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By Ryan Tracy and John D. McKinnon
WASHINGTON -- The record $5 billion fine and oversight conditions federal regulators imposed on Facebook Inc. for privacy violations put Big Tech on notice that any company failing to protect consumer information may now face greater legal risks than previously.
The penalty against Facebook, approved on a 3-2 vote by the Federal Trade Commission, expands potential liability for the social-media giant's chief executive, Mark Zuckerberg, and restructures the company's board of directors to boost its oversight of privacy practices.
While critics dismissed the financial penalty as a wrist-slap for Facebook -- which reported second-quarter revenue of $16.9 billion Wednesday -- the structural changes imposed by the commission are now likely to be seen as a measuring stick for other companies.
"I expect a lot of board members and CEOs are chatting and texting today about what exactly they need to do to ensure they are within spitting distance of these new best practices," said Trevor Hughes, president of the International Association of Privacy Professionals.
Mr. Zuckerberg said he hopes the FTC-imposed mandates on Facebook would "set a completely new standard for our industry."
Facebook agreed to the settlement after a year-long FTC investigation found the company had repeatedly used deceptive disclosures and account settings to lure users into sharing personal information, undermining their actual privacy preferences.
The company's actions misled tens of millions of people about the use of their phone numbers, photos of their faces and more -- while allowing app developers that were paying Facebook for ads to gain special access to user information, the FTC said.
The Facebook penalties are "a message to [other companies] that if you get yourself in Facebook's position, this is what you'll get," FTC Chairman Joe Simons told reporters following the announcement.
"The price of privacy violations just went up," said Commissioner Noah Phillips.
Yet the FTC panel split along party lines, with Democrats Rebecca Kelly Slaughter and Rohit Chopra contending that the settlement isn't tough enough to prevent future violations by Facebook. The company's business model relies on tracking online user behavior to sell targeted advertising.
"If the market gets the message that it's profitable to violate a law or order, it's very difficult for a deterrence message to be effective," Ms. Slaughter said.
Congressional Democrats were generally critical. "This fig-leaf deal releases Facebook without requiring any real privacy protections -- no restraints on future data use, no accountability for top executives, nothing more than chump change financial fines," said Sen. Richard Blumenthal (D., Conn.).
Republicans were more supportive. Sen. Roger Wicker (R., Miss.), the Commerce Committee chairman, praised the investigation and settlement as exemplary work by the FTC. But he said the case underscored the need for federal privacy legislation.
Sen. Josh Hawley (R., Mo.), a Big Tech critic, said on Twitter that the settlement "does nothing to change Facebook's creepy surveillance of its own users & the misuse of user data."
Still, Washington is raising its scrutiny of the industry.
The Justice Department -- which shares antitrust enforcement authority with the FTC -- said this week it is opening a broad new review examining whether dominant technology firms are unlawfully stifling competition. That is adding to risks for Facebook as well as Google parent Alphabet Inc., Amazon.com Inc. and Apple Inc.
In its second-quarter earnings report later Wednesday, Facebook warned that the FTC had launched an antitrust investigation into the company in June. Facebook is also facing privacy probes in other countries, and confirmed another mistake this week that allowed children to interact with unapproved users on its Messenger Kids app.
Under the settlement, Mr. Zuckerberg will be required to certify that the company is complying with new privacy strictures, and face civil and criminal penalties for false statements. An independent privacy auditor will be granted access inside Facebook, and the company said it would assign more than 1,000 people to work on the matter.
Facebook's board will create a new committee to more closely monitor the company's privacy practices, and independent directors will have more say over new members. At the same time, Mr. Zuckeberg controls most of the company's voting shares.
Marc Rotenberg, president of the Electronic Privacy Information Center advocacy group, said the internal changes at Facebook won't give the public a way to check their effectiveness. "This is internal reporting, not subject to public review," he said.
Users' experience on Facebook may not change much, but the settlement should boost consumers' confidence that the company is keeping its privacy promises, the FTC and Facebook said.
It will be up to other companies whether to follow Facebook's lead. While FTC officials wanted to use the case to set an example, they also made clear they saw Facebook's actions as distinctly unacceptable.
The Securities and Exchange Commission announced separately on Wednesday a settlement with Facebook -- including a $100 million fine -- over claims it misled investors about the misuse of customer data.
The federal probes began more than a year ago after disclosures that data on tens of millions of Facebook users had been improperly transferred to a political data-analytics firm, Cambridge Analytica, that did work for Donald Trump's 2016 presidential campaign. The FTC and SEC both filed complaints in federal court detailing the results of their investigations, which Facebook agreed to settle without admitting or denying.
Cambridge Analytica's data on Facebook users originated with a University of Cambridge professor's app, "thisisyourdigitiallife," that quizzed users on their personalities and harvested other information from them and their friends. The firm and professor used the information to target U.S. voters, the FTC said in a separate action announcing orders restricting future business activities by the professor and Cambridge Analytica's former CEO.
The FTC said that incident was part of a pattern: Facebook let users think they had turned off certain types of data sharing, when in fact the data was shared anyway -- in many cases because their friends had allowed it. Even after Facebook said in 2015 it had closed that loophole, it only did so partially -- still granting access to "whitelisted" developers, the FTC said.
Facebook separately told users it wanted their phone numbers for security purposes, without making it clear that information would be used for advertising. It also told users they would have to opt into the use of facial-recognition technology on their photos, when in fact approximately 60 million users were subjected to it by default, the FTC said.
The problems weren't a secret inside Facebook, regulators said. As early as September 2015, some employees raised alarms about Cambridge Analytica's practices and asked for an internal investigation into whether it was "scraping" user data, the SEC said.
Over time, more than 30 employees became aware of the data firm's actions, yet Facebook made only generic disclosures to investors in 2016 and 2017 about theoretical data-privacy risks, and told journalists it hadn't uncovered any indications of wrongdoing, the SEC said.
--Dave Michaels contributed to this article.
Write to Ryan Tracy at email@example.com and John D. McKinnon at firstname.lastname@example.org
(END) Dow Jones Newswires
July 24, 2019 18:16 ET (22:16 GMT)
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