Securities Regulation Daily Wrap Up, FRAUD AND MANIPULATION—S.D. Fla.: Complaint against TikTok moderation provider passes muster after amendment, (Aug 29, 2024)

By Anne Sherry, J.D.

Given another try, plaintiffs identified specifically why statements were false and raised the possibility that content moderation was a core operation of the defendant’s business.

Investors in a French company that provided content moderation to TikTok cured the defects that had brought down their initial complaint. With the benefit of the Southern District of Florida’s earlier decision, which had examined the elements of the plaintiffs’ fraud claims and winnowed down the actionable misstatements, the plaintiffs identified false statements with specificity. Despite the defendants’ arguments that the core operations theory of scienter has not been adopted in the circuit, the court reasoned that this theory can contribute to a holistic scienter analysis (City of Warren Gen. Emps.’ Ret. Sys. v. Teleperformance SE, No. 23-24580-CIV (S.D. Fla. Aug. 28, 2024)).

Background. Among other things, Teleperformance SE provided content-moderation services to TikTok, including removal of “egregious content.” The complaint alleged that the defendants made false statements and omissions about the content-moderation business and Teleperformance’s exit from the business of moderating egregious content following reports that moderators were being trained using images of child sexual abuse.

In May, the court dismissed the action with leave to amend. Because the defects—a failure to plead a domestic transaction and the use of an improper “puzzle pleading” approach—could be easily cured, the court addressed the defendants’ remaining arguments for dismissal and determined that the plaintiffs identified some actionable statements, raised a strong inference of scienter as to those statements, and potentially identified a corrective disclosure for purposes of loss causation.

Falsity. The plaintiffs’ amendments indeed went far enough to insulate the complaint from dismissal. The amended complaint identified as misleading statements that, while accompanied by language suggesting puffery, also contained specific and quantifiable statements of what the defendants did. The plaintiffs met the lower pleading standard for pleading a false or misleading statement and were not required to allege contemporaneous statements or contradictory facts, as is required for pleading scienter. It was plausible that the misstatements were false when made, based on multiple accounts from former content moderators, which witness accounts were grounded in a sufficient factual basis.

Scienter. The court also reiterated its conclusion from the previous opinion that the complaint supported a strong inference of scienter. The surviving statements from the amended complaint were very similar, if not identical, to the statements that the court had already concluded were actionable. The plaintiffs alleged that content moderation was a critical driver of the company’s growth, that the defendants repeated the misstatements, that they gave evasive answers to questions, and that the Colombian government investigated the company. Taken together, this gave rise to a strong inference of scienter. The evasive answers cited by the plaintiffs were not merely “after-the-fact events”; they were directly nonresponsive to questions about negative news articles.

Furthermore, the core operations doctrine at least bolstered this inference of scienter, even if it could not support a strong inference on its own. The complaint went far enough as to raise a factual dispute over whether content moderation and egregious-content moderation could be a core operation.

Loss causation. Finally, a Forbes article qualified as a corrective disclosure for purposes of loss causation. The disclosure did not have to mirror the earlier misrepresentation, but rather share the same subject, and the article met that standard. The plaintiffs also alleged that the article revealed adverse effects on the defendants’ moderators that contradicted the alleged misstatements, making the article both a negative and a corrective disclosure. However, a Time article about the Colombian investigation was not a corrective disclosure because under Eleventh Circuit precedent, an investigation alone is not corrective without allegations of a later finding of wrongdoing.

The case is No. 23-24580-CIV.

Judge: Altonaga, C.

Attorneys: Alex Kaplan (Robbins Geller Rudman & Dowd LLP) for City of Warren General Employees' Retirement System and City of Westland Police and Fire Retirement System. Benjamin Ross Shiekman (Lash Goldberg Fineberg LLP) for Teleperformance SE, Olivier Rigaudy, Daniel Julien and Akash Pugalia.

Companies: City of Warren General Employees' Retirement System; City of Westland Police and Fire Retirement System; Teleperformance SE

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