A Guide to Investigations and Penalties Facing Facebook

Shares of social media leader Facebook Inc. (FB) have soared in 2019, up by 44.8% year-to-date through the May 7 close, almost triple the 15.0% gain for the S&P 500 Index (SPX). Despite its sharp rebound in 2019, Facebook is far from being out of the woods when it comes to investigations and the possibly massive fines and legal sanctions that may follow.

In 2018, Facebook shares were battered in the wake of various scandals and executive departures, most notably revelations that now-defunct British political consulting firm Cambridge Analytica had mined personal data on more than 87 million Facebook users in the U.S. without their consent, per Forbes. Facebook's stock sank by 43.7% from July 25 to Dec. 24, 2018, based on intraday prices. U.K. regulators hit Facebook with the largest fine possible for the Cambridge Analytica affair, £500,000 ($655,000 at the current exchange rate).

The table below summarizes six significant active investigations being conducted by various governments into Facebook, and, where known, the possible penalties.

Data Sharing Agreements

A federal grand jury in New York City is reportedly investigating the deals that Facebook has struck with more than 150 tech firms to share users' personal information, such as friends, contacts, and other data, sometimes without consent, per The New York Times. Sources for that article indicate that the grand jury has subpoenaed records from at least two prominent device makers. Facebook indicated in a public statement that they are cooperating with the probe.

In a separate matter, the New York State Attorney General's office has confirmed that it is looking into claims that Facebook collected information without approval from the e-mail address books of more than 1.5 million users, per another NYT report. This information allegedly was used to improve the targeting of ads, among other things.

The Cambridge Analytica Affair

The SEC, as well as the Securities and Financial Fraud (SFF) Unit in the U.S. Department of Justice (DOJ), are reportedly investigating Facebook's involvement with Cambridge Analytica, which was utilized by President Trump's campaign organization in 2016, according to an additional report in the NYT. Both are looking into the timeliness and accuracy of Facebook's public assertions about the matter, while the DOJ probe also is concerned with propriety of Facebook's data sharing arrangement with Cambridge.

FTC Data Privacy Probe

As the top federal agency involved with consumer protection, the FTC has data privacy among its concerns. In a 2011 consent decree, Facebook agreed to tighten the security around user data. The FTC reportedly is investigating how Facebook has lived up to that promise, in light of Cambridge Analytica and other matters. Fines could exceed $1 billion, and Facebook could face greater restrictions on how it handles user data, the Times notes.

Housing Discrimination Investigation

The U.S. Department of Housing and Urban Development (HUD) has sued Facebook over allegations that it aids housing discrimination by accepting housing-related ads that are targeted by factors such as race. The company has reached settlements with civil rights groups over this matter, and is fighting the HUD action, the Times indicates.

Under Fire in Europe

Facebook is under ten separate investigations in Ireland alone regarding whether it has violated a new European Union (EU) privacy law, the General Data Protection Regulation (GDPR), that took effect on May 25, 2018, The Wall Street Journal reports. The matters under investigation include whether Facebook is gathering, processing, and protecting users' data in accordance with the law, and whether it is making adequate disclosures to users about its practices.

Meanwhile, pursuant to a data breach that was announced in Sept. 2018, Facebook could face fines of up to $1.63 billion, per another report in the Journal. This breach compromised the accounts of more than 50 million users, and penalties can be assessed if Facebook is determined to be at fault out of failure to adhere to GDPR guidelines. The Data Protection Commission in Ireland is acting as the lead privacy regulator for Facebook in the EU.

Looking Ahead

Despite its sharp advance in 2019, Facebook stock is 13.2% below its 52-week high. Given the legal issues surrounding the firm, including the possibility that those outlined above may represent only the tip of the iceberg, investments in Facebook may have a significant amount of risk attached.