Meta must face most claims over ‘pump-and-dump' Chinese penny stock scheme

SAN FRANCISCO (CN) — Meta can’t dodge claims by users who say the tech giant helped scammers create knowingly fraudulent advertisements to convince users to purchase shares of a Chinese penny stock that were nearly worthless.

U.S. Chief District Court Judge Richard Seeborg advanced the majority of class action claims that 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.

The Barack Obama appointee found that Meta is not immune from the plaintiffs’ claims under Section 230 of the Communications Decency Act — which shields online businesses and social media platforms from liability for content posted by third-parties — because the plaintiffs claim the fraudulent ads at issue were made using tools offered by Meta, including generative AI tools.

“Plaintiffs have averred that Meta participated in the construction of the ads by literally generating, using artificial intelligence, the images and text in the advertisements. That degree of participation is not protected by section 230,” Seeborg wrote in the 19-page order issued Tuesday.

Seeborg also denied Meta’s motion to dismiss in part, allowing the plaintiff’s claims for aiding and abetting fraud, negligence and unjust enrichment to proceed.

The judge found that Meta “plausibly acquired knowledge” that it was aiding and abetting a fraud because of the generative AI tools used in the creation of the ads.

“At the moment a scammer asked Advantage+ Creative to generate an ad using a celebrity, a secret chat room, and the promise of unfathomable riches, there is at least a fact question on whether Meta acquired knowledge that it was aiding and abetting a fraud,” he said.

The plaintiffs include users who clicked on the ads and were added to a group on Meta-owned WhatsApp, where the scammers, posing as financial advisors, encouraged them to purchase shares of China Liberal Education Holdings Ltd., a Chinese penny stock, by predicting far-fetched returns of up to 380% and promising investors to reimburse a losses.

However, the plaintiffs did not know the scammers secretly held hundreds of millions of shares of CLEU. When the market learned of the undisclosed shares, the price per share plummeted, resulting in the plaintiffs losing an estimated $300 million, they say in their complaint.

The plaintiffs sued Meta in June, accusing the company of aiding and abetting fraud, negligence, breach of contract and violations of state discrimination law.

As for the negligence claim, Seeborg rejected Meta’s arguments that the ads in question were solely created by third parties and that Meta doesn’t have any obligation to control third parties’ behavior, describing it as a “repackaged version of its section 230 argument.”

However, the judge granted Meta’s motion to dismiss as to the plaintiffs’ contract claim, finding that Meta’s Terms of Service does not have any binding language requiring the company to take any action regarding fraud.

“To the extent the ToS even mentions Meta doing something to prevent fraud, it speaks only in aspirational terms,” he said, adding, “Meta, however, never promises to take concrete steps to effectuate that aspiration.”

He also dismissed the plaintiffs’ anti-discrimination claim, finding that they do not contend they were denied access to a business due to a protected characteristic.

The plaintiffs have 21 days from the ruling to file an amended complaint.

In a statement to Courthouse News, Andrew W. Robertson of Morris Kandino, an attorney for the plaintiffs, said that they are “pleased with Judge Seeborg’s thorough and well-reasoned decision, and we look forward to obtaining justice for victims of Meta’s scam marketing machine.”

A representative for Meta did not immediately respond to a request for comment.

Follow @mhattridge_