EFiled: Aug 14 2018 04:33PM EDT Transaction ID 62347665 Case No. 2018-0307-JRS IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE KAREN SBRIGLIO and FIREMEN’S : RETIREMENT SYSTEM OF ST. : LOUIS, derivatively on behalf of : Nominal Defendant FACEBOOK, INC., : C. A. No. 2018-0307-JRS : Plaintiffs, : : v. : : MARK ZUCKERBERG, SHERYL : Filed August 7, 2018 SANDBERG, MARC ANDREESSEN, : ERSKINE B. BOWLES, SUSAN : PUBLIC VERSION DESMOND-HELLMANN, REED : PURSUANT TO HASTINGS, JAN KOUM, PETER A. : CT. CH. R. 5.1 THIEL, and : PRICEWATERHOUSECOOPERS, LLP : Public Version Filed August 14, 2018 : Defendants, : : and : : FACEBOOK, INC., : : Nominal Defendant. : : : : FIRST AMENDED VERIFIED STOCKHOLDER DERIVATIVE COMPLAINT This document contains information produced by Nominal Defendant Facebook, Inc. pursuant to Section 220 of the Delaware General Corporation Law (“DGCL”) under a confidentiality agreement. 120294587_1 TABLE OF CONTENTS Page(s) TABLE OF EXHIBITS ........................................................................................... iv I. PRELIMINARY STATEMENT ............................................................................ 1 II. INTRODUCTION......................................................................................... 3 III. JURISDICTION AND VENUE .................................................................24 IV. PARTIES .....................................................................................................25 V. RELEVANT NON-PARTIES ....................................................................31 VI. THE SPECIFIC DUTIES OF FACEBOOK’S BOARD ............................32 VII. FACTUAL BACKGROUND ...................................................................388 A. Facebook’s Aggressive Business Model and Open Platform ...........388 B. Facebook’s Illusory User Agreements, Data Policies and Privacy Settings .................................................................................422 C. The Extensive Regulation of User Privacy and Facebook’s Business ...............................................................................................49 D. Individual Defendants Knew, or Were Reckless in Not Knowing, That Facebook Did Not Comply with Its Legal Obligations ..........................................................................................53 1. Facebook has a Culture of Indifference and Narrow Sense of Responsibility .............................................................53 2. Facebook was Forced to Explain a Stream of Early Privacy Abuses ..........................................................................57 3. Following Frequent, Ongoing Revelations About Facebook’s Data Privacy Practice, the FTC Takes Enforcement Action ..................................................................62 i 120294587_1 4. Following Entry of the FTC Consent Order, Facebook Continued to Violate Its Privacy Obligations .........................624 5. Facebook Operations Manager and Whistleblower Sandy Parakilas Warned Senior Executives in 2012 of the Dangers of Lax Controls Over App Developers .....................625 E. GSR and Cambridge Analytica Use Facebook Data For Political Purposes ................................................................................71 F. Individual Defendants Illegally Concealed the Cambridge Analytica Scandal ................................................................................76 1. The Guardian Reports on Cambridge Analytica’s Activities in December 2015. ...................................................76 2. After The Guardian Published the December 2015 Article, Facebook Continued to Pursue Revenue Generated Through Election Activities, Ignoring the Warnings of the Media, Investigators, Zuckerberg’s Mentor Roger McNamee, and Facebook’s Chief Security Officer Alex Stamos. ................................................................82 3. Zuckerberg Refuses to Testify Before the British Parliament. ................................................................................88 4. Individual Defendants Continue to Resist Admitting to the Public that they Concealed the Cambridge Analytica Scandal in Hearings Before the U.S. Congress. .......................95 G. Following the Revelations of Cambridge Analytica, Zuckerberg Continued to Mislead The Public ........................................................98 H. Individual Defendants Knowingly Made False and Misleading Public Statements Regarding Facebook’s Privacy Practices ............108 I. Defendants Koum, Zuckerberg, and Sandberg Sold Facebook Shares Based on Their Knowledge of Material, Non-Public Information ........................................................................................127 J. Individual Defendants Consciously Disregarded Their Duties ........133 ii 120294587_1 K. Defendant PwC Aided and Abetted Individual Defendants’ Breaches of Fiduciary Duties ............................................................137 L. Defendants’ Misconduct Has Harmed Facebook ..............................147 VIII. DERIVATIVE ALLEGATIONS ..............................................................151 A. Demand on Facebook’s Board Would Have Been Futile .................152 B. The Board Lacks Independence ........................................................152 C. The Majority of the Board is Subject to Substantial Risk of Personal Liability ..............................................................................159 IX. LEGAL COUNTS .....................................................................................164 COUNT I – BREACH OF FIDUCIARY DUTY (AGAINST DEFENDANT ZUCKERBERG).......................................................164 COUNT II – BREACH OF FIDUCIARY DUTY (AGAINST ALL INDIVIDUAL DEFENDANTS OTHER THAN DEFENDANT ZUCKERBERG)...........................................................................165 COUNT III – BREACH OF FIDUCIARY DUTY (AGAINST INDIVIDUAL DEFENDANTS ZUCKERBERG AND SANDBERG) .........................................................................................................166 COUNT IV – AIDING AND ABETTING ............................................................168 COUNT V – BREACH OF FIDUCIARY DUTY OF DISCLOSURE (AGAINST INDIVIDUAL DEFENDANTS) .......................................................170 COUNT VI – INSIDER TRADING (AGAINST DEFENDANTS ZUCKERBERG, SANDBERG, AND KOUM) ...1711 COUNT VII - CONTRIBUTION OR INDEMNIFICATION (AGAINST ALL INDIVIDUAL DEFENDANTS) ..............................................172 PRAYER FOR RELIEF ........................................................................................173 iii 120294587_1 TABLE OF EXHIBITS Exhibit Document Description Page(s) 1 Ex. A FTC Consent Order, dated 7.27.2012 6, 52, 63 2 Ex. B 12.11.2015, Ted Cruz campaign using firm that 6 harvested data on millions of unwitting Facebook users _ US news _ The Guardian 3 Ex. C Letter from Senator Blumenthal to FTC, 8, 66 4.19.2018 4 Ex. D GSR and Facebook Confidential Settlement 9 Agreement & Mutual Release and Certifications 5 Ex. E The Guardian and New York Times March 17, 10, 73 2018 6 Ex. F Zuckerberg Opening Statement to Senate 11, 38 Committee, April 10, 2018 7 Ex. G Transcript of Mark Zuckerberg Senate hearing, 11, 42 4.10.2018 8 Ex. H Transcript of Zuckerberg appearance before 11, 80, 101 House committee 4.11.2018 9 Ex. I Utterly horrifying_ ex-Facebook insider says 17,19, 67, 91 covert data harvesting was routine _ News _ The Guardian 10 Ex. J 2015-2017 PwC Report on Facebook's Privacy 18 Program 11 Ex. K Copy of Andrew Bosworth Memo, dated 56 6.18.2016 12 Ex. L Facebook Data Policy, as of Dec. 11, 2015 47 13 Ex. M Facebook Data Policy, April 19, 2018 48 14 Ex. N Facebook's 2018 Proxy Statement 123, 170 15 Ex. O Zuckerberg Insider Sales Table 130 16 Ex. P Sandberg Insider Sales Table 132 17 Ex. Q Koum Insider Sales Table 132 18 Ex. R 2012-2013 PwC Report on Facebook's Privacy 141 Program 19 Ex. S 2013-2015 PwC Report on Facebook's Privacy 141 Program 20 Ex. T Facebook -- 2018 Proxy -- SUPP 121, 170 iv 120294587_1 I. PRELIMINARY STATEMENT Plaintiffs Firemen’s Retirement System of St. Louis (“FRS”) and Karen Sbriglio (collectively, the “Plaintiffs”) derivatively on behalf of nominal defendant Facebook, Inc. (“Facebook” or the “Company”), bring the following Amended Verified Derivative Complaint against Facebook’s Chief Executive Officer (“CEO”) and Chairman of its board Mark Zuckerberg (“Zuckerberg”), Chief Operating Officer (“COO”) and director Sheryl Sandberg (“Sandberg”), and directors Marc Andreessen (“Andreesen”), Erskine S. Bowles (“Bowles”), Susan Desmond-Hellmann (“Desmond”), Reed Hastings (“Hastings”), Jan Koum (“Koum”), and Peter Thiel (“Thiel”) (collectively “Individual Defendants”), for breaching fiduciary duties that they owed to the Company and to its shareholders, and also bring claims against PricewaterhouseCoopers, LLP (“PwC”) for aiding and abetting in several of these breaches of fiduciary duty. Except for the allegations specifically pertaining to Plaintiffs and Plaintiffs’ own acts, the allegations in this Complaint are based on information and belief. Shareholder Plaintiffs, by and through their attorneys, derivatively on behalf of Facebook, allege upon personal knowledge as to themselves and their own acts, and upon information and belief as to all other matters, based upon, inter alia, the investigation conducted by and through their attorneys, which included, among other things: 1 120294587_1 • Exposé newspaper articles; • Transcripts of