ...............................................................................................177 vi. Andreessen ..........................................................................................181 vii. Thiel ....................................................................................................189 VI. COUNTS ........................................................................................................204 iii Table of Exhibits to the Complaint Exhibit Description A Complaint filed by the FTC in connection with the First FTC Agreement B Decision and Order in connection with the First FTC Agreement C Gibson Dunn white paper sent to the FTC in February 2019 D Special Committee Report E Complaint filed by the FTC in connection with the 2019 FTC Agreement F Draft complaint sent to Facebook by the FTC in February 2019 G Complaint filed by the SEC in connection with 2019 settlement H Stipulated Order entered into by Facebook and the FTC in connection with the 2019 FTC Agreement iv I. INTRODUCTION [T]he government essentially traded getting more money, so that an individual did not have to submit to sworn testimony and I just think that’s fundamentally wrong. - Rohit Chopra Commissioner, Federal Trade Commission 1. “For many years, [Mark] Zuckerberg ended Facebook meetings with the half-joking exhortation ‘Domination!’”1 He has achieved that goal. Facebook is, by any measure, the world’s dominant social media platform. And the Company’s extraordinary power and influence rest almost entirely in the hands of Zuckerberg, its founder, Chairman, CEO, and controlling stockholder. 2. Zuckerberg founded Facebook in 2004. This was auspicious timing. The Silicon Valley ecosystem was fast recovering from the puncturing of the 1990s dot-com bubble. And it was rapidly evolving in a way that would enable Zuckerberg and other tech-savvy prodigies to build fantastic wealth at a young age without sacrificing power or control over the companies that they built. 3. The dot-com era had created extravagant wealth for many founders but cost them control of their creations through dilution or acquisitions. Now, the founders of the twentieth century were the venture capitalists of the twenty-first. 1 Evan Osnos, Can Mark Zuckerberg Fix Facebook Before It Breaks Democracy?, THE NEW YORKER (Sept. 10, 2018). 1 Determined to right the perceived wrongs of their past, these new founder-friendly- VCs—including key Facebook investors Defendants Peter Thiel and Marc Andreessen—built their brands around their widely marketed belief that founders should be able to obtain billions of dollars in outside money while maintaining autocratic control over their creations. Google’s 2004 IPO showed that technology companies could successfully go public with a dual-class share structure—allowing founders to achieve liquidity without sacrificing control. A wave of companies, including Facebook, would soon follow. 4. Thiel, Andreessen, and other adherents to the so-called “cult of the founder” were rewarded for their faith for many years. Over the last seventeen years, a herd of “unicorns”2 led by young, strong-willed CEOs have achieved remarkable success with the backing of founder-friendly venture funds. Beginning with Zuckerberg, a line of “boy kings”3 have made billions of dollars for themselves and their venture backers while maintaining ironclad control over companies that have wrought sweeping changes across our society. 5. But Lord Acton was right about the perils of absolute power. In recent years, a number of unicorns have stumbled when brilliant young creators proved 2 A “unicorn” in Silicon Valley parlance is a venture-backed company valued at a billion dollars or more. 3 See Kate Losse, THE BOY KINGS: A JOURNEY INTO THE HEART OF THE SOCIAL NETWORK (2012). 2 unequal to the task of managing mature, public companies. In several instances— most prominently, WeWork and Uber—outside directors had to remove out-of- control founders and install professional managers at the head of the company. In others, supine directors have acted as enablers and failed to impose adult supervision.4 6. Facebook and its Board have followed the latter course. Since the Company was founded, Facebook’s “platform [has been] built upon a fundamental, possibly irreconcilable