WEBVTT - States Sue Meta Over Addictive Features Targeting Youth 0:00:03.200 --> 0:00:08.000 This is Bloomberg Law with June Grosso from Bloomberg Radio. 0:00:10.360 --> 0:00:14.440 So today we're announcing a federal lawsuit against Meta. Met 0:00:14.520 --> 0:00:17.960 of course, is the parent company of Instagram and Facebook, 0:00:18.320 --> 0:00:22.360 for knowingly harming the mental health of young social media users. 0:00:23.280 --> 0:00:27.040 Meta Platforms is being sued by forty one states who 0:00:27.080 --> 0:00:32.239 claimed that social media platforms Instagram and Facebook exploit young 0:00:32.360 --> 0:00:36.000 people for profit by building an addictive features that are 0:00:36.040 --> 0:00:38.720 harming their mental health. At a press conference of the 0:00:38.760 --> 0:00:43.440 Attorney General of Washington State, Bob Ferguson, two teenagers described 0:00:43.479 --> 0:00:47.400 their struggles coping with social media sites like Instagram. 0:00:47.800 --> 0:00:51.560 The worst part was these pictures and videos were never ending. 0:00:52.120 --> 0:00:55.400 The addictive algorithm and the constant flood of new content 0:00:55.680 --> 0:00:58.200 kept me glued to my phone, and before I knew it, 0:00:58.720 --> 0:01:00.360 I began to hate myself and. 0:01:00.320 --> 0:01:01.040 The way I looked. 0:01:02.320 --> 0:01:04.080 This all happened before I. 0:01:04.000 --> 0:01:08.960 Turned thirteen, as I would go on my phone intending 0:01:09.080 --> 0:01:12.759 to do other things and then instinctively start opening up Instagram, 0:01:12.880 --> 0:01:17.440 opening up different social media platforms without even meaning to, 0:01:17.680 --> 0:01:20.679 and then getting stuck in the cycle of scrolling seeing 0:01:20.720 --> 0:01:23.200 other people's lives and interactions. 0:01:23.520 --> 0:01:27.840 Ferguson said, Meta knowingly misled users and hooked youngsters with 0:01:28.040 --> 0:01:31.240 psychologically manipulative product features. 0:01:31.319 --> 0:01:34.559 They tap into their so called fear of missing out, 0:01:34.959 --> 0:01:37.679 discouraging them from leaving the apps once they are logged on. 0:01:38.680 --> 0:01:42.040 Meta is aware of the addictive nature of these features 0:01:42.040 --> 0:01:45.560 for young people and the risks that they pose. The 0:01:45.600 --> 0:01:50.000 original developer of the infinite scroll concept Liken the feature too, 0:01:50.240 --> 0:01:53.080 and I'm quoting now behavioral cocaine. 0:01:53.320 --> 0:01:56.640 Thirty three states are filing a joint lawsuit in federal 0:01:56.720 --> 0:02:00.800 court in California, while attorneys general for d and eight 0:02:00.840 --> 0:02:04.560 other states are filing separate complaints in federal, state or 0:02:04.640 --> 0:02:09.440 local courts. Joining me is Bloomberg Intelligence analyst Matthew Shettenhelm. 0:02:09.800 --> 0:02:11.760 Matt tell us about the federal lawsuit. 0:02:12.160 --> 0:02:19.239 So yesterday over thirty states filed in federal court in California, 0:02:19.280 --> 0:02:25.640 basically using their consumer protection laws under each states and 0:02:25.720 --> 0:02:30.160 accompanying that with one claim under federal law under the 0:02:30.960 --> 0:02:35.120 Children Online Privacy Protection Act, which is known as KAPPA. 0:02:35.720 --> 0:02:40.880 And basically the allegation here is that Meta acted in 0:02:40.960 --> 0:02:46.720 an unfair and deceptive manner because it knew that its 0:02:46.880 --> 0:02:53.079 social media service was harmful to teens, but it withheld 0:02:53.360 --> 0:02:58.400 that knowledge and misled users and proceeded to deliver its 0:02:58.480 --> 0:03:04.399 product to teens anyway. So it's seeking damages, civil penalties 0:03:04.760 --> 0:03:08.320 as well as injunctive relief, basically forcing the company to 0:03:08.520 --> 0:03:12.520 change how it serves teams. That's the goal of the lawsuit. 0:03:13.000 --> 0:03:18.600 And so what they're alleging is that Meta designed algorithms. 0:03:19.160 --> 0:03:22.519 It says Meta did not disclose that its algorithms were 0:03:22.560 --> 0:03:27.600 designed to capitalize on young users, dopamine responses, and create 0:03:27.639 --> 0:03:31.680 an addictive cycle of engagement. So the allegation is that 0:03:31.840 --> 0:03:34.400 Meta specifically designed an algorithm for this. 0:03:34.920 --> 0:03:37.920 That's exactly right. So the lawsuit takes aim at a 0:03:38.000 --> 0:03:41.920 number of features that are sort of fundamental to how 0:03:42.080 --> 0:03:47.400 Meta designed its social media platforms, using data about the 0:03:47.480 --> 0:03:51.840 teams to send them content that keeps them scrolling and 0:03:51.960 --> 0:03:56.080 keeps them reading, sending them notifications that keep them coming 0:03:56.120 --> 0:03:58.600 back to the service as soon as they look away 0:03:58.640 --> 0:04:02.480 from it, using the law like system that entices them 0:04:02.520 --> 0:04:04.800 and draws them in and pushes them to put more 0:04:04.920 --> 0:04:09.640 content out there. And the allegation here is that Meta 0:04:09.800 --> 0:04:14.000 knew that all of these features were harmful to teams. 0:04:14.000 --> 0:04:17.400 There's a separate lawsuit actually in this same federal court 0:04:17.680 --> 0:04:21.320 that goes to the design of the product itself and 0:04:21.360 --> 0:04:25.719 whether that violates product liability law or whether Facebook was 0:04:25.800 --> 0:04:29.279 negligent in designing it. Actually, this Friday, that's going to 0:04:29.320 --> 0:04:32.600 be go for emotion to dismiss hearing. This suit's a 0:04:32.640 --> 0:04:36.760 little bit different. It's not about the design itself. It's 0:04:36.800 --> 0:04:41.000 about did Meta lie? Did it mislead users about that? 0:04:41.440 --> 0:04:44.799 And so it takes same It uses these existing consumer 0:04:45.040 --> 0:04:48.560 protection laws about what is unfair and what is deceptive 0:04:49.000 --> 0:04:53.680 to ask did Facebook mislead the public about what it knew? 0:04:53.920 --> 0:04:58.240 And a lot of this is based on the whistleblower 0:04:58.480 --> 0:05:01.599 who released internal Dyes documents in twenty twenty one. 0:05:02.040 --> 0:05:04.039 Yeah, I think that's the real start of this, when 0:05:04.040 --> 0:05:08.200 Francis Hoggin came out with her release of the internal 0:05:08.240 --> 0:05:13.760 documents suggesting that that Facebook knew more about the risk 0:05:14.560 --> 0:05:18.680 to children than it was letting on. And so this 0:05:18.880 --> 0:05:22.640 is really you been playing out ever since that moment. Now, 0:05:22.680 --> 0:05:27.280 Facebook disputes her allegations and says that they're overblown and 0:05:27.279 --> 0:05:30.720 that the evidence isn't clearly as one sided as it 0:05:31.120 --> 0:05:34.359 might seem or as she might suggest. So that's the 0:05:34.440 --> 0:05:37.480 sort of allegation that would be tested in this case 0:05:37.600 --> 0:05:39.760 if it gets past a motion to dismiss. 0:05:40.080 --> 0:05:43.600 Metta said, we share the Attorney General's commitment to providing 0:05:43.640 --> 0:05:48.520 teens with safe, positive experiences online and have already introduced 0:05:48.640 --> 0:05:52.080 over thirty tools to support teens and their families. Do 0:05:52.080 --> 0:05:53.719 you know what kind of tools they're talking about. 0:05:54.000 --> 0:05:56.800 I think these are features like there are settings that 0:05:57.320 --> 0:06:01.040 teens can put on the product to turn off after 0:06:01.880 --> 0:06:04.320 so many minutes on the product. I think there are 0:06:04.560 --> 0:06:07.440 a handful of features like that that they have added. 0:06:07.520 --> 0:06:10.120 You can turn off if you go into the settings, 0:06:10.160 --> 0:06:12.919 you can turn off the data that is used about 0:06:12.960 --> 0:06:16.240 you for ads. I think as a practical matter, these 0:06:16.279 --> 0:06:19.640 features may not be used all that frequently. I know 0:06:19.760 --> 0:06:24.360 my teenager doesn't jump to find those features, and I 0:06:24.400 --> 0:06:27.839 suspect that's true of many many other teams as well. 0:06:27.920 --> 0:06:31.880 So I think the negotiation here before this lawsuit was filed, 0:06:32.000 --> 0:06:35.039 was trying to push the states, likely trying to push 0:06:35.080 --> 0:06:39.200 Meta to find more features and more effective features. And 0:06:39.279 --> 0:06:42.240 I think eventually, if you saw this lawsuit settle, you 0:06:42.320 --> 0:06:45.480 might see a push for even more in that direction, 0:06:46.000 --> 0:06:50.440 more effective features to discourage the use of the network 0:06:50.680 --> 0:06:52.440 so frequently by young users. 0:06:52.560 --> 0:06:55.480 Would they have to actually change the algorithm? Would Meta 0:06:55.560 --> 0:06:57.040 have to change its algorithm? 0:06:57.440 --> 0:07:01.080 That's the question. It starts to become maybe a difficult 0:07:01.080 --> 0:07:04.599 solution because, as we've talked about, this is really focused 0:07:04.600 --> 0:07:07.320 on young users. And is there even a way for 0:07:07.440 --> 0:07:11.480 the company to tailor a fix that changes the algorithm 0:07:11.720 --> 0:07:15.720 just for teens. I don't know. That's probably part of 0:07:15.760 --> 0:07:19.200 the conversation, and it has a technical component that probably 0:07:19.240 --> 0:07:20.360 makes it tricky as well. 0:07:20.680 --> 0:07:23.920 Yeah, because I was listening at the press conference by 0:07:24.000 --> 0:07:29.400 the Washington a G he had two teenagers talk about this, 0:07:29.680 --> 0:07:33.640 and they were so self aware of what was happening, 0:07:34.000 --> 0:07:37.840 and yet they still couldn't get away from it. Listen 0:07:37.880 --> 0:07:40.840 to the things that one of the teenagers tried. 0:07:41.520 --> 0:07:44.080 I've done a lot of different methods to try to 0:07:44.080 --> 0:07:48.720 prevent engagement with Instagram. I've created time limits, I've created 0:07:48.760 --> 0:07:51.040 like an app that you have to open first to 0:07:51.120 --> 0:07:55.720 breathe and then to engage with Instagram. But all of 0:07:55.760 --> 0:07:58.920 these methods eventually fail because I understand that it's up 0:07:58.920 --> 0:08:03.560 to my own discretion and the promise of gaining connection 0:08:03.760 --> 0:08:08.280 with my peers owas seems to be more important. 0:08:09.320 --> 0:08:12.280 Yeah, I mean, I think that's the allegation that it's 0:08:12.360 --> 0:08:16.840 so inviting and so difficult for young users to look away, 0:08:17.640 --> 0:08:21.120 that the companies need to make changes here. Now, it's 0:08:21.120 --> 0:08:24.200 sort of a tricky First Amendment problem here. I mean, 0:08:24.720 --> 0:08:28.000 in the media, there's always been allegations about, you know, 0:08:28.080 --> 0:08:30.440 the next form of media and the harm that it's 0:08:30.480 --> 0:08:32.360 causing to you. So you can go back to the 0:08:32.440 --> 0:08:35.559 nineteen seventies and the Federal Trade Commission was going to 0:08:35.640 --> 0:08:41.120 go after advertising to kids that made them eat onhealthy things, 0:08:41.160 --> 0:08:43.640 and there was a big to do over that, and 0:08:44.040 --> 0:08:48.319 ultimately that sort of fizzled as well. And so you wonder, 0:08:48.760 --> 0:08:51.680 especially in light of the serious First Amendment arguments that 0:08:51.880 --> 0:08:54.400 Meta is going to make to say, look, we have 0:08:54.520 --> 0:08:58.200 the right to organize speech on our platform and to 0:08:58.240 --> 0:09:01.160 make it enticing, to make it, you know, so useful 0:09:01.280 --> 0:09:04.839 and engaging for our users. That's sort of a fundamental 0:09:04.880 --> 0:09:08.120 First Amendment right. What they can't do is mislead about it. 0:09:08.200 --> 0:09:10.360 So that's what if we get right back down to 0:09:10.400 --> 0:09:13.360 the key legal element here is did they mislead? Did 0:09:13.400 --> 0:09:16.920 they know something and then tell the world the opposite. 0:09:17.080 --> 0:09:19.439 Coming up next on the Bloomberg Law Show, I'll continue 0:09:19.440 --> 0:09:23.960 this conversation with Bloomberg Intelligence analyst Matthew Shettenhelm, and we'll 0:09:23.960 --> 0:09:27.560 talk about emotion for summary judgment that's coming up this week. 0:09:28.040 --> 0:09:32.199 In some other lawsuits against social media platforms, I'm June 0:09:32.200 --> 0:09:36.760 Grosso and this is Bloomberg. The Attorney General for Washington State, 0:09:36.920 --> 0:09:41.120 Bob Ferguson, is one of the forty one state ags 0:09:41.240 --> 0:09:46.520 suing Meta platforms, claiming Instagram and Facebook exploit young people 0:09:46.559 --> 0:09:50.439 for profit by building an addictive features that are harming 0:09:50.480 --> 0:09:51.440 their mental health. 0:09:51.800 --> 0:09:54.080 Not only did Meta know the risks these features posed 0:09:54.120 --> 0:09:57.480 to children and teens, the company's own research demonstrate the 0:09:57.520 --> 0:10:00.359 potential for psychological and physical. 0:10:00.559 --> 0:10:04.880 I've been talking to Bloomberg Intelligence analyst Matthew Shettenhelm, and 0:10:05.160 --> 0:10:12.720 our children or teenagers particularly attractive demographic for businesses and advertisers. 0:10:13.280 --> 0:10:16.440 Yeah, I think it's it's important for the company to 0:10:16.960 --> 0:10:21.679 facilitate engagement in young users because young users look at 0:10:21.840 --> 0:10:25.920 they are important a source for advertisers to go after, 0:10:26.559 --> 0:10:29.880 and young users grow up to be older users, and 0:10:29.960 --> 0:10:33.080 so that the more you can engage them at a 0:10:33.120 --> 0:10:36.520 young age, that only makes them, you know, use the 0:10:36.520 --> 0:10:39.679 product more in later years. So I do think it's 0:10:39.720 --> 0:10:42.679 an important demographic now. Metas pushed back on that a 0:10:42.679 --> 0:10:46.240 little bit and said, it really maybe isn't a large 0:10:46.240 --> 0:10:50.160 goal to keep youthful users on the service for you know, 0:10:50.400 --> 0:10:52.280 extended amounts of times. I think that's going to be 0:10:52.320 --> 0:10:55.120 an issue in this case is how much has Meta 0:10:55.200 --> 0:10:57.720 said that that is or is not a goal to 0:10:57.800 --> 0:11:00.840 keep young users spending time the platform. 0:11:01.240 --> 0:11:05.320 The suit also accuses Meta of violating the Children's Online 0:11:05.360 --> 0:11:06.760 Privacy Protection. 0:11:06.440 --> 0:11:08.640 Act right so that you know, I almost read it 0:11:08.679 --> 0:11:10.560 like a throw in. They kind of throw that in 0:11:10.600 --> 0:11:12.400 at the back of the suit maybe to get this 0:11:12.480 --> 0:11:15.800 into federal courts, because all these other things are state 0:11:15.960 --> 0:11:19.160 law claims that you would think maybe would be brought 0:11:19.360 --> 0:11:21.840 state by state in their own courts. By having a 0:11:21.880 --> 0:11:24.960 federal claim in there, then you say, all these other 0:11:25.000 --> 0:11:27.440 state claims are sort of supplemental to it, and so 0:11:27.920 --> 0:11:30.320 one federal court should take the whole thing at one time. 0:11:30.360 --> 0:11:32.760 But the federal claim focuses on the idea that for 0:11:33.000 --> 0:11:36.720 the youngest users, those under thirteen, this federal law says 0:11:36.720 --> 0:11:40.040 you have to have the parents make the decision about 0:11:40.160 --> 0:11:43.480 whether the kids' data can be used for ad targeting 0:11:43.480 --> 0:11:45.880 and have to get their consent and the allegation here 0:11:45.960 --> 0:11:49.400 is that Facebook knew that some of these users were 0:11:49.480 --> 0:11:54.920 under thirteen years old, and it nevertheless let them use 0:11:54.960 --> 0:11:57.800 the system without getting proper parental approval. 0:11:58.160 --> 0:12:01.480 My daughter is well paid the teenage years. So let 0:12:01.480 --> 0:12:03.680 me ask you this. When there are these rules that 0:12:03.880 --> 0:12:07.800 you have to get parental permission, how is that implemented 0:12:07.920 --> 0:12:10.400 when you're online. 0:12:10.520 --> 0:12:14.040 I mean, it's a problem with this law too in 0:12:14.080 --> 0:12:17.719 one other sense as well, that it only applies. Facebook 0:12:17.760 --> 0:12:21.880 only is vulnerable to the law if it knows it 0:12:22.080 --> 0:12:27.160 knowingly allows users under thirteen to go on the site. 0:12:27.320 --> 0:12:29.320 And so that's the first problem that a lot of 0:12:29.360 --> 0:12:32.760 times kids are going on and filling this in. And 0:12:32.800 --> 0:12:35.679 as long as Facebook doesn't know that the kids are 0:12:35.720 --> 0:12:39.680 going on below age thirteen without getting parental approval, then 0:12:39.920 --> 0:12:44.880 it's at least theoretically protected from liability. But otherwise I 0:12:44.880 --> 0:12:47.800 think there's sort of a notification process where once you 0:12:47.920 --> 0:12:51.120 fill in that hey, I'm younger than thirteen years old, 0:12:51.679 --> 0:12:54.520 then there's going to be pop up screens that require 0:12:54.679 --> 0:12:57.920 a second level of approvals and sign off from a parent. 0:12:58.360 --> 0:13:01.240 But if the kid misleads in that first answer to 0:13:01.280 --> 0:13:04.240 the question, that's where it gets kind of tricky. 0:13:04.880 --> 0:13:07.800 When I first heard about this lawsuit, I thought, well, 0:13:07.840 --> 0:13:10.240 there have been other lawsuits like this, right, I keep 0:13:10.280 --> 0:13:13.720 hearing about lawsuits against platforms. What happens to them? 0:13:14.120 --> 0:13:17.800 Yeah, So this is just one piece of a much 0:13:18.040 --> 0:13:21.840 larger sort of legal puzzle I think here on exactly 0:13:21.920 --> 0:13:24.280 this issue. So you know, as I said, there's this 0:13:24.520 --> 0:13:28.439 other lawsuits that is going ahead Friday of this week 0:13:28.640 --> 0:13:31.800 in the Northern District of California that says, look, social 0:13:31.880 --> 0:13:35.560 media itself is a defective product and the companies are 0:13:35.679 --> 0:13:38.439 negligent just by putting it out there exactly for these 0:13:38.440 --> 0:13:41.680 features we talked about, you know, in facilitating engagement of 0:13:41.720 --> 0:13:44.800 youth and the harm it and inflicts on you know, 0:13:45.040 --> 0:13:48.920 mental health for youth across the country. Is that itself 0:13:49.200 --> 0:13:52.760 defective And so that suit's going to play out. As 0:13:52.760 --> 0:13:56.320 we've talked about before, there's this liability shield Section two 0:13:56.360 --> 0:14:01.520 thirty liability shield. Usually Facebook didn't face lawsuit for bad 0:14:01.559 --> 0:14:04.600 stuff on its system because of the liability shield. Increasingly 0:14:04.640 --> 0:14:08.040 courts are reading that real narrowly and so these cases 0:14:08.080 --> 0:14:11.360 can move ahead in a way that they hadn't before. 0:14:11.960 --> 0:14:15.280 The Federal Trade Commission is going after Meta on its 0:14:15.320 --> 0:14:18.360 targeting of youth. So it's really it's a storm here 0:14:18.640 --> 0:14:21.320 on multiple levels. And the real elephant in the room 0:14:21.480 --> 0:14:24.240 is what's Congress going to do about it. Congress hasn't 0:14:24.280 --> 0:14:28.200 been able to pass a law restricting the use of 0:14:28.520 --> 0:14:32.280 data from kids or advertising to kids, and so the 0:14:32.880 --> 0:14:35.880 real question is is Congress going to be able to 0:14:35.880 --> 0:14:39.440 step in with something here? In the meantime, this is 0:14:39.680 --> 0:14:42.920 an effort to use existing old law to try to 0:14:42.960 --> 0:14:45.280 go after these companies, and that's often not easy. So 0:14:45.360 --> 0:14:48.280 I think the companies can win these cases, fight this 0:14:48.360 --> 0:14:50.800 stuff off, although I mean it's not easy. It can 0:14:50.880 --> 0:14:52.320 be difficult. In a lot of cases. 0:14:52.600 --> 0:14:55.080 It seems like meta it's part of the cost of 0:14:55.120 --> 0:14:59.440 doing business. It's been fighting with the Federal Trade Commission for. 0:14:59.320 --> 0:15:02.840 How long exactly right. It did a five million dollars 0:15:02.960 --> 0:15:06.640 settlement on its data issues is part of the Cambridge 0:15:06.680 --> 0:15:10.160 Analytica matter, and that hasn't been the end of the story. 0:15:10.280 --> 0:15:12.880 Now under Lena Khan, the Federal Trade Commission is trying 0:15:12.920 --> 0:15:16.760 to reopen that settlement and ban exactly what we're talking 0:15:16.800 --> 0:15:20.400 about here, the use of data to advertise to kids. 0:15:20.680 --> 0:15:22.680 There was a court hearing I went to in Washington, 0:15:23.240 --> 0:15:26.440 I think just last week on exactly that question, can 0:15:26.480 --> 0:15:30.520 the FTC ban that just by reopening the twenty twenty settlement. 0:15:30.640 --> 0:15:33.880 So this is part of life for a company like 0:15:34.000 --> 0:15:37.800 Meta these days. And these are lawsuits that are difficult, 0:15:37.840 --> 0:15:40.440 but there are lawsuits that you know, you're applying old 0:15:40.560 --> 0:15:43.880 law to new technology, and their lawsuits that often I 0:15:43.880 --> 0:15:46.360 think the companies can win, but it's not always going 0:15:46.400 --> 0:15:46.880 to be easy. 0:15:47.160 --> 0:15:49.640 You know, I'm surprised that Congress hasn't been well. I'm 0:15:49.640 --> 0:15:54.080 not surprised surprised that Congress hasn't been able to do 0:15:54.160 --> 0:15:57.360 something about, you know, the young users, because you know, 0:15:57.440 --> 0:16:02.040 with this lawsuit, you have bipartisan attorneys general from blue 0:16:02.080 --> 0:16:05.640 states and red states and purple states joining together to 0:16:05.760 --> 0:16:09.240 sue Meta. So it's surprising that Congress can't get together. 0:16:09.560 --> 0:16:12.440 That's a great point. And there is a law piece 0:16:12.480 --> 0:16:15.760 of legislation that has advanced in Congress known as the 0:16:15.880 --> 0:16:19.720 Kids Online Safety Act, and it has over forty co 0:16:19.920 --> 0:16:24.520 sponsors in the Senate. Right now, it's just so difficult 0:16:24.760 --> 0:16:27.400 for Congress to agree on anything. I mean, right now 0:16:27.440 --> 0:16:30.560 they're struggling just to agree on who their leaders will be. 0:16:31.280 --> 0:16:35.160 And you know, all of these proposed laws have just 0:16:35.280 --> 0:16:39.080 struggled to advance very far. But you're exactly right. This 0:16:39.200 --> 0:16:42.880 has bipartisan support, and as I said that Kids Online 0:16:42.920 --> 0:16:46.080 Safety Act, you know, it probably has a better chance 0:16:46.360 --> 0:16:49.400 than most pieces of legislation. So you could see some 0:16:49.560 --> 0:16:51.960 movement there if Congress can get attacked together. 0:16:52.440 --> 0:16:57.760 Also, I mean TikTok I always thought was the most 0:16:57.760 --> 0:17:00.040 addictive of these platforms for. 0:17:00.160 --> 0:17:04.200 Kids, right right, I think that's that's right, and it's 0:17:04.320 --> 0:17:07.359 very popular with the kids. Some of the lawsuits have 0:17:07.520 --> 0:17:10.400 targeted TikTok as well, as I said that the one 0:17:10.400 --> 0:17:13.000 that's pending in the Northern District of California that will 0:17:13.000 --> 0:17:16.760 be heard on Friday, that targets TikTok as well as Meta, 0:17:16.920 --> 0:17:20.640 as well as a couple of the other social media networks. 0:17:20.760 --> 0:17:23.640 This new one doesn't target TikTok, but we could see 0:17:23.680 --> 0:17:26.600 follow on actions from the states I think going after 0:17:26.680 --> 0:17:27.600 TikTok as well. 0:17:27.920 --> 0:17:30.000 Well, we'll have to check back with you to find 0:17:30.040 --> 0:17:33.840 out what happens on Friday at that hearing. Thanks so much, Matt. 0:17:34.200 --> 0:17:38.199 That's Matthew Shechttenhelm, Bloomberg intelligence analyst. Coming up next on 0:17:38.240 --> 0:17:42.480 The Bloomberg Law Show. Instagram promoters test the limits of 0:17:42.520 --> 0:17:46.800 a ninety year old securities law. This is Bloomberg. 0:17:47.119 --> 0:17:50.600 Welcome back to real estate investing made simple. Grant Cardone 0:17:50.600 --> 0:17:53.480 here in the car Doon Zone. Every Monday, I said, Steve, 0:17:53.480 --> 0:17:53.960 what I hey you? 0:17:54.040 --> 0:17:54.560 Last month? 0:17:54.880 --> 0:18:00.320 Steve was paid thirty one twenty dollars last month because 0:18:00.320 --> 0:18:05.840 the invested at Cardoncapital dot Com, Cardoncapital dot Com, Cardoncapital 0:18:05.880 --> 0:18:06.520 dot Com. 0:18:06.840 --> 0:18:09.800 This month, the Supreme Court declined to hear a case 0:18:09.920 --> 0:18:14.920 involving a lawsuit against real estate management company cardone Capital 0:18:15.320 --> 0:18:19.760 and its CEO, Grant Cardone, for misleading statements in YouTube 0:18:19.760 --> 0:18:24.080 and Instagram videos. The lawsuit was dismissed on other grounds 0:18:24.200 --> 0:18:27.600 days after the justices refused the case, But the core 0:18:27.760 --> 0:18:31.240 issue remains, what does it mean to sell securities in 0:18:31.320 --> 0:18:35.680 the age of YouTube and Instagram? As venture capital firms 0:18:35.680 --> 0:18:40.320 and others hyping investment projects online are facing lawsuits from 0:18:40.400 --> 0:18:44.400 disgruntled buyers. Joining me is Anne Lipton, a business law 0:18:44.480 --> 0:18:49.600 professor at Tulane University. Start with the real basics, which 0:18:49.680 --> 0:18:53.760 is tell us about the provision in the thirty three 0:18:53.800 --> 0:19:00.000 Securities Act that allows sellers to sue over unregistered securities. 0:19:00.359 --> 0:19:02.720 Okay, so Section twelve is from the nineteen thirty three 0:19:02.720 --> 0:19:06.240 Securities Act, and it basically has two separate provisions. The 0:19:06.280 --> 0:19:09.239 first is that a purchaser of a security that was 0:19:09.280 --> 0:19:13.240 sold unregistered when it should have been registered has a 0:19:13.440 --> 0:19:16.920 right to sue the seller. Basically, it's a right of recision. 0:19:16.960 --> 0:19:19.120 They can give the security back and ask for their 0:19:19.119 --> 0:19:23.080 money back minus any income they've earned on it, so 0:19:23.119 --> 0:19:25.320 they can sue whoever sold it to them if it 0:19:25.400 --> 0:19:29.200 was sold in violation of the registration provisions. And then secondly, 0:19:29.480 --> 0:19:32.119 they can sue anyone who sold it to them or 0:19:32.119 --> 0:19:38.440 who solicited the purchase if the prospectus or sales documents 0:19:38.480 --> 0:19:42.560 contained false statements. Now, sometimes there's a bit of a 0:19:42.600 --> 0:19:44.879 debate about what counts as a prospectus, but what it 0:19:44.920 --> 0:19:47.360 comes down to is that this is sometimes a more 0:19:47.359 --> 0:19:50.760 attractive option than say, more traditional ways of suing for 0:19:50.840 --> 0:19:53.600 false statements, like Section ten B, which is the anti 0:19:53.640 --> 0:19:56.919 fraud statute, because if you sue for false statements in 0:19:56.920 --> 0:20:01.520 connection with essentially these unregistered ccurity sales under section twelve, 0:20:02.240 --> 0:20:05.040 you don't have to a show that you relied on 0:20:05.080 --> 0:20:06.720 the false statement, and you don't have to show that 0:20:06.720 --> 0:20:09.320 there was any intent to make a false statement, and so. 0:20:09.520 --> 0:20:15.280 How did the Supreme Court define a seller in nineteen eighty. 0:20:15.119 --> 0:20:17.720 Eight, So in the case of Pitter versus Doll, there 0:20:17.720 --> 0:20:20.399 was a question of who counts as a statutory seller. 0:20:20.440 --> 0:20:23.800 In other words, Section twelve speaks of people who sell securities. 0:20:24.119 --> 0:20:25.960 So the question was, do you have to be actually 0:20:26.000 --> 0:20:28.800 the person who transfer the title me to you or 0:20:28.880 --> 0:20:31.560 could it be other people who are somewhat involved with 0:20:31.640 --> 0:20:34.680 the sale. And the court first said it has to 0:20:34.760 --> 0:20:38.480 be either a direct transfer of title or it has 0:20:38.520 --> 0:20:41.680 to be someone who solicited the purchase. But they drew 0:20:41.720 --> 0:20:46.120 a distinction between someone who is somehow involved and had 0:20:46.200 --> 0:20:49.639 something to do with the buyer actively going out and 0:20:49.640 --> 0:20:52.679 purchasing the security, and instead they said they have to 0:20:52.760 --> 0:20:56.000 have actually solicited and had some kind of relationship with 0:20:56.119 --> 0:20:59.520 the buyer. They rejected a test that would be somehow 0:20:59.640 --> 0:21:02.920 like people who are just substantially participate in the sale. 0:21:03.080 --> 0:21:06.720 So that was interpreted by courts to mean that you 0:21:06.760 --> 0:21:09.480 could only be liable under section twelve if you literally 0:21:09.520 --> 0:21:12.280 transferred title it was your security and you sold it 0:21:12.359 --> 0:21:15.960 to someone else, or if you had some kind of 0:21:16.000 --> 0:21:19.480 direct contact with a relationship with the buyer so that 0:21:19.560 --> 0:21:21.760 you induced the purchase that way. 0:21:21.840 --> 0:21:25.760 So in our world of social media, where venture capital 0:21:25.800 --> 0:21:31.000 firms and others are hyping investment projects online, are courts 0:21:31.040 --> 0:21:35.199 having a difficult time determining whether they're sellers or not. 0:21:36.119 --> 0:21:39.680 Yeah. So the issue here is that after Pinter versus Doll, 0:21:39.760 --> 0:21:43.040 there were a bunch of cases involving what were basically 0:21:43.119 --> 0:21:47.000 registered offerings. They were registered offerings, they were IPOs where 0:21:47.040 --> 0:21:50.399 people sued for false statements in the IPO documents. Now 0:21:50.400 --> 0:21:53.600 there's a cause of action specifically for that false statements 0:21:53.640 --> 0:21:56.720 in a registration statement under section eleven, and they would 0:21:56.720 --> 0:21:59.960 also sue under section twelve because Section twelve has liability 0:22:00.080 --> 0:22:03.400 both for unregistered offerings, which these weren't, or for false 0:22:03.400 --> 0:22:07.240 statements and a perspective, and courts rejected the Section twelve 0:22:07.280 --> 0:22:11.000 liability looking at Pinter in a lot of cases where 0:22:11.080 --> 0:22:15.080 there was no direct contact with the buyer. So for example, 0:22:15.520 --> 0:22:19.040 issuing companies, it was their security, but they sold in 0:22:19.080 --> 0:22:22.280 a firm commitment underwriting, meaning the underwriters bought the securities 0:22:22.280 --> 0:22:24.880 from the issuer. The underwriters then sold to the public. 0:22:25.440 --> 0:22:27.800 The producer would try to sue the issuer under section 0:22:27.840 --> 0:22:30.680 twelve because the issuer's name is all over the perspectives. 0:22:30.760 --> 0:22:34.080 It's like their company, it's their securities being sold, and 0:22:34.119 --> 0:22:36.640 the courts would say the issuer did not have enough 0:22:37.119 --> 0:22:41.080 direct involvement with this particular sale to this buyer to 0:22:41.359 --> 0:22:45.080 justify imposing Section twelve viability. Now, you could still have 0:22:45.359 --> 0:22:48.439 other forms of liability because these were registered offerings, but 0:22:48.480 --> 0:22:51.080 you couldn't have liability under section twelve. So the court 0:22:51.119 --> 0:22:53.480 reading pincher vicious now very narrowly to mean you have 0:22:53.560 --> 0:22:56.000 to have had some kind of contact with a relationship 0:22:56.000 --> 0:22:58.680 with the buyer. So now we fast forward to crypto, 0:22:58.800 --> 0:23:02.280 and the problem is there is an alternative scheme because crypto, 0:23:02.440 --> 0:23:04.679 assuming it's a security, which is a whole everything, but 0:23:04.720 --> 0:23:08.040 let's assume is a security. If crypto is a security, 0:23:08.080 --> 0:23:12.119 it's not registered. So the liability regime that was available 0:23:12.280 --> 0:23:16.080 in those IPO cases for registered offerings is not available 0:23:16.200 --> 0:23:20.840 to these shareholders. So for these shareholders, Section twelve is 0:23:21.160 --> 0:23:25.040 sort of the main potential avenue of liability other than 0:23:25.119 --> 0:23:28.359 the anti fraud laws, which are hard. There's much harder. 0:23:28.960 --> 0:23:32.560 So they're suing under section twelve because that's it. And 0:23:32.840 --> 0:23:35.960 what we've seen now is too Appellate Court said, direct contact, 0:23:35.960 --> 0:23:38.280 we never said that. We are you talking about known 0:23:38.320 --> 0:23:41.280 as it's talent is a solicitation. As long as you 0:23:41.359 --> 0:23:45.280 make these public statements in advertising urging people to buy, 0:23:45.359 --> 0:23:48.760 that's a solicitation, even if there's no personal relationship. Meanwhile, 0:23:48.760 --> 0:23:51.399 there are at least a couple of other decisions that say, no, 0:23:51.680 --> 0:23:54.560 we're sticking to the old interpretations of pinter that there 0:23:54.600 --> 0:23:57.360 have to be this kind of direct relationship. And then 0:23:57.400 --> 0:23:59.800