Facebook has been misleading investors about its “shrinking” teen and young-adult user bases and about the actual number of Facebook users, former employee Frances Haugen alleged in a whistleblower complaint filed with the US Securities and Exchange Commission. “For years, Facebook has misled investors and advertisers about [its] shrinking user base in important demographics, declining content production, and the true number of recipients of ‘Reach & Frequency’ advertising,” the complaint said.

Noting that “Facebook’s stock valuation is based almost entirely on predictions of future advertising revenue,” the complaint cites “evidence showing that Facebook has, for years past and ongoing, violated US securities laws by making material misrepresentations and omissions in statements to investors and prospective investors, including… through filings with the SEC, testimony to Congress, online statements, and media stories.”

“Facebook has misrepresented core metrics to investors and advertisers including the amount of content produced on its platforms and growth in individual users (especially in high-value demographics),” the complaint said. Facebook’s advertising algorithms did not properly account for what the complaint calls Single Users with Multiple Accounts (SUMA), and the company thus “systematically overcharg[ed] advertisers” by misrepresenting the number of individual users, Haugen alleged.

“Facebook’s mishandling of duplicate accounts constitutes extensive fraud against its advertisers, and misrepresentations to investors,” the complaint alleged.

While Facebook reported user growth to investors, the company “failed to disclose internal data showing a contraction of the user base in important demographics, including American teenagers and young adults. The company has also hidden the extent to which content production per user has been in long-term decline,” the complaint said.

Complaints based on internal Facebook documents

Haugen filed eight whistleblower complaints with the help of nonprofit group Whistleblower Aid, all of which were published in a CBS News article yesterday. The complaints are “based on tens of thousands of internal Facebook documents secretly copied by Haugen before she left the social media company in May,” CBS wrote.

Some of the allegations in the complaints were revealed weeks ago, such as one regarding the XCheck program that allowed 5.8 million VIPs including celebrities, politicians, and athletes to evade the posting rules that applied to most users.

Haugen’s other complaints allege that Facebook misled investors and the public about various problems including Facebook’s role in the January 6 insurrection, Facebook’s failure to remove the vast majority of hate speech, the harm Facebook caused teenagers’ mental and physical health, Facebook’s enablement of human trafficking, Facebook’s promotion of misinformation and hate speech, and how Facebook “promotes global division and ethnic violence.” Haugen initially filed the complaints anonymously but spoke in a 60 Minutes interview and testified in a Senate Commerce Committee hearing today about protecting kids online.

Facebook said in a statement to Ars that “These claims are simply false. It’s important to note that Frances herself admits that she has no direct knowledge of how our ads system works. We tell investors and advertisers about our user base and how it is calculated in our public filings, and we provide additional information to advertisers in our ad products, ad interfaces, in our help centers, and in other places. We stand by these disclosures. Ultimately, advertisers use Facebook because they see results—we help them meet their business objectives and provide appropriate metrics in our reporting tools.”

In its most recent quarterly earnings report, Facebook said it had 1.91 billion average daily active users and 2.9 billion monthly active users in June, with both figures up 7 percent year over year.

Young adults see FB as “negative, fake, and boring”

The complaint cited an internal Facebook report that said, “Facebook’s teen and young adult DAU [Daily Active Users] has been in decline since 2012/2013. Data science findings indicate that only users 25 and above are increasing their use of Facebook. The Teen DAU has plateaued and the Young Adult (18-24) DAU continues to decline.”

Another internal record said that young adults “want uplifting and motivating content, yet see FB content as negative, fake, and boring.” Internal records also said that teen daily active users dropped 13 percent from 2019 to 2021 and that during the pandemic, “every cohort’s use of Facebook increased, except for those 23 and under, which continued to decline.”

One internal document said that over 15 percent of new teen accounts were existing users creating a second account, a higher percentage than for users overall. Facebook acknowledged its duplicate-account problem in a January 2021 filing with the SEC, saying that “duplicate accounts may have represented approximately 11 percent of our worldwide MAUs [monthly active users],” the complaint noted. But in a 2018 earnings call, Facebook CEO Mark Zuckerberg claimed the company’s tally of MAUs “refers to individual people rather than active accounts, so it excludes when people have multiple active accounts on a single app,” the complaint said.

Facebook CFO David Wehner seemed to contradict Zuckerberg in that same call, acknowledging that “the Facebook MAU number does count multiple accounts for a single user when such accounts exist, and we estimate those represent approximately 10 percent of our Facebook MAUs as previously disclosed in the limitation of key metrics section in our SEC filings.” Haugen’s complaint also pointed to a September 2017 AdWeek article that said Facebook claimed to reach more people than actually existed in certain age groups, and to a November 2019 Financial Times article on “Facebook’s fake numbers problem.”

“Facebook overcharged advertisers on a vast scale”

In the section alleging that “Facebook’s mishandling of duplicate accounts constitutes extensive fraud against its advertisers, and misrepresentations to investors,” the complaint notes that Facebook offers “Reach and Frequency” tools that let advertisers control the number of users who are shown an ad and the number of times each person sees an ad.

“By delivering too many ads to users that the advertisers did not want to pay for, Facebook overcharged advertisers on a vast scale,” the complaint alleged, citing a document that said adjusting numbers for duplicate accounts “would reduce overestimation of population in age groups for our top 30 ad markets by 50 percent when included by itself and by 63 percent when included in conjunction with age modeling.”

“We find that, after including SUMA accounting in audience size calculation, 82 percent of current R&F revenue would see an audience size reduction [of] less than 10 percent, [while] 95 percent [of current R&F revenue would see] a reduction less than 16 percent,” the Facebook document said.

The whistleblower complaint concluded by urging the SEC to take action:

The SEC is charged with enforcing the laws that protect investors in public companies like Facebook. Facebook’s investors care about these misrepresentations and omissions about duplicate accounts and corresponding user numbers/growth for two reasons. First, if advertisers were aware of the discrepancies, they would spend less on ads, leading to lower advertising revenue and lower profits. Second, some investors simply will not want to invest in a company that does not have the growth (e.g., daily and monthly active users) that is represented and then engages in misstatements and omissions on this topic.

https://arstechnica.com/?p=1801234