Shareholder Brings Fraud Suit Against Zoom Over Encryption and Privacy Issues

Stockholder Michael Drieu filed a class action complaint against defendants Zoom Video Communications, Inc., et al. for violating federal securities laws. The suit comes as Zoom and other videoconferencing platforms have seen usage increase dramatically, as millions move to telework during the COVID-19 pandemic. The rise in popularity has also revealed privacy flaws within Zoom.

Drieu and other class members purchased Zoom securities between April 18, 2019, and April 6, 2020. He alleges that Zoom violated the Securities Exchange Act of 1934, specifically, Sections 10(b) and 20(a) and Rule 10b-5. On April 18, 2019, Zoom conducted its initial public offering (IPO), which sold 9.91 million shares at $36.00 per share. Drieu states that throughout the aforementioned period the defendants “made materially false and misleading statements regarding the Company’s business, operational and compliance policies.”

Zoom allegedly “made false and/or misleading statements and/or failed to disclose that: (i) Zoom had inadequate data privacy and security measures; (ii) contrary to Zoom’s assertions, the Company’s video communications service was not end-to-end encrypted; (iii) as a result of all the foregoing, users of Zoom’s communications services were at an increased risk of having their personal information accessed by unauthorized parties, including Facebook; (iv) usage of the Company’s video communications services was foreseeably likely to decline when the foregoing facts came to light; and (v) as a result, the Company’s public statements were materially false and misleading at all relevant times.”

A July 2019 article revealed that hackers could exploit a flaw in Zoom to hijack and take over webcams. Afterward, Zoom stock fell by 1.22 percent, the equivalent of $1.12 per share. A few days later, a complaint filed with the FTC caused shares to fall an additional $1.32 per share (1.42 percent) to close at $91.40. Drieu argues that Zoom’s stock at the time was artificially inflated. Filings with the FTC reveal that Zoom used “catch-all” provisions for flaws and weaknesses, without identifying its own risks and weaknesses.

In light of the COVID-19 pandemic and widespread use of Zoom, the share price initially increased.  However, a Vice article published on March 26, 2020, revealed that user information was sent to Facebook, resulting in a further drop in stock price. Zoom was sued for transferring this information, an issue which Zoom has now claimed to have fixed. Further revelations have led to multiple Attorney Generals to question Zoom and triggered the filing of a class-action lawsuit. The FBI cautioned Zoom users that hackers were “zoombombing” calls by hijacking meetings and spreading hate speech.

Further, Elon Musk’s SpaceX has banned its employees from using Zoom out of privacy concerns. Zoom CEO Eric Yuan wrote a blog post about the company’s failures and shortcomings. After these revelations, Zoom stock fell $29.77 per share, the equivalent of a 19.62 percent decrease. The shares closed on April 2 at $131.93. The complaint noted that Yuan “recently dumped $38 million of the company’s stock ahead of an investigation into security breaches.”

Further adverse actions, such as the aforementioned investigations and New York City Mayor Bill de Blasio banning the use of Zoom for public schools, led to further decreases in price. Zoom stock fell by 4.10 percent or $5.26 on April 6, closing at $122.94.

The plaintiff states that as a result of Zoom’s “wrongful acts and omissions, and the precipitous decline in the market value of the Company’s securities, Plaintiff and the other Class members have suffered significant losses and damages.”

Drieu concluded that Zoom has violated the Securities Exchange Act of 1934 and subsequently has sought to recover damages from Zoom’s violations. Specifically, he has sought to certify the class and to be awarded damages.

The suit is filed in the California Northern sum District Court. The plaintiff is represented by Pomerantz.