Lawsuit against Meta invokes modern portfolio theory to protect shareholders

This seems totally insane to me. The lawsuit is arguing that directors not only have a fiduciary responsibility to shareholders to increase the value of their Meta holdings, but also of <i>other</i> stocks they may own.<p>The consequences of that line of thinking are scary. I&#x27;m sure the vast majority of shareholders of most US companies own ICE cars. If a company decides to put a lot of effort into, for example, cheaper batteries, could shareholders sue because the company is devaluing an asset most of them own?<p>This totally smells like a lawyer trying a random, BS theory in the hope that something &quot;sticks&quot; in order to make their mark.

Anyone who invested in Facebook directly (rather than via a managed or exchange-traded fund of some sort) did so with the expected awareness that all the voting stock was controlled by Zuckerberg personally. Effectively, FB is a corporate dictatorship and it&#x27;s hard to have sympathy for people who put money into it during the good times and are now surprised to discover that they made a bad investment decision.<p><a href="https:&#x2F;&#x2F;www.morningstar.com&#x2F;articles&#x2F;1061237&#x2F;how-facebook-silences-its-investors" rel="nofollow">https:&#x2F;&#x2F;www.morningstar.com&#x2F;articles&#x2F;1061237&#x2F;how-facebook-si...</a><p>Suing Zuckerberg on the basis that FB has made the world a worse place is one thing, suing him on the basis that a corporate dictatorship has disrupted their portfolio is a joke. They&#x27;d be better off suing the SEC or FTC for failure to regulate effectively.

I&#x27;m just a two-bit software engineer and not a lawyer but I&#x27;ll go against the general flow of the rest of the posts here and say &quot;this is interesting.&quot; Whether or not it will work is another question, but it seems like they are trying to establish some precedent that companies need to consider the downstream impacts of the things they do.<p>I see posters here brushing off talk about mental health and political impacts from decisions corporate directors make. Well if there is a measurable harm that can be traced back to a given company why shouldn&#x27;t they be sued?<p>It&#x27;s a meme, but we live in a society. Companies don&#x27;t exist in isolation, neither do profits.

Interesting and disturbing. They are making an argument that Facebook&#x2F;Meta is harmful to the global economy because it cant do [impossible task] of moderating its 3.5 billion users to stifle [unwanted behavior]. And because of that, their decisions are negatively impacting the modern investors distributed portfolios.<p>Because Mark Z. is not diversified (wealth is in Meta) and has total control over the company, his decisions create a conflict of interest to the modern investor.<p>Yet the article doesnt mention how his decisions directly impacted the economy. Maybe the lawsuit does, but Im not going to read that...<p>&gt;the fiduciary implication of the fact that modern investors are generally diversified, so that their interests extend beyond (and may be in opposition to) the maximization of the value of future cash flows to be received from owning a company’s shares.<p>So it&#x27;s fighting monopolistic behavior?

The lawsuit doesn&#x27;t argue that Facebook actions hurt specific portfolios from their shareholders.<p>It claims that it hurt a typical diversified portfolio. One that FB shareholders should have, according to the Modern Portfolio Theory (MPT). It notes that the MPT is not only commonly accepted, it is in fact used to write laws and regulations: &quot;Before the advent of MPT, “legal lists” prohibited many fiduciaries from owning common stock&quot;.<p>So if the MPT is indeed a cornerstone of modern economics, and modern laws, the natural conclusion is that it should be considered when looking at the fiduciary consequences of a company decision.<p>Facebook case shows the problem very clearly, because both of the scale of the impact of the company on the World in general, and the structure of its governance, where the majority vote holder interests are not diversified, which makes them diverge significantly from all the other shareholders interests.<p>As I understand it, it&#x27;s a bit of legal jiu-jitsu: it takes the MPT, which so far has been used to allow more actors to invest in stocks, and so accepted readily by business and legal actors. It then uses it to extend the responsibility of companies to some externalities.<p>It may or may not succeed, but it doesn&#x27;t seem completely insane. At the very least the discovery process could be used to show to which extend Facebook knows about features that have a clearly negative effect on society in general, and chooses to implement them anyway.

&quot;Distinguishing the Complaint From Models Based on Either Stakeholder or Enterprise Value<p>It is important to note two things that the complaint does not claim. First, it does not claim that stakeholders (e.g., users of its platforms or citizens of destabilized countries) are owed fiduciary duties, or that harm to these stakeholders in and of itself constitutes a fiduciary breach.<p>Secondly, the complaint does not allege that this conduct was bad for Meta’s own finances.<p>Instead, the complaint alleges that the conduct revealed by Haugen threatens the global economy, and consequently the portfolios of the Company’s diversified shareholders. The complaint explains:<p>Meta is the largest social media network company in the world, with 3.5 billion users—43% of humanity. Its business decisions inevitably create financial impact well beyond its own cash flows and enterprise value and have significant impacts on the global economy. While defendants have a duty to operate the Company as a business for the financial benefit of its stockholders, those stockholders are often diversified investors with portfolio interests beyond Meta’s own financial success.<p>If the decisions that maximize the Company’s long-term cash flows also imperil the rule of law or public health, the portfolios of its diversified stockholders are likely to be financially harmed by those decisions.&quot;&quot;

Honestly, the whole business of shareholders suing companies is a bit crazy given they were also the beneficiary of any ill-gotten gains and, ultimately, any damages come out of the share price.<p>I realize in this case it&#x27;s effectively one subset if shareholders trying to get paid at the expense of other shareholders but it feels like there should be a higher bar for this type of litigation.

In simple terms, investors are suing because even though they might have made a boatload of cash from their investments in Meta, they ended up with a net loss overall because what Meta did to pump up the stock value ended up destroying the value of a lot of other things the investors had in their portfolios.

Everything is securities fraud and everything is insider trading - Levine

Can litigious shareholders be countersued for the financial harm caused by self-litigating?

While I like the idea that a company has a duty to the wider marketplace, the construction using diversified portfolios is more creative than convincing. Problem is, that we can easily construct portfolios that react in a specific way to actions. In the example with promotion of mental health issues we may wonder how the bottom line of clinics of chocolate manufacturers is impacted by trying to avoid mental health issues.

It looks coherent with internalization of negative externalities but actually proving that is an econometrics mindfuck.

Hopefully the case gets summarily tossed for lack of standing. The idea that one company&#x27;s decisions would have such tangible and personally-harmful (to &quot;my portfolio&quot;) effects due to &quot;negative political rhetoric, while facilitating ethnic cleansing, drug cartels, modern slavery, and vaccine disinformation&quot; would open up every company to diffuse claims of responsibility.

Stop! Please think of the impact articles like this will have on Matt Levine.

I can&#x27;t speak to the legalese, but on the surface the complaint sounds ridiculous.<p>&gt; The complaint alleges that the Meta directors failed to consider that shareholders with diversified portfolios may be subject to net losses from Meta’s pursuit of a business model that maximizes advertising revenue without regard to the harms it inflicts on the rest of their portfolios. In particular, the complaint identifies press reports establishing that the company knew that its conduct was leading to mental health issues for millions of users and increasingly negative political rhetoric, while facilitating ethnic cleansing, drug cartels, modern slavery, and vaccine disinformation. These activities pose risks to political stability, public health, and rule of law, threatening the intrinsic value of the global economy and thus the value of diversified portfolios.<p>Is there any company in existence that would clear this bar?

This is America. Garbage piled on garbage. With lawyers collecting fees all the way.