1 00:00:02,040 --> 00:00:03,800 Speaker 1: This is Bloomberg Law. 2 00:00:03,920 --> 00:00:06,760 Speaker 2: What does a prosecutor have to prove in order to 3 00:00:06,760 --> 00:00:09,959 Speaker 2: get a Rico conviction? Tell us why the Solicitor General 4 00:00:10,000 --> 00:00:12,280 Speaker 2: is sometimes referred to as the tenth Justice. 5 00:00:12,320 --> 00:00:15,520 Speaker 1: Interviews with prominent attorneys in Bloomberg Legal Experts. 6 00:00:15,560 --> 00:00:18,360 Speaker 2: That's Jennifer k for Bloomberg Law. Joining me is former 7 00:00:18,440 --> 00:00:20,160 Speaker 2: federal prosecutor Robert miss. 8 00:00:20,040 --> 00:00:23,200 Speaker 1: And analysis of important legal issues, cases and headlines. 9 00:00:23,239 --> 00:00:27,040 Speaker 2: It's the toughest hurdle for prosecutors proving Trump's intent. Alito 10 00:00:27,120 --> 00:00:30,479 Speaker 2: took on Congress, saying Congress has no power to regulate 11 00:00:30,520 --> 00:00:31,319 Speaker 2: the Supreme Court. 12 00:00:31,520 --> 00:00:34,640 Speaker 1: Bloomberg Law With June Grosso from Bloomberg Radio. 13 00:00:39,920 --> 00:00:42,720 Speaker 2: Welcome to a special best of edition of the Bloomberg 14 00:00:42,800 --> 00:00:46,000 Speaker 2: Law Show. Ahead in this hour, Meta is being sued 15 00:00:46,000 --> 00:00:49,840 Speaker 2: by forty two attorneys general for addictive features that harm 16 00:00:49,920 --> 00:00:53,920 Speaker 2: the mental health of young people and Instagram promoters test 17 00:00:54,040 --> 00:00:58,360 Speaker 2: the limits of a ninety year old securities law. 18 00:01:00,000 --> 00:01:04,200 Speaker 3: They were announcing a federal lawsuit against Meta. Meta, of course, 19 00:01:04,319 --> 00:01:08,320 Speaker 3: is the parent company of Instagram and Facebook, for knowingly 20 00:01:08,480 --> 00:01:13,280 Speaker 3: harming the mental health of young social media users. In short, 21 00:01:13,720 --> 00:01:17,800 Speaker 3: Meta intentionally designed its social media platform to be more 22 00:01:17,800 --> 00:01:19,479 Speaker 3: addictive to kids and young people. 23 00:01:20,319 --> 00:01:24,080 Speaker 2: Meta Platforms is being sued by forty one states who 24 00:01:24,120 --> 00:01:29,360 Speaker 2: claimed that social media platforms Instagram and Facebook exploit young 25 00:01:29,400 --> 00:01:33,080 Speaker 2: people for profit by building an addictive features that are 26 00:01:33,080 --> 00:01:35,760 Speaker 2: harming their mental health. At a press conference of the 27 00:01:35,800 --> 00:01:40,520 Speaker 2: Attorney General of Washington State, Bob Ferguson, two teenagers described 28 00:01:40,560 --> 00:01:44,440 Speaker 2: their struggles coping with social media sites like Instagram. 29 00:01:44,840 --> 00:01:48,600 Speaker 4: The worst part was these pictures and videos were never ending. 30 00:01:49,160 --> 00:01:52,440 Speaker 4: The addictive algorithm and the constant flood of new content 31 00:01:52,720 --> 00:01:55,240 Speaker 4: kept me glued to my phone, and before I knew it, 32 00:01:55,760 --> 00:01:58,080 Speaker 4: I began to hate myself and the way I looked. 33 00:01:59,360 --> 00:02:04,000 Speaker 4: This all has happened before I turned thirteen, as. 34 00:02:03,840 --> 00:02:06,320 Speaker 5: I would go on my phone and tending to do 35 00:02:06,400 --> 00:02:10,280 Speaker 5: other things, and then instinctively start opening up Instagram, opening 36 00:02:10,360 --> 00:02:14,800 Speaker 5: up different social media platforms without even meanings too, and 37 00:02:14,840 --> 00:02:17,959 Speaker 5: then getting stuck in the cycle of scrolling seeing other 38 00:02:18,000 --> 00:02:20,240 Speaker 5: people's lives and interactions. 39 00:02:20,560 --> 00:02:24,920 Speaker 2: Ferguson said Meta knowingly misled users and hooked youngsters with 40 00:02:25,080 --> 00:02:29,480 Speaker 2: psychologically manipulative product features to keep them on the sites. 41 00:02:30,280 --> 00:02:34,600 Speaker 3: These other features are intentionally designed to incessantly monopolize the 42 00:02:34,639 --> 00:02:38,120 Speaker 3: time and attention of kids using Instagram and Facebook. They 43 00:02:38,160 --> 00:02:42,200 Speaker 3: tap into their so called fear of missing out, discouraging 44 00:02:42,240 --> 00:02:44,320 Speaker 3: them from leaving the apps once they are logged on. 45 00:02:45,320 --> 00:02:48,680 Speaker 3: Meta is aware of the addictive nature of these features 46 00:02:48,680 --> 00:02:52,200 Speaker 3: for young people and the risks that they pose. The 47 00:02:52,240 --> 00:02:56,639 Speaker 3: original developer of the infinite scroll concept Liken the feature too, 48 00:02:56,880 --> 00:02:59,680 Speaker 3: and I'm quoting now behavioral cocaine. 49 00:03:00,080 --> 00:03:03,320 Speaker 2: Thirty three states are filing a joint lawsuit in federal 50 00:03:03,360 --> 00:03:07,440 Speaker 2: court in California, while attorneys general for DC and eight 51 00:03:07,480 --> 00:03:11,200 Speaker 2: other states are filing separate complaints in federal, state or 52 00:03:11,280 --> 00:03:16,080 Speaker 2: local courts. Joining me is Bloomberg Intelligence analyst Matthew Shettenhelm. 53 00:03:16,440 --> 00:03:18,400 Speaker 2: Matt tell us about the federal lawsuit. 54 00:03:18,840 --> 00:03:25,240 Speaker 6: So yesterday over thirty states filed in federal court in California, 55 00:03:25,919 --> 00:03:32,280 Speaker 6: basically using their consumer protection laws under each state and 56 00:03:32,360 --> 00:03:36,800 Speaker 6: accompanying that with one claim under federal law under the 57 00:03:37,600 --> 00:03:41,760 Speaker 6: Children Online Privacy Protection Act, which is known as KAPPA. 58 00:03:42,360 --> 00:03:47,560 Speaker 6: And basically the allegation here is that Meta acted in 59 00:03:47,600 --> 00:03:53,440 Speaker 6: an unfair and deceptive manner because it knew that its 60 00:03:53,520 --> 00:03:59,720 Speaker 6: social media service was harmful to teens, but it withheld 61 00:04:00,360 --> 00:04:05,440 Speaker 6: knowledge and misled users and proceeded to deliver its product 62 00:04:05,520 --> 00:04:11,560 Speaker 6: to teens anyway. So it's seeking damages, civil penalties as 63 00:04:11,600 --> 00:04:15,680 Speaker 6: well as injunctive relief, basically forcing the company to change 64 00:04:15,880 --> 00:04:19,200 Speaker 6: how it serves teams. That's the goal of the lawsuit. 65 00:04:19,640 --> 00:04:23,440 Speaker 2: And so what they're alleging is that Meta did not 66 00:04:23,560 --> 00:04:28,000 Speaker 2: disclose that its algorithms were designed to capitalize on young users, 67 00:04:28,080 --> 00:04:33,280 Speaker 2: dopamine responses, and create an addictive cycle of engagement. So 68 00:04:33,360 --> 00:04:37,280 Speaker 2: the allegation is that Meta specifically designed an algorithm for this. 69 00:04:37,800 --> 00:04:40,800 Speaker 6: That's exactly right. So the lawsuit takes aim at a 70 00:04:40,880 --> 00:04:44,760 Speaker 6: number of features that are sort of fundamental to how 71 00:04:44,960 --> 00:04:50,279 Speaker 6: Meta designed its social media platforms, using data about the 72 00:04:50,400 --> 00:04:54,719 Speaker 6: teens to send them content that keeps them scrolling and 73 00:04:54,839 --> 00:04:58,960 Speaker 6: keeps them reading, sending them notifications that keep them coming 74 00:04:59,000 --> 00:05:01,479 Speaker 6: back to the service as soon as they look away 75 00:05:01,520 --> 00:05:05,479 Speaker 6: from it, using the like system that entices them and 76 00:05:05,560 --> 00:05:08,280 Speaker 6: draws them in and pushes them to put more content 77 00:05:08,400 --> 00:05:13,080 Speaker 6: out there. And the allegation here is that Meta knew 78 00:05:13,560 --> 00:05:17,080 Speaker 6: that all of these features were harmful to teams. There's 79 00:05:17,120 --> 00:05:20,680 Speaker 6: a separate lawsuit actually in this same federal court that 80 00:05:20,839 --> 00:05:24,520 Speaker 6: goes to the design of the product itself and whether 81 00:05:24,640 --> 00:05:29,160 Speaker 6: that violates product liability law. Or whether Facebook was negligent 82 00:05:29,240 --> 00:05:32,400 Speaker 6: in designing it. This suit's a little bit different. It's 83 00:05:32,480 --> 00:05:36,520 Speaker 6: not about the design itself. It's about did Meta lie? 84 00:05:36,880 --> 00:05:40,760 Speaker 6: Did it mislead users about that? And so it takes 85 00:05:40,800 --> 00:05:44,960 Speaker 6: same It uses these existing consumer protection laws about what 86 00:05:45,120 --> 00:05:48,960 Speaker 6: is unfair and what is deceptive to ask did Facebook 87 00:05:49,040 --> 00:05:52,120 Speaker 6: mislead the public about what it knew? 88 00:05:52,360 --> 00:05:56,680 Speaker 2: And a lot of this is based on the whistleblower 89 00:05:56,920 --> 00:05:59,880 Speaker 2: who released internal documents in twenty twenty one. 90 00:06:00,480 --> 00:06:02,440 Speaker 6: Yeah, I think that's the real start of this, when 91 00:06:02,480 --> 00:06:07,240 Speaker 6: Francis Hoggin came out with her release of the internal documents, 92 00:06:07,279 --> 00:06:12,360 Speaker 6: suggesting that that Facebook knew more about the risk to 93 00:06:13,200 --> 00:06:17,400 Speaker 6: children than it was letting on. And so this is 94 00:06:17,720 --> 00:06:21,080 Speaker 6: really you been playing out ever since that moment. Now, 95 00:06:21,120 --> 00:06:25,720 Speaker 6: Facebook disputes her allegations and says that they're overblown and 96 00:06:25,720 --> 00:06:29,160 Speaker 6: that the evidence isn't clearly as one sided as it 97 00:06:29,560 --> 00:06:32,800 Speaker 6: might seem or as she might suggest. So that's the 98 00:06:32,839 --> 00:06:35,880 Speaker 6: sort of allegation that would be tested in this case 99 00:06:36,040 --> 00:06:38,200 Speaker 6: if it gets past a motion to dismiss. 100 00:06:38,520 --> 00:06:42,000 Speaker 2: Meta said, we share the Attorney General's commitment to providing 101 00:06:42,080 --> 00:06:46,960 Speaker 2: teens with safe, positive experiences online and have already introduced 102 00:06:47,080 --> 00:06:50,480 Speaker 2: over thirty tools to support teens and their families. Do 103 00:06:50,520 --> 00:06:52,239 Speaker 2: you know what kind of tools they're talking about. 104 00:06:52,400 --> 00:06:55,240 Speaker 6: I think these are features like there are settings that 105 00:06:55,720 --> 00:06:59,440 Speaker 6: teens can put on the product to turn off after 106 00:07:00,320 --> 00:07:02,760 Speaker 6: so many minutes on the product. I think there are 107 00:07:03,000 --> 00:07:05,880 Speaker 6: a handful of features like that that they have added. 108 00:07:05,960 --> 00:07:08,560 Speaker 6: You can turn off if you go into the settings, 109 00:07:08,560 --> 00:07:11,320 Speaker 6: you can turn off the data that is used about 110 00:07:11,360 --> 00:07:14,680 Speaker 6: you for ads. I think as a practical matter, these 111 00:07:14,680 --> 00:07:18,080 Speaker 6: features may not be used all that frequently. I know 112 00:07:18,200 --> 00:07:22,800 Speaker 6: my teenager doesn't jump to find those features, and I 113 00:07:22,840 --> 00:07:26,280 Speaker 6: suspect that's true of many many other teams as well. 114 00:07:26,360 --> 00:07:30,320 Speaker 6: So I think the negotiation here before this lawsuit was filed, 115 00:07:30,400 --> 00:07:33,400 Speaker 6: was trying to push the states likely trying to push 116 00:07:33,520 --> 00:07:37,640 Speaker 6: Meta to find more features and more effective features. And 117 00:07:37,680 --> 00:07:40,680 Speaker 6: I think eventually, if you saw this lawsuit settle, you 118 00:07:40,760 --> 00:07:43,880 Speaker 6: might see a push for even more in that direction, 119 00:07:44,440 --> 00:07:48,880 Speaker 6: more effective features to discourage the use of the network 120 00:07:49,120 --> 00:07:50,880 Speaker 6: so frequently by young users. 121 00:07:51,000 --> 00:07:53,920 Speaker 2: Would they have to actually change the algorithm? Would Meta 122 00:07:54,000 --> 00:07:55,480 Speaker 2: have to change its algorithm? 123 00:07:55,880 --> 00:07:59,920 Speaker 6: That's the question. It starts to become maybe a difficult solution, 124 00:08:00,080 --> 00:08:03,040 Speaker 6: And because as we've talked about, this is really focused 125 00:08:03,040 --> 00:08:05,760 Speaker 6: on young users, and is there even a way for 126 00:08:05,880 --> 00:08:09,920 Speaker 6: the company to tailor a fix that changes the algorithm 127 00:08:10,160 --> 00:08:14,160 Speaker 6: just for teens. I don't know. That's probably part of 128 00:08:14,200 --> 00:08:17,640 Speaker 6: the conversation, and it has a technical component that probably 129 00:08:17,680 --> 00:08:18,800 Speaker 6: makes it tricky as well. 130 00:08:19,120 --> 00:08:22,320 Speaker 2: Yeah, because I was listening at the press conference by 131 00:08:22,440 --> 00:08:27,800 Speaker 2: the Washington a G he had two teenagers talk about this, 132 00:08:28,080 --> 00:08:32,080 Speaker 2: and they were so self aware of what was happening, 133 00:08:32,440 --> 00:08:36,280 Speaker 2: and yet they still couldn't get away from it. Listen 134 00:08:36,320 --> 00:08:39,240 Speaker 2: to the things that one of the teenagers tried. 135 00:08:39,920 --> 00:08:42,480 Speaker 5: I've done a lot of different methods to try to 136 00:08:42,520 --> 00:08:47,120 Speaker 5: prevent engagement with Instagram. I've created time limits, I've created 137 00:08:47,200 --> 00:08:49,480 Speaker 5: like an app that you have to open first to 138 00:08:49,559 --> 00:08:54,160 Speaker 5: breathe and then to engage with Instagram. But all of 139 00:08:54,200 --> 00:08:57,360 Speaker 5: these methods eventually fail because I understand that it's up 140 00:08:57,360 --> 00:09:02,000 Speaker 5: to my own discretion and the promise of gaining connection 141 00:09:02,200 --> 00:09:06,720 Speaker 5: with my peers ohas seems to be more important. 142 00:09:07,760 --> 00:09:10,720 Speaker 6: Yeah, I mean, I think that's the allegation that it's 143 00:09:10,800 --> 00:09:15,240 Speaker 6: so inviting and so difficult for young users to look away, 144 00:09:16,040 --> 00:09:19,520 Speaker 6: that the companies need to make changes here. Now it's 145 00:09:19,559 --> 00:09:22,760 Speaker 6: sort of a tricky First Amendment problem here, and we 146 00:09:23,160 --> 00:09:26,440 Speaker 6: in the media. There's always been allegations about the you know, 147 00:09:26,520 --> 00:09:28,880 Speaker 6: the next form of media and the harm that it's 148 00:09:28,920 --> 00:09:30,760 Speaker 6: causing to you. So you can go back to the 149 00:09:30,880 --> 00:09:34,000 Speaker 6: nineteen seventies and the Federal Trade Commission was going to 150 00:09:34,080 --> 00:09:39,559 Speaker 6: go after advertising to kids that made them eat onhealthy things, 151 00:09:39,600 --> 00:09:42,079 Speaker 6: and there was a big to do over that, and 152 00:09:42,480 --> 00:09:46,760 Speaker 6: ultimately that sort of fizzled as well. And so you wonder, 153 00:09:47,200 --> 00:09:50,120 Speaker 6: especially in light of the serious First Amendment arguments that 154 00:09:50,320 --> 00:09:52,840 Speaker 6: Meta is going to make to say, look, we have 155 00:09:52,960 --> 00:09:56,640 Speaker 6: the right to organize speech on our platform and to 156 00:09:56,679 --> 00:09:59,800 Speaker 6: make it enticing, to make it you know, useful and 157 00:10:00,040 --> 00:10:03,600 Speaker 6: gauging for our users. That's sort of a fundamental First 158 00:10:03,600 --> 00:10:06,560 Speaker 6: Amendment right. What they can't do is mislead about it. 159 00:10:06,600 --> 00:10:08,800 Speaker 6: So that's what if we get right back down to 160 00:10:08,840 --> 00:10:11,800 Speaker 6: the key legal element here is did they mislead? Did 161 00:10:11,840 --> 00:10:15,359 Speaker 6: they know something and then tell the world the opposite. 162 00:10:15,520 --> 00:10:17,880 Speaker 2: Coming up next on the Bloomberg Law Show, I'll continue 163 00:10:17,880 --> 00:10:22,319 Speaker 2: this conversation with Bloomberg intelligence analyst Matthew Shettenhelm, and we'll 164 00:10:22,400 --> 00:10:25,559 Speaker 2: talk about emotion for some rejudgment that's coming up this 165 00:10:25,640 --> 00:10:30,439 Speaker 2: week in some other lawsuits against social media platforms, remember 166 00:10:30,440 --> 00:10:32,640 Speaker 2: you can always get the latest legal news by listening 167 00:10:32,679 --> 00:10:36,600 Speaker 2: to our Bloomberg Law podcast wherever you get your favorite podcasts. 168 00:10:36,760 --> 00:10:39,240 Speaker 2: I'm June Grosso and this is Bloomberg. 169 00:10:46,880 --> 00:10:51,680 Speaker 1: This is Bloomberg Law with June Grosso from Bloomberg Radio. 170 00:10:52,760 --> 00:10:55,360 Speaker 2: You're listening to a special best of edition of the 171 00:10:55,400 --> 00:10:59,400 Speaker 2: Bloomberg Law Show. Bob Ferguson is one of the forty 172 00:10:59,480 --> 00:11:05,480 Speaker 2: one sts suing Meta platforms, claiming Instagram and Facebook exploit 173 00:11:05,600 --> 00:11:09,560 Speaker 2: young people for profit by building an addictive features that 174 00:11:09,600 --> 00:11:11,200 Speaker 2: are harming their mental health. 175 00:11:12,000 --> 00:11:14,280 Speaker 3: Not only did Meta know the risks these features pose 176 00:11:14,320 --> 00:11:17,720 Speaker 3: to children and teens, the company's own research demonstrate the 177 00:11:17,720 --> 00:11:23,400 Speaker 3: potential for psychological and physical harms. These harms include higher 178 00:11:23,480 --> 00:11:28,680 Speaker 3: rates of depression, anxiety, and attention deficit disorders, eating disorders, 179 00:11:28,679 --> 00:11:33,160 Speaker 3: and low self esteem, especially for adolescent girls, disruptions asleep 180 00:11:33,240 --> 00:11:37,280 Speaker 3: and other activities essential for kids health. The stakes here 181 00:11:37,360 --> 00:11:41,280 Speaker 3: are high. According to the US Surgeon General. Recent research 182 00:11:41,360 --> 00:11:44,360 Speaker 3: shows that adolescents who spend more than three hours a 183 00:11:44,440 --> 00:11:48,400 Speaker 3: day on social media face double the risk of poor 184 00:11:48,440 --> 00:11:51,439 Speaker 3: mental health outcomes such as depression or anxiety. 185 00:11:52,760 --> 00:11:57,120 Speaker 2: I've been talking to Bloomberg Intelligence analyst Matthew Shettenhelm, and 186 00:11:57,360 --> 00:12:04,960 Speaker 2: are children or teenagers particularly attractive demographic for businesses and advertisers? 187 00:12:05,480 --> 00:12:08,640 Speaker 6: Yeah, I think it's it's important for the company to 188 00:12:09,160 --> 00:12:13,880 Speaker 6: facilitate engagement in young users because young users look at 189 00:12:14,040 --> 00:12:18,160 Speaker 6: they are important a source for advertisers to go after, 190 00:12:18,800 --> 00:12:22,120 Speaker 6: and young users grow up to be older users, and 191 00:12:22,160 --> 00:12:25,320 Speaker 6: so that the more you can engage them at a 192 00:12:25,360 --> 00:12:28,720 Speaker 6: young age, that only makes them, you know, use the 193 00:12:28,760 --> 00:12:31,920 Speaker 6: product more in later years. So I do think it's 194 00:12:31,920 --> 00:12:34,800 Speaker 6: an important demographic. Now Meta is pushed back on that 195 00:12:34,840 --> 00:12:38,000 Speaker 6: a little bit and said it really maybe isn't a 196 00:12:38,120 --> 00:12:41,600 Speaker 6: large goal to keep youthful users on the service for 197 00:12:42,160 --> 00:12:44,360 Speaker 6: you know, extended amounts of times. I think that's going 198 00:12:44,400 --> 00:12:46,440 Speaker 6: to be an issue in this case is how much 199 00:12:46,720 --> 00:12:49,400 Speaker 6: has Meta said that that is or is not a 200 00:12:49,480 --> 00:12:53,079 Speaker 6: goal to keep young users spending time on the platform. 201 00:12:53,480 --> 00:12:57,520 Speaker 2: The suit also accuses Meta of violating the Children's Online 202 00:12:57,559 --> 00:12:58,920 Speaker 2: Privacy Protection. 203 00:12:58,679 --> 00:13:00,840 Speaker 6: Act, Right, so that's you know, I almost read it 204 00:13:00,880 --> 00:13:02,760 Speaker 6: like a throw in. They kind of throw that in 205 00:13:02,840 --> 00:13:04,640 Speaker 6: at the back of the suit maybe to get this 206 00:13:04,679 --> 00:13:08,040 Speaker 6: into federal courts, because all these other things are state 207 00:13:08,160 --> 00:13:11,400 Speaker 6: law claims that you would think maybe would be brought 208 00:13:11,559 --> 00:13:14,040 Speaker 6: state by state in their own courts. By having a 209 00:13:14,080 --> 00:13:17,160 Speaker 6: federal claim in there, then you say all these other 210 00:13:17,240 --> 00:13:19,679 Speaker 6: state claims are sort of supplemental to it, and so 211 00:13:20,120 --> 00:13:22,559 Speaker 6: one federal court should take the whole thing at one time. 212 00:13:22,600 --> 00:13:24,960 Speaker 6: But the federal claim focuses on the idea that for 213 00:13:25,240 --> 00:13:28,920 Speaker 6: the youngest users, those under thirteen, this federal law says 214 00:13:28,960 --> 00:13:32,240 Speaker 6: you have to have the parents make the decision about 215 00:13:32,400 --> 00:13:35,679 Speaker 6: whether the kids' data can be used for ad targeting, 216 00:13:35,720 --> 00:13:38,079 Speaker 6: and have to get their consent. And the allegation here 217 00:13:38,160 --> 00:13:41,600 Speaker 6: is that Facebook knew that some of these users were 218 00:13:41,720 --> 00:13:47,120 Speaker 6: under thirteen years old, and it nevertheless let them use 219 00:13:47,160 --> 00:13:50,040 Speaker 6: the system without getting proper parental approval. 220 00:13:50,360 --> 00:13:53,640 Speaker 2: My daughter is well past the teenage years. So let 221 00:13:53,720 --> 00:13:55,880 Speaker 2: me ask you this. When there are these rules that 222 00:13:56,120 --> 00:13:59,920 Speaker 2: you have to get parental permission, how is that implemented 223 00:14:00,160 --> 00:14:02,640 Speaker 2: when you're online. 224 00:14:02,720 --> 00:14:06,240 Speaker 6: I mean, it's a problem with this law too in 225 00:14:06,280 --> 00:14:09,920 Speaker 6: one other sense as well, that it only applies. Facebook 226 00:14:10,000 --> 00:14:14,120 Speaker 6: only is vulnerable to the law if it knows it 227 00:14:14,280 --> 00:14:19,200 Speaker 6: knowingly allows users under thirteen to go on the site. 228 00:14:19,560 --> 00:14:21,560 Speaker 6: And so that's the first problem that a lot of 229 00:14:21,560 --> 00:14:24,960 Speaker 6: times kids are going on and filling this in. And 230 00:14:25,000 --> 00:14:27,880 Speaker 6: as long as Facebook doesn't know that the kids are 231 00:14:27,960 --> 00:14:31,800 Speaker 6: going on below age thirteen without getting prontal approval, then 232 00:14:32,160 --> 00:14:37,080 Speaker 6: it's at least theoretically protected from liability. But otherwise, I 233 00:14:37,120 --> 00:14:40,040 Speaker 6: think there's sort of a notification process where once you 234 00:14:40,160 --> 00:14:43,320 Speaker 6: fill in that hey, I'm younger than thirteen years old, 235 00:14:43,880 --> 00:14:46,720 Speaker 6: then there's going to be pop up screens that require 236 00:14:46,880 --> 00:14:50,160 Speaker 6: a second level of approvals and sign off from a parent. 237 00:14:50,560 --> 00:14:53,440 Speaker 6: But if the kid misleads in that first answer to 238 00:14:53,480 --> 00:14:56,440 Speaker 6: the question, that's where it gets kind of tricky. 239 00:14:57,080 --> 00:15:00,080 Speaker 2: When I first heard about this lawsuit, I thought, well, 240 00:15:00,120 --> 00:15:02,440 Speaker 2: there have been other lawsuits like this, right, I keep 241 00:15:02,480 --> 00:15:05,960 Speaker 2: hearing about lawsuits against platforms. What happens to them? 242 00:15:06,320 --> 00:15:10,040 Speaker 6: Yeah, so this is just one piece of a much 243 00:15:10,240 --> 00:15:14,080 Speaker 6: larger sort of legal puzzle I think here on exactly 244 00:15:14,120 --> 00:15:16,480 Speaker 6: this issue. So you know, as I said, there's this 245 00:15:16,760 --> 00:15:20,360 Speaker 6: other lawsuit in the Northern District of California that says, look, 246 00:15:20,480 --> 00:15:24,400 Speaker 6: social media itself is a defective product and the companies 247 00:15:24,400 --> 00:15:27,240 Speaker 6: are negligent just by putting it out there exactly for 248 00:15:27,280 --> 00:15:30,560 Speaker 6: these features we talked about, you know, in facilitating engagement 249 00:15:30,560 --> 00:15:33,760 Speaker 6: of youth and the harm it inflicts on you know, 250 00:15:34,000 --> 00:15:38,800 Speaker 6: mental health for youth. Across the country is that itself defective, 251 00:15:39,320 --> 00:15:41,920 Speaker 6: and so that suit's going to play out. As we've 252 00:15:41,920 --> 00:15:45,680 Speaker 6: talked about before, there's this liability shield Section two thirty 253 00:15:45,720 --> 00:15:49,920 Speaker 6: liability shield. Usually Facebook didn't face lawsuits, you know, for 254 00:15:50,240 --> 00:15:53,600 Speaker 6: bad stuff on its system because the liability shield. Increasingly, 255 00:15:53,640 --> 00:15:57,040 Speaker 6: courts are reading that real narrowly, and so these cases 256 00:15:57,080 --> 00:16:00,160 Speaker 6: can move ahead in a way that they hadn't been for. 257 00:16:00,960 --> 00:16:04,240 Speaker 6: The Federal Trade Commission is going after Meta on its 258 00:16:04,280 --> 00:16:07,360 Speaker 6: targeting of youth. So it's really it's a storm here 259 00:16:07,640 --> 00:16:10,280 Speaker 6: on multiple levels. And the real elephant in the room 260 00:16:10,480 --> 00:16:13,240 Speaker 6: is what's Congress going to do about it. Congress hasn't 261 00:16:13,240 --> 00:16:17,200 Speaker 6: been able to pass a law restricting the use of 262 00:16:17,520 --> 00:16:21,240 Speaker 6: data from kids or advertising to kids, and so the 263 00:16:21,840 --> 00:16:24,840 Speaker 6: real question is is Congress going to be able to 264 00:16:24,880 --> 00:16:28,400 Speaker 6: step in with something here. In the meantime, this is 265 00:16:28,640 --> 00:16:31,920 Speaker 6: an effort to use existing old law to try to 266 00:16:31,920 --> 00:16:34,280 Speaker 6: go after these companies, and that's often not easy. So 267 00:16:34,320 --> 00:16:37,240 Speaker 6: I think the companies can win these cases fight this 268 00:16:37,360 --> 00:16:39,800 Speaker 6: stuff off, although I mean it's not easy. It can 269 00:16:39,840 --> 00:16:41,280 Speaker 6: be difficult. In a lot of cases. 270 00:16:41,560 --> 00:16:44,080 Speaker 2: It seems like Meta it's part of the cost of 271 00:16:44,120 --> 00:16:47,520 Speaker 2: doing business. It's been fighting with the Federal Trade Commission 272 00:16:48,080 --> 00:16:48,880 Speaker 2: for how long? 273 00:16:49,320 --> 00:16:52,760 Speaker 6: Exactly right, it did a five million dollars settlement on 274 00:16:53,120 --> 00:16:56,600 Speaker 6: its data issues is part of the Cambridge Analytica matter, 275 00:16:57,320 --> 00:16:59,440 Speaker 6: and that hasn't been the end of the story. Now 276 00:16:59,560 --> 00:17:02,000 Speaker 6: under a con the Federal Trade Commission is trying to 277 00:17:02,000 --> 00:17:06,240 Speaker 6: reopen that settlement and ban exactly what we're talking about here, 278 00:17:06,320 --> 00:17:09,920 Speaker 6: the use of data to advertise to kids. There was 279 00:17:09,920 --> 00:17:12,400 Speaker 6: a court hearing I went to in Washington on exactly 280 00:17:12,800 --> 00:17:16,520 Speaker 6: that question. Can the FTC ban that just by reopening 281 00:17:16,560 --> 00:17:20,000 Speaker 6: the twenty twenty settlement. So this is part of life 282 00:17:20,240 --> 00:17:23,199 Speaker 6: for a company like Meta these days. And these are 283 00:17:23,280 --> 00:17:26,679 Speaker 6: lawsuits that are difficult. But there are lawsuits that you know, 284 00:17:26,760 --> 00:17:30,159 Speaker 6: you're applying old law to new technology, and there are 285 00:17:30,200 --> 00:17:32,679 Speaker 6: lawsuits that often I think the companies can win, but 286 00:17:32,760 --> 00:17:34,119 Speaker 6: it's not always going to be easy. 287 00:17:34,400 --> 00:17:36,880 Speaker 2: You know, I'm surprised that Congress hasn't been well, I'm 288 00:17:36,880 --> 00:17:41,320 Speaker 2: not surprised surprised that Congress hasn't been able to do 289 00:17:41,359 --> 00:17:44,600 Speaker 2: something about, you know, the young users, because you know, 290 00:17:44,680 --> 00:17:49,320 Speaker 2: with this lawsuit, you have bipartisan attorneys general from blue 291 00:17:49,320 --> 00:17:52,879 Speaker 2: states and red states and purple states joining together to 292 00:17:53,000 --> 00:17:56,479 Speaker 2: sue Meta so it's surprising that Congress can't get together. 293 00:17:56,800 --> 00:17:59,600 Speaker 6: That's a great point. And there is a law piece 294 00:17:59,640 --> 00:18:03,000 Speaker 6: of ledge that has advanced in Congress known as the 295 00:18:03,119 --> 00:18:06,960 Speaker 6: Kids Online Safety Act, and it has over forty co 296 00:18:07,160 --> 00:18:11,760 Speaker 6: sponsors in the Senate. Right now, it's just so difficult 297 00:18:12,000 --> 00:18:16,440 Speaker 6: for Congress to agree on anything, and you know, all 298 00:18:16,480 --> 00:18:20,880 Speaker 6: of these proposed laws have just struggled to advance very far. 299 00:18:21,000 --> 00:18:25,159 Speaker 6: But you're exactly right. This has bipartisan support, and as 300 00:18:25,200 --> 00:18:27,879 Speaker 6: I said, that Kids Online Safety Act, you know, it 301 00:18:28,000 --> 00:18:31,480 Speaker 6: probably has a better chance than most pieces of legislation. 302 00:18:31,600 --> 00:18:34,480 Speaker 6: So you could see some movement there if Congress can 303 00:18:34,480 --> 00:18:35,320 Speaker 6: get attacked together. 304 00:18:35,800 --> 00:18:41,119 Speaker 2: Also, I mean TikTok I always thought was the most 305 00:18:41,160 --> 00:18:44,720 Speaker 2: addictive of these platforms for kids. 306 00:18:44,480 --> 00:18:48,400 Speaker 6: Right right, I think that's right, and it's very popular 307 00:18:48,680 --> 00:18:51,960 Speaker 6: with the kids. Some of the lawsuits have targeted TikTok 308 00:18:52,040 --> 00:18:54,320 Speaker 6: as well. As I said that the one that's pending 309 00:18:54,400 --> 00:18:56,720 Speaker 6: in the Northern District of California that will be heard 310 00:18:56,760 --> 00:19:00,480 Speaker 6: on Friday, that targets TikTok as well as Meta as 311 00:19:00,480 --> 00:19:04,000 Speaker 6: well as a couple of the other social media networks. 312 00:19:04,119 --> 00:19:07,000 Speaker 6: This new one doesn't target TikTok, but we could see 313 00:19:07,040 --> 00:19:09,960 Speaker 6: follow on actions from the States. I think going after 314 00:19:10,040 --> 00:19:10,960 Speaker 6: TikTok as well. 315 00:19:11,280 --> 00:19:13,359 Speaker 2: Well, we'll have to check back with you to find 316 00:19:13,400 --> 00:19:17,160 Speaker 2: out what happens. Thanks so much, Matt. That's Matthew Shettenhelm, 317 00:19:17,200 --> 00:19:21,160 Speaker 2: Bloomberg Intelligence analyst. Coming up next on The Bloomberg Law Show. 318 00:19:21,800 --> 00:19:25,440 Speaker 2: Instagram promoters test the limits of a ninety year old 319 00:19:25,520 --> 00:19:30,280 Speaker 2: securities law and attorneys looking for legal research. Whether you're 320 00:19:30,320 --> 00:19:33,960 Speaker 2: an in house council or in private practice, Bloomberg Law 321 00:19:34,000 --> 00:19:37,119 Speaker 2: gives you the edge with the latest in AI powered 322 00:19:37,200 --> 00:19:42,080 Speaker 2: legal analytics, business insights, and workflow tools. With guidance from 323 00:19:42,080 --> 00:19:45,360 Speaker 2: our experts, you'll grasp the latest trends in the legal industry, 324 00:19:45,640 --> 00:19:48,879 Speaker 2: helping you achieve better results for the practice of law, 325 00:19:49,000 --> 00:19:52,120 Speaker 2: the business of law, the future of law. Visit Bloomberg 326 00:19:52,200 --> 00:19:54,560 Speaker 2: Law dot com. This is Bloomberg. 327 00:20:02,840 --> 00:20:07,639 Speaker 1: This is Bloomberg Law with June Brusso from Bloomberg Radio. 328 00:20:08,400 --> 00:20:11,000 Speaker 2: You're listening to a special best of edition of The 329 00:20:11,040 --> 00:20:12,080 Speaker 2: Bloomberg Law Show. 330 00:20:13,200 --> 00:20:14,720 Speaker 1: Real Estate Investing Made Simple. 331 00:20:14,720 --> 00:20:16,560 Speaker 2: Grant cardone here in the cardon zone. 332 00:20:16,600 --> 00:20:19,200 Speaker 7: Every Monday, I said Steve, what I pay you last month? 333 00:20:19,520 --> 00:20:24,200 Speaker 1: Steve was paid thirty one twenty dollars last month. 334 00:20:24,600 --> 00:20:29,680 Speaker 4: Because he invested at Cardoncapital dot Com, Cardoncapitol dot Com, 335 00:20:29,680 --> 00:20:31,359 Speaker 4: Cardoncapital dot Com. 336 00:20:31,400 --> 00:20:34,439 Speaker 2: In October, the Supreme Court declined to hear a case 337 00:20:34,520 --> 00:20:39,320 Speaker 2: involving a lawsuit against real estate management company Cardone Capital 338 00:20:39,640 --> 00:20:43,800 Speaker 2: and its CEO, Grant Cardone, for misleading statements in YouTube 339 00:20:43,840 --> 00:20:48,120 Speaker 2: and Instagram videos. The lawsuit was dismissed on other grounds 340 00:20:48,240 --> 00:20:51,639 Speaker 2: days after the justices refused the case, But the core 341 00:20:51,800 --> 00:20:55,280 Speaker 2: issue remains, what does it mean to sell securities in 342 00:20:55,320 --> 00:20:59,680 Speaker 2: the age of YouTube and Instagram? As venture capital firms 343 00:20:59,680 --> 00:21:03,520 Speaker 2: and ow there is hyping investment projects online are facing 344 00:21:03,600 --> 00:21:07,800 Speaker 2: lawsuits from disgruntled buyers. Joining me is Anne Lipton, a 345 00:21:07,880 --> 00:21:13,000 Speaker 2: business law professor at Tulane University. Start with the real basics, 346 00:21:13,359 --> 00:21:17,600 Speaker 2: which is, tell us about the provision in the thirty 347 00:21:17,600 --> 00:21:19,480 Speaker 2: three Securities Act. 348 00:21:19,800 --> 00:21:22,120 Speaker 7: Okay, So, Section twelve is from the nineteen thirty three 349 00:21:22,119 --> 00:21:25,640 Speaker 7: Securities Act and it basically has two separate provisions. The 350 00:21:25,720 --> 00:21:28,639 Speaker 7: first is that a purchaser of a security that was 351 00:21:28,720 --> 00:21:32,679 Speaker 7: sold unregistered when it should have been registered has a 352 00:21:32,840 --> 00:21:36,320 Speaker 7: right to sue the seller. Basically, it's a right of rescision. 353 00:21:36,359 --> 00:21:38,520 Speaker 7: They can give the security back and ask for their 354 00:21:38,560 --> 00:21:42,480 Speaker 7: money back minus any income they've earned on it, so 355 00:21:42,520 --> 00:21:44,760 Speaker 7: they can sue whoever sold it to them if it 356 00:21:44,840 --> 00:21:48,639 Speaker 7: was sold in violation of the registration provisions. And then secondly, 357 00:21:48,880 --> 00:21:51,560 Speaker 7: they can sue anyone who sold it to them or 358 00:21:51,560 --> 00:21:57,880 Speaker 7: who solicited the purchase if the prospectus or sales documents 359 00:21:57,920 --> 00:22:01,920 Speaker 7: contained a false statements. Now, sometimes there's a bit of 360 00:22:01,960 --> 00:22:04,159 Speaker 7: a debate about what counts as a perspectus, but what 361 00:22:04,200 --> 00:22:06,600 Speaker 7: it comes down to is that this is sometimes a 362 00:22:06,640 --> 00:22:10,080 Speaker 7: more attractive option than say, more traditional ways of suing 363 00:22:10,119 --> 00:22:12,680 Speaker 7: for false statements, like Section ten B, which is the 364 00:22:12,720 --> 00:22:16,280 Speaker 7: anti fraud statute, because if you sue for false statements 365 00:22:16,280 --> 00:22:20,879 Speaker 7: in connection with essentially these unregistered security sales under section twelve, 366 00:22:21,640 --> 00:22:24,600 Speaker 7: you don't have to show that you relied on the 367 00:22:24,600 --> 00:22:26,320 Speaker 7: false statement, and you don't have to show that there 368 00:22:26,320 --> 00:22:28,000 Speaker 7: was any intent to make a false statement. 369 00:22:28,320 --> 00:22:33,040 Speaker 2: And so how did the Supreme Court define a seller 370 00:22:33,720 --> 00:22:35,600 Speaker 2: in nineteen eighty eight, So in. 371 00:22:35,560 --> 00:22:37,600 Speaker 7: The case of Pitter versus Doll, there was a question 372 00:22:37,640 --> 00:22:40,480 Speaker 7: of who counts as a statutory seller. In other words, 373 00:22:40,480 --> 00:22:43,760 Speaker 7: Section twelve speaks of people who sell securities. So the 374 00:22:43,840 --> 00:22:45,879 Speaker 7: question was, do you have to be actually the person 375 00:22:45,920 --> 00:22:48,639 Speaker 7: who transfer the title me to you, or could it 376 00:22:48,680 --> 00:22:51,320 Speaker 7: be other people who are somewhat involved. 377 00:22:50,880 --> 00:22:51,920 Speaker 6: With the sale. 378 00:22:52,119 --> 00:22:54,879 Speaker 7: And the court first said it has to be either 379 00:22:54,960 --> 00:22:58,159 Speaker 7: a direct transfer of title or it has to be 380 00:22:58,200 --> 00:23:01,800 Speaker 7: someone who solicited the purchase. But they drew a distinction 381 00:23:01,960 --> 00:23:06,199 Speaker 7: between someone who is somehow involved and had something to 382 00:23:06,320 --> 00:23:10,120 Speaker 7: do with the buyer actively going out and purchasing the security, 383 00:23:10,480 --> 00:23:13,480 Speaker 7: and instead they said they have to have actually solicited 384 00:23:13,480 --> 00:23:16,760 Speaker 7: and had some kind of relationship with the buyer. They 385 00:23:17,040 --> 00:23:19,560 Speaker 7: rejected a test that would be somehow like people who 386 00:23:19,600 --> 00:23:23,919 Speaker 7: are just substantially participate in the sale. So that was 387 00:23:23,960 --> 00:23:26,919 Speaker 7: interpreted by courts to mean that you could only be 388 00:23:26,960 --> 00:23:30,040 Speaker 7: liable Intersection twelve if you literally transferred title it was 389 00:23:30,080 --> 00:23:33,400 Speaker 7: your security and you sold it to someone else, or 390 00:23:34,040 --> 00:23:36,600 Speaker 7: if you had some kind of direct contact with a 391 00:23:36,720 --> 00:23:40,080 Speaker 7: relationship with the buyer so that you induced the purchase 392 00:23:40,119 --> 00:23:41,200 Speaker 7: that way. 393 00:23:41,280 --> 00:23:45,160 Speaker 2: So in our world of social media, where venture capital 394 00:23:45,240 --> 00:23:50,400 Speaker 2: firms and others are hyping investment projects online, are courts 395 00:23:50,480 --> 00:23:54,639 Speaker 2: having a difficult time determining whether they're sellers or not. 396 00:23:55,520 --> 00:23:59,120 Speaker 7: Yeah. So the issue here is that after pinter versus doll, 397 00:23:59,160 --> 00:24:02,480 Speaker 7: there were a bunch of cases involving what were basically 398 00:24:02,520 --> 00:24:06,440 Speaker 7: registered offerings. They were registered offerings. They were IPOs where 399 00:24:06,440 --> 00:24:09,800 Speaker 7: people sued for false statements in the IPO documents. Now 400 00:24:09,840 --> 00:24:13,080 Speaker 7: there's a cause of action specifically for that false statements 401 00:24:13,080 --> 00:24:16,120 Speaker 7: in a registration statement under section eleven, and they would 402 00:24:16,160 --> 00:24:19,480 Speaker 7: also sue under section twelve because Section twelve has liability 403 00:24:19,520 --> 00:24:22,800 Speaker 7: both for unregistered offerings, which these weren't, or for false 404 00:24:22,840 --> 00:24:26,680 Speaker 7: statements and a perspectives and courts rejected the Section twelve 405 00:24:26,720 --> 00:24:30,439 Speaker 7: liability looking at pinter in a lot of cases where 406 00:24:30,480 --> 00:24:34,520 Speaker 7: there was no direct contact with the buyer. So for example, 407 00:24:34,960 --> 00:24:38,480 Speaker 7: issuing companies, it was their securities, but they sold in 408 00:24:38,520 --> 00:24:41,680 Speaker 7: a firm commitment underwriting, meaning the underwriters bought the securities 409 00:24:41,720 --> 00:24:44,320 Speaker 7: from the issuer. The underwriters then sold to the public. 410 00:24:44,840 --> 00:24:47,200 Speaker 7: The purduser would try to sue the issuer under section 411 00:24:47,280 --> 00:24:50,159 Speaker 7: twelve because the issuer's name is all over the perspectives, 412 00:24:50,160 --> 00:24:53,520 Speaker 7: it's like their company, it's their securities being sold, and 413 00:24:53,560 --> 00:24:56,080 Speaker 7: the courts would say the issuer did not have enough 414 00:24:56,520 --> 00:25:00,520 Speaker 7: direct involvement with this particular sale to this buyer to 415 00:25:00,800 --> 00:25:04,480 Speaker 7: justify imposing Section twelve viability. Now, you could still have 416 00:25:04,800 --> 00:25:07,840 Speaker 7: other forms of liability because these were registered offerings, but 417 00:25:07,880 --> 00:25:10,520 Speaker 7: you couldn't have liability under section twelve. So the court 418 00:25:10,520 --> 00:25:13,080 Speaker 7: reading penttrovicious now very narrowly to mean you have to 419 00:25:13,080 --> 00:25:15,520 Speaker 7: have had some kind of contact with a relationship with 420 00:25:15,560 --> 00:25:18,280 Speaker 7: the buyer. So now we fast forward to crypto, and 421 00:25:18,320 --> 00:25:21,720 Speaker 7: the problem is there isn't an alternative scheme because crypto, 422 00:25:21,840 --> 00:25:24,080 Speaker 7: assuming it's a security, which is a wholes everything, but 423 00:25:24,160 --> 00:25:27,439 Speaker 7: let's assume is a security. If crypto is a security, 424 00:25:27,520 --> 00:25:31,560 Speaker 7: it's not registered. So the liability regime that was available 425 00:25:31,680 --> 00:25:35,520 Speaker 7: in those IPO cases for registered offerings is not available 426 00:25:35,600 --> 00:25:40,280 Speaker 7: to these shareholders. So for these shareholders, section twelve is 427 00:25:40,560 --> 00:25:44,480 Speaker 7: sort of the main potential avenue of liability other than 428 00:25:44,520 --> 00:25:47,800 Speaker 7: the anti fraud laws, which are hard. There's much harder. 429 00:25:48,400 --> 00:25:51,959 Speaker 7: So they're suing under section twelve because that's it. And 430 00:25:52,240 --> 00:25:55,400 Speaker 7: what we've seen now is to appellate court said direct contact. 431 00:25:55,400 --> 00:25:57,679 Speaker 7: We never said that. What are you talking about, known 432 00:25:57,720 --> 00:26:00,600 Speaker 7: as it's talent is a solicitation And as long as 433 00:26:00,640 --> 00:26:04,680 Speaker 7: you make these public statements in advertising urging people to buy, 434 00:26:04,760 --> 00:26:08,120 Speaker 7: that's a solicitation even if there's no personal relationship. Meanwhile, 435 00:26:08,200 --> 00:26:10,439 Speaker 7: there are at least a couple of other decisions that 436 00:26:10,560 --> 00:26:13,600 Speaker 7: say no, we're sticking to the old interpretations of pinter 437 00:26:13,720 --> 00:26:16,080 Speaker 7: that there have to be this kind of direct relationship. 438 00:26:16,520 --> 00:26:18,560 Speaker 7: And then you have courts that are sort of like saying, 439 00:26:19,160 --> 00:26:22,800 Speaker 7: like in a case against Coinbase, that coinbase with air 440 00:26:22,880 --> 00:26:27,040 Speaker 7: drops and materials about particular securities. That wasn't a solicitation. 441 00:26:27,119 --> 00:26:30,280 Speaker 7: But it's not exactly clear why, you know, the court 442 00:26:30,359 --> 00:26:33,040 Speaker 7: just says that's not enough. So we don't know exactly 443 00:26:33,080 --> 00:26:35,720 Speaker 7: what's enough or what exactly the regime is going to be. 444 00:26:36,400 --> 00:26:40,040 Speaker 2: The Supreme Court decided not to take a case involving 445 00:26:40,119 --> 00:26:44,840 Speaker 2: cardone Capital. Tell us a little about the issues there, Well, 446 00:26:44,960 --> 00:26:45,400 Speaker 2: that was the. 447 00:26:45,359 --> 00:26:47,200 Speaker 7: Case that was Actually it wasn't a registered offering. I 448 00:26:47,240 --> 00:26:50,480 Speaker 7: believe it was under Regulation A. So Regulation A is 449 00:26:50,600 --> 00:26:54,879 Speaker 7: an exemption from a full on registered offerings, but it 450 00:26:54,880 --> 00:26:58,480 Speaker 7: does require some degree of filing and disclosure with the SEC. 451 00:26:59,119 --> 00:27:02,919 Speaker 7: So it wasn't an registered offering. But because it's not 452 00:27:03,440 --> 00:27:07,040 Speaker 7: registered offerings, the standard protections available in registered offerings are 453 00:27:07,080 --> 00:27:10,960 Speaker 7: not available to purchasers. Instead, the only liability available would be, 454 00:27:11,000 --> 00:27:13,080 Speaker 7: you know, just straight up fraud, which is again very 455 00:27:13,080 --> 00:27:16,400 Speaker 7: hard to prove, or Section twelve liability. That's what's available. 456 00:27:16,800 --> 00:27:20,240 Speaker 7: And so this real estate company they use social media 457 00:27:20,880 --> 00:27:24,560 Speaker 7: to advertise the offering that was filed with the SEC. 458 00:27:24,680 --> 00:27:26,280 Speaker 7: They had documents with the SEC and so forth, and 459 00:27:26,359 --> 00:27:30,920 Speaker 7: shareholders claimed that these advertisements were solicitations. In the Ninth 460 00:27:30,960 --> 00:27:34,320 Speaker 7: Circuit agreed and repudiated. I mean, you know, some of 461 00:27:34,359 --> 00:27:36,359 Speaker 7: the case law that had held there must be direct 462 00:27:36,400 --> 00:27:38,040 Speaker 7: contact hadn't come out of the Ninth Circuit, so at 463 00:27:38,080 --> 00:27:40,520 Speaker 7: very least it was disagreeing with you know, the other 464 00:27:40,640 --> 00:27:45,119 Speaker 7: courts that had imposed something like a direct contact requirement. 465 00:27:45,359 --> 00:27:48,199 Speaker 7: But the Supreme Court denied sort you know, I mean, 466 00:27:48,200 --> 00:27:49,720 Speaker 7: there are any number of reasons why they could have 467 00:27:49,720 --> 00:27:52,480 Speaker 7: denied CIRT. But one possibility is that the social media 468 00:27:52,560 --> 00:27:56,640 Speaker 7: cases are new. They're you know, looking to this old 469 00:27:56,760 --> 00:28:00,280 Speaker 7: precedent that was generated under IPO situations, and you know, 470 00:28:00,280 --> 00:28:02,119 Speaker 7: it may take some time to work through the courts. 471 00:28:02,600 --> 00:28:04,800 Speaker 2: You know, if you ask an average person, it doesn't 472 00:28:04,840 --> 00:28:09,240 Speaker 2: seem like the difficult question. They're online, they're soliciting. Yeah, 473 00:28:09,240 --> 00:28:09,879 Speaker 2: they're selling. 474 00:28:10,800 --> 00:28:14,800 Speaker 7: What makes more difficult, Well, because the interesting thing is 475 00:28:14,880 --> 00:28:18,240 Speaker 7: that the word solicit it doesn't actually appear in the statute. 476 00:28:18,320 --> 00:28:22,560 Speaker 7: Nothing in the statute says imposing liability for solicitation. Well, 477 00:28:22,560 --> 00:28:26,320 Speaker 7: the statute says is imposing liability for selling. The Supreme 478 00:28:26,400 --> 00:28:29,920 Speaker 7: Court's interpretation of selling in Printer versus Doll, this case 479 00:28:29,920 --> 00:28:32,760 Speaker 7: from nineteen eighty eight is the one that imposed this 480 00:28:32,920 --> 00:28:37,040 Speaker 7: concept of solicitation with this very specific kind of definition. 481 00:28:37,240 --> 00:28:39,680 Speaker 7: And to be honest, Printer doesn't seem to really understand 482 00:28:39,720 --> 00:28:42,600 Speaker 7: how security sales works. There are parts of it that 483 00:28:43,400 --> 00:28:46,840 Speaker 7: display a kind of lack of understanding. For instance, there's 484 00:28:46,880 --> 00:28:49,040 Speaker 7: a line in it that says you can't have liability 485 00:28:49,080 --> 00:28:51,760 Speaker 7: for a sellers seller that if you sell to somebody 486 00:28:52,080 --> 00:28:55,240 Speaker 7: and that person sells to someone else, the original seller 487 00:28:55,280 --> 00:28:55,720 Speaker 7: isn't going. 488 00:28:55,640 --> 00:28:56,200 Speaker 6: To be liable. 489 00:28:56,200 --> 00:28:58,880 Speaker 7: But that's a firm commitment underwriting and ports of struggling 490 00:28:58,920 --> 00:29:00,880 Speaker 7: with that the secs and ruggling with that ever since 491 00:29:00,880 --> 00:29:04,040 Speaker 7: Piner versus all held it. So you know, this concept 492 00:29:04,040 --> 00:29:07,360 Speaker 7: of solicitation exactly how we're defining it is not in 493 00:29:07,400 --> 00:29:09,760 Speaker 7: the statute. It comes from the Supreme Court case Lawn. 494 00:29:09,800 --> 00:29:11,000 Speaker 7: So now we're all trying to figure out what the 495 00:29:11,040 --> 00:29:13,600 Speaker 7: Supreme Court mat and how you translate a case in 496 00:29:13,680 --> 00:29:15,120 Speaker 7: nineteen eighty eight to today. 497 00:29:15,640 --> 00:29:17,880 Speaker 2: Coming up next on the Bloomberg Law Show, I'll continue 498 00:29:17,880 --> 00:29:22,440 Speaker 2: this conversation with Professor Ann Lipton of Tulane University, and 499 00:29:22,480 --> 00:29:25,000 Speaker 2: we'll talk about the split in the circuit. Remember, you 500 00:29:25,000 --> 00:29:27,240 Speaker 2: can always get the latest legal news by listening to 501 00:29:27,280 --> 00:29:31,440 Speaker 2: our Bloomberg Law podcasts and attorneys looking for legal research. 502 00:29:31,760 --> 00:29:34,800 Speaker 2: Whether you're an in house counsel or in private practice, 503 00:29:34,920 --> 00:29:38,000 Speaker 2: Bloomberg Law gives you the edge with the latest in 504 00:29:38,120 --> 00:29:43,000 Speaker 2: AI powered legal analytics, business insights, and workflow tools. With 505 00:29:43,160 --> 00:29:46,320 Speaker 2: guidance from our experts, you'll grasp the latest trends in 506 00:29:46,360 --> 00:29:50,080 Speaker 2: the legal industry, helping you achieve better results for the 507 00:29:50,120 --> 00:29:53,320 Speaker 2: practice of law, the business of law, the future of law. 508 00:29:53,520 --> 00:29:56,760 Speaker 2: Visit Bloomberg Law dot com. I'm June Brosso and you're 509 00:29:56,800 --> 00:29:57,959 Speaker 2: listening to Bloomberg. 510 00:30:05,840 --> 00:30:10,640 Speaker 1: This is Bloomberg Law with June Grosso from Bloomberg Radio. 511 00:30:11,400 --> 00:30:14,000 Speaker 2: You're listening to a special best of edition of the 512 00:30:14,040 --> 00:30:17,640 Speaker 2: Bloomberg Law Show. I've been talking to business law professor 513 00:30:17,680 --> 00:30:20,840 Speaker 2: and Lipton of Tulane University about what it means to 514 00:30:20,920 --> 00:30:25,360 Speaker 2: sell securities in the age of YouTube and Instagram. So 515 00:30:25,520 --> 00:30:28,760 Speaker 2: the Ninth and the eleventh Circuits are they in sync 516 00:30:28,840 --> 00:30:30,239 Speaker 2: their rulings. 517 00:30:30,080 --> 00:30:32,920 Speaker 7: Yeah, they seem to be following the same path at 518 00:30:33,080 --> 00:30:34,680 Speaker 7: you know, at least at the very least these sort 519 00:30:34,720 --> 00:30:38,720 Speaker 7: of widespread social media campaigns for sufficient. But what's really 520 00:30:38,800 --> 00:30:40,680 Speaker 7: unclear is like what would be like I mean like, 521 00:30:40,720 --> 00:30:43,680 Speaker 7: once you take away the requirement of direct contact, which 522 00:30:43,720 --> 00:30:46,600 Speaker 7: is how courts seem to be reading it before, then 523 00:30:46,640 --> 00:30:49,400 Speaker 7: there's the question of well, how much urging is enough? 524 00:30:50,160 --> 00:30:53,120 Speaker 7: And that was exactly what happened with coinbase, where you know, 525 00:30:53,240 --> 00:30:55,920 Speaker 7: Coinbase technically it did have direct contact. It was talking 526 00:30:55,920 --> 00:30:58,360 Speaker 7: to its customers and it you know, does whatever it 527 00:30:58,400 --> 00:30:59,960 Speaker 7: does to say, you know, here's an air drop of 528 00:31:00,120 --> 00:31:02,040 Speaker 7: new security or whatever. And the court said, well, that's 529 00:31:02,120 --> 00:31:04,200 Speaker 7: just not enough. So now we have all kinds of 530 00:31:04,240 --> 00:31:07,040 Speaker 7: questions like if social media is permissible, if you don't 531 00:31:07,040 --> 00:31:11,040 Speaker 7: have the restriction of direct contact, then how much urging 532 00:31:11,400 --> 00:31:15,120 Speaker 7: is enough to qualify solicitation? Given that in Pinter, the 533 00:31:15,120 --> 00:31:19,720 Speaker 7: Supreme Court's concern was we don't want just substantial participation 534 00:31:19,800 --> 00:31:21,640 Speaker 7: to be enough. And the reason we don't was because 535 00:31:21,640 --> 00:31:23,680 Speaker 7: we want people to have certainty as to when they 536 00:31:23,680 --> 00:31:26,440 Speaker 7: are potentially liable or not. It's important that we have certainty. 537 00:31:26,800 --> 00:31:30,080 Speaker 2: And which circuits have a different take on this than 538 00:31:30,120 --> 00:31:31,280 Speaker 2: the ninth and the eleventh. 539 00:31:32,000 --> 00:31:35,040 Speaker 7: There are several circuits that implied anyway, especially in these 540 00:31:35,040 --> 00:31:37,719 Speaker 7: IPO cases, that you needed something like direct contact. The 541 00:31:37,760 --> 00:31:41,520 Speaker 7: third circuit, the first circuit, the fifth circuit. I know 542 00:31:41,560 --> 00:31:46,280 Speaker 7: there's definitely a district core case involving crypto that followed 543 00:31:46,600 --> 00:31:49,240 Speaker 7: in the second circuit that followed these cases to say no, 544 00:31:49,360 --> 00:31:52,640 Speaker 7: you need something like direct contact, although sometimes the phrasing 545 00:31:52,680 --> 00:31:54,960 Speaker 7: they use is sort of unclear because they say direct 546 00:31:55,040 --> 00:31:57,800 Speaker 7: contact or active solicitation, and it's not exactly clear what 547 00:31:57,840 --> 00:31:58,640 Speaker 7: they mean by active. 548 00:31:59,520 --> 00:32:03,680 Speaker 2: Why don't don't these in quote sellers want to register 549 00:32:04,160 --> 00:32:05,240 Speaker 2: just to be safe? 550 00:32:05,520 --> 00:32:07,120 Speaker 7: So first of all, the crypto people, I'll say that 551 00:32:07,120 --> 00:32:09,360 Speaker 7: these aren't securities anyway. But the whole point is that 552 00:32:09,520 --> 00:32:14,520 Speaker 7: like registration, if you register them that there's a terrific 553 00:32:14,560 --> 00:32:17,760 Speaker 7: amount of disclosure you have to make, and there's very 554 00:32:17,760 --> 00:32:21,360 Speaker 7: strict liability if those disclosures are false. That's why courts 555 00:32:21,360 --> 00:32:23,360 Speaker 7: could get away for so long saying well, we won't 556 00:32:23,360 --> 00:32:26,800 Speaker 7: have Section twelve liability for these IPO situations because there 557 00:32:26,840 --> 00:32:29,680 Speaker 7: were alternatives. There's some very strict liability for false statements. 558 00:32:29,680 --> 00:32:32,040 Speaker 7: If you register, you have to do a terrific amount 559 00:32:32,120 --> 00:32:35,959 Speaker 7: of disclosure. It's very expensive, and you're risking this liability, 560 00:32:36,200 --> 00:32:40,080 Speaker 7: and a lot of crypto people say that the registration requirements, 561 00:32:40,120 --> 00:32:45,080 Speaker 7: like the disclosure requirements that attach, are simply not suitable 562 00:32:45,080 --> 00:32:47,240 Speaker 7: for crypto, Like they ask for things that don't make 563 00:32:47,280 --> 00:32:50,360 Speaker 7: sense in the crypto context, like principles of an organization 564 00:32:50,480 --> 00:32:53,960 Speaker 7: when it's a decentralized autonomous organization, or addresses when there 565 00:32:54,000 --> 00:32:57,160 Speaker 7: is no address. So the crypto people will say that 566 00:32:57,320 --> 00:33:00,360 Speaker 7: not only is disclosure expensive and open us up to 567 00:33:00,360 --> 00:33:04,440 Speaker 7: all this liability, but the sec hasn't updated the registration 568 00:33:04,520 --> 00:33:06,800 Speaker 7: requirements to really make sense in a crypto world. 569 00:33:07,680 --> 00:33:10,040 Speaker 2: So then will it be up to the Supreme Court 570 00:33:10,240 --> 00:33:13,800 Speaker 2: to clarify this so that there is clearer guidance? 571 00:33:14,520 --> 00:33:16,560 Speaker 7: Very possibly, I mean, you know, there's a lot that 572 00:33:16,560 --> 00:33:18,680 Speaker 7: could happen in between now and then. I mean, first 573 00:33:18,680 --> 00:33:21,320 Speaker 7: of all, if all the circuits come to settle on something, 574 00:33:21,800 --> 00:33:24,040 Speaker 7: I mean, the Supreme Court doesn't have the kind of 575 00:33:24,080 --> 00:33:28,760 Speaker 7: passion for securities cases that say I do. So if 576 00:33:28,760 --> 00:33:33,680 Speaker 7: the circuits coalesce around a principle that's coherent, then the 577 00:33:33,720 --> 00:33:36,280 Speaker 7: Supreme Court may not step in at all. And you know, 578 00:33:36,760 --> 00:33:38,920 Speaker 7: we can all argue about it, but you know, I'm 579 00:33:38,920 --> 00:33:41,680 Speaker 7: not convinced that crypto is you know, the wave of 580 00:33:41,680 --> 00:33:45,080 Speaker 7: the future. So at some point, if crypto has becomes 581 00:33:45,160 --> 00:33:48,600 Speaker 7: less popular, then we may just see less of these cases. 582 00:33:48,840 --> 00:33:52,200 Speaker 7: I mean, Regulation A was how this came up in 583 00:33:52,280 --> 00:33:55,000 Speaker 7: the Ninth Circuit, and that will still exist because that's 584 00:33:55,000 --> 00:33:57,800 Speaker 7: sort of a formal disclosure space for securities that you 585 00:33:57,840 --> 00:34:00,720 Speaker 7: don't want to do full registration for ok isn't really 586 00:34:00,720 --> 00:34:04,160 Speaker 7: that popular to begin with, So I mean, if crypto 587 00:34:04,320 --> 00:34:07,200 Speaker 7: becomes less of a thing, it may simply be that 588 00:34:07,320 --> 00:34:09,880 Speaker 7: the distute kind of settles down by itself. 589 00:34:10,400 --> 00:34:12,600 Speaker 2: Well, it's been great to talk to you in I 590 00:34:12,719 --> 00:34:17,200 Speaker 2: love your enthusiasm about securities law. That's Anne Lipton, a 591 00:34:17,239 --> 00:34:20,880 Speaker 2: business law professor at Tulane University. And that's it for 592 00:34:20,920 --> 00:34:23,640 Speaker 2: this edition of the Bloomberg Law Show. Remember you can 593 00:34:23,719 --> 00:34:26,040 Speaker 2: always get the latest legal news by listening to our 594 00:34:26,080 --> 00:34:30,160 Speaker 2: Bloomberg Law podcasts. You can find them on Apple Podcasts, Spotify, 595 00:34:30,600 --> 00:34:35,800 Speaker 2: and at www dot Bloomberg dot com, Slash podcast Slash Law. 596 00:34:36,280 --> 00:34:39,800 Speaker 2: Stay with us. Today's top stories and global business headlines 597 00:34:39,800 --> 00:34:42,480 Speaker 2: are coming up right now.