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SAN FRANCISCO (CN) — A federal judge said Wednesday that jurisdiction issues will likely doom two lawsuits accusing Meta of facilitating investment scams through fraudulent ads.
U.S. District Judge William H. Orrick III said he was inclined to dismiss the lawsuits following the dismissal of a similar case, Bouck v. Meta Platforms, Inc., in which Chief U.S. District Judge Richard Seeborg, a Barack Obama appointee, found the Securities Litigation Uniform Standards Act preempts the plaintiffs’ claims. Meta argued the case 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.”
“I’m inclined to follow his reasoning that SLUSA applies,” Orrick, also an Obama appointee, said. “The ‘in connection with’ element is met — injuries occurred from the devalued stock purchased in the pump-and-dump scheme. From that, I would conclude that I don’t have jurisdiction and I’d dismiss it without prejudice.”
The plaintiffs in all three cases include users who were involved in an investment scheme they say was perpetrated by organized criminal networks, the majority of which operate out of China. The plaintiffs describe identical schemes, where scammers used Meta to target victims with hundreds of ads for investment clubs that were supposedly associated with celebrities and well-known investors.
They say users who clicked on the false ads were added to groups on Meta-owned WhatsApp, where the scammers, posing as financial advisors, encouraged them to purchase shares of specific securities they predicted would have a positive return. However, the plaintiffs say the scammers secretly held large amounts of the stocks and were “pumping,” or artificially inflating the stock price, before “dumping” their shares at the inflated prices, causing the stock to lose almost all its value.
Wednesday’s hearing focused on two schemes involving Jayud Global Logistics Ltd. (JSL) and Ostin Technology Group Co., Ltd. (OST), both of which are listed on NASDAQ. The plaintiffs say the scammers held 50 million shares of JGL and more than 80 million shares of OST, resulting in an estimated loss of $500 million and $110 million, respectively, for the proposed classes once the scammers “dumped” their shares in a short time period.
Their attorney Andrew Robertson of Morris Kandinov argued the two surviving complaints should not be dismissed under SLUSA because Meta was only involved in the beginning, when the victims were lured into the scheme with the fraudulent ads, and in later stages, when the scammers made the misrepresentations that led to the purchasing of securities.
“What we’re talking about here is Meta’s role as a quasi-advertising agency. It has never been governed by federal securities law. In terms of the purpose of SLUSA … this case would have no impact on that,” he said, adding the fact that there was a scam that ultimately involved securities does not “turn Meta into an entity that is regulated by securities laws.”
Robertson also argued Meta violated its terms of service by not upholding the “guidelines and guardrails” the company has for targeted ads. However, he tried to distance the breach of contract claims from the actual investment scam itself.
“The breach of contract exposed victims to the scam, but it was the scammers who turned that into a scam involving securities,” he said.
Meta attorney Sonal Mehta of WilmerHale pushed back on the claim that Meta was only involved in the beginning of the scheme, stating the plaintiffs have repeatedly claimed a “fully integrated scheme.”
Mehta said both sets of plaintiffs say Meta was responsible for an essential element of the schemes and “Meta’s advertising tools were the primary means through which the scheme was implemented.”
“You can’t have it both ways. Either the ads Meta contributed caused the material decision to purchase the covered security, in which SLUSA applies, or they weren’t, and that is exactly what Judge Seeborg found,” she said.
As for the plaintiffs’ breach of contract claims, Mehta echoed a previous ruling from Seeborg finding Meta’s terms of service do not have any binding language requiring the company to take any action regarding fraud.
Orrick said he would issue a ruling soon.
Representatives for the parties did not immediately respond to a request for comment.
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