Facebook settles in 2 investigations; Round 3 begins

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Facebook is facing public criticism from President Donald Trump and others about its planned cryptocurrency Libra. PHOTO: AFP

SAN FRANCISCO (NYTIMES) - Facebook came under siege on multiple fronts on Wednesday (July 24), agreeing to new layers of oversight and two fines to settle privacy and disclosure violations, even as it acknowledged that it was under investigation from the Federal Trade Commission (FTC) for antitrust concerns.

Early in the day, the company was penalised by the FTC with a record US$5 billion (S$6.8 billion) fine for deceiving users about their ability to control the privacy of their personal data.

As part of a settlement, the company was also ordered to create a new privacy committee on its board and to make other structural changes to increase the transparency and accountability of its data practices.

But the agreement was criticised for failing to limit Facebook's gathering, sharing and use of people's personal information, a practice that has repeatedly raised privacy questions.

And the FTC's commissioners were divided on partisan lines this month when they voted 3-2 to approve the measures, which provide immunity to Facebook's officers and directors and shield the company from known claims of violations through last month - essentially giving it a pass on its past.

At the same time, the Securities and Exchange Commission (SEC) said on Wednesday that it had imposed a US$100 million penalty against Facebook for making misleading disclosures to investors about the risks of misuse of user data.

The SEC said Facebook had known for two years about that misuse but had presented those risks to investors as merely hypothetical.

Hours later, Facebook also disclosed that it was the target of an antitrust investigation by the FTC.

While the agency was known to be looking into the company and whether it had used its reach and clout to reduce competition, a formal investigation starts a more intensive phase of examination.

The developments highlighted the new reality for big tech companies: Scrutiny from regulators and lawmakers has become a constant.

Just on Tuesday, the Justice Department announced a sweeping antitrust review of the tech giants.

For the past few years, American regulators appeared to be lagging as the authorities around the world have stepped up their actions to crimp the power of Facebook, Google, Amazon and Apple.

The contrast was starkest with European officials, who have passed laws and imposed a series of large penalties against big tech companies.

But in recent months, American lawmakers and regulators have also ramped up their activity.

"The online technology industry and our company have received increased regulatory scrutiny in the past quarter," Facebook said in a statement on Wednesday.

Mr Mark Zuckerberg, Facebook's chief executive, said at an employee meeting at the company's headquarters in Silicon Valley that he supported the privacy settlement with the FTC and that the company would change the way the social network operated because "if we don't, then we're going to be held accountable for it".

He did not specifically address the antitrust concerns but said on a conference call with investors, "with the guidance and expectations from regulators, we have a clearer path forward". He called for more government oversight of the tech industry at large.

The FTC confirmed the antitrust investigation against Facebook and declined to comment further.

The agency's five commissioners put out duelling statements on the privacy settlement. The three Republican commissioners - including FTC chairman Joseph Simons - who voted to approve the deal said they were "proud" of the agreement and believed the measures "will provide significant deterrence not just to Facebook, but to every other company that collects or uses consumer data".

But the two Democratic commissioners disagreed. One of them, Mr Rohit Chopra, warned that the terms of the settlement legally shielded Facebook from liability for a wide range of past problematic practices.

"This shield represents a major win for Facebook but leaves the public in the dark as to how the company violated the law and what violations, if any, are going unaddressed," he said.

Even as the scrutiny around Facebook has grown, its business has remained strong. It said on Wednesday that revenue for its second quarter rose 28 per cent from a year ago to US$16.9 billion. While profits fell 49 per cent to US$2.6 billion because of a one-time US$2 billion charge to pay the FTC's fine and an accounting charge related to tax deductions, Facebook still performed better than Wall Street had expected.

"Facebook, with all of its missteps over the past two years, is going to remain a strong stock over the next few years," said Mr Shawn Riegsecker, chief executive of ad-technology company Centro.

The FTC's privacy settlement with Facebook follows an investigation over the past year into whether the company had violated a 2011 privacy agreement with the agency.

Under that earlier agreement, the social network had said it would not deceive people over how their information was used and shared. Then last year, a report from The New York Times and The Observer of London revealed how Facebook had allowed Cambridge Analytica, a British consulting firm to the Trump campaign, to harvest the personal information of its users.

Cambridge Analytica had used the data to build profiles of American voters without the consent of Facebook users.

In its settlement with Facebook Wednesday, the FTC said it had mandated that the social network create an independently appointed privacy committee on its board to review decisions affecting user privacy.

That would reduce the ability of Mr Zuckerberg and others to unilaterally make decisions, the agency said. The FTC also ordered Facebook to designate compliance officers to oversee a privacy programme, undergo regular privacy audits that Mr Zuckerberg and others must submit to and appoint an outside assessor to monitor the handling of data.

All of these would increase Facebook's transparency and accountability, the agency said. Yet the FTC's two Democratic commissioners said the measures were inadequate.

Facebook's officers should be held personally liable for privacy transgressions, they argued, and more needed to be done to curb the company's data-mining practices. They also said that a US$5 billion fine was a drop in the bucket.

"When companies can violate the law, pay big penalties and still turn a profit while keeping their business model intact, enforcement agencies cannot claim victory," Mr Chopra said in his dissent.

The three Republican commissioners said that the US$5 billion fine was "record-breaking" and that it reset the baseline for privacy cases. They also said the FTC did not have a strong enough case to move forward with any litigation against Facebook.

Ultimately, Mr Simons and the other two Republican commissioners, Mr Noah Phillips and Ms Christine Wilson, said the concessions they were able to extract with a settlement were more valuable - and far more certain - than what might be achieved with a drawn-out legal battle.

"Is the relief we would obtain through this settlement equal to or better than what we could reasonably obtain through litigation?" they said. "If the answer had been 'no', it would have made sense to aggressively move forward in court. The answer, however, was 'yes'. "

Lawmakers were sharply critical. The FTC agreement "utterly fails to penalise acebook in any effective way," said Senator Josh Hawley.

Professor Andrew Gavil, who teaches law at Howard University, said the FTC's antitrust investigation represented a commitment of staff and agency resources.

"It also suggests there is reason to believe there is anti-competitive behavior to look at," he said.

The FTC's lengthy privacy inquiry into Facebook could well have brought out evidence that helped persuade the agency to pursue an antitrust investigation, said Prof Gavil, who is a former senior FTC official.

Investigations can take months or even years. They result in staff presentations, by the agency's economic bureau and by its competition bureau, made in private to the five commissioners. The politically appointed commissioners then decide whether to bring a case or not, or try to reach a settlement.

Unlike with the privacy case, there is no provision for fines in a civil antitrust case. But what can happen, if a corporate defendant is found to have violated the nation's antitrust law, is follow-on cases by private plaintiffs, such as other companies.

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