Twitter may trigger SEC scrutiny with attack on Musk

Twitter’s fight with Elon Musk to enforce his $44bn deal to buy the social media platform could attract scrutiny from the US securities regulator over whether Musk misled the market during the course of the deal.

Twitter asked a Delaware court on Tuesday to order the Tesla boss and world’s richest person to complete the merger, setting in motion what may be one of the biggest legal scraps in Wall Street history.

On Friday, Musk said he was terminating the deal because Twitter violated the agreement by failing to respond to requests for information on fake or spam accounts on the platform, which is fundamental to its business performance.

In its Tuesday lawsuit, Twitter alleged that Musk was backing out for financial reasons, breached the deal’s terms and contravened US securities rules by failing to disclose his 9% holding in Twitter on time.

Twitter also claims that in making up a “narrative” about its spam accounts, Musk misrepresented Twitter’s handling of the issue and his communications with the social media company, “with equally misleading implications about the likelihood that the merger would be completed and about Twitter’s operations”.

The price of Twitter shares, on a wild ride since Musk disclosed his stake in the group on April 4, jumped 27% initially and rose to nearly $52 when the deal was agreed on April 25, before falling to about $37 on Wednesday.

Legal experts say the case could attract scrutiny from the US securities and exchange commission (SEC), which has been locked in a feud with Musk since the billionaire tweeted in 2018 that he had funding secured to take Tesla private when the SEC found he did not. The agency already has several open probes into Musk, according to court filings and media reports.

“When you’re dealing with statements about public companies that have an impact on stock prices, the SEC’s antenna goes sky high,” said Stephen Crimmins, a partner at Davis Wright Tremaine and a former SEC litigator. “So the SEC’s got to be looking at it, and all the more so because of Musk’s recent history with the SEC.”

The SEC and Twitter declined to comment. Representatives for Musk did not respond to requests for comment.

Twitter estimates that about 5% of its users are fake accounts, though independent researchers estimate the number could be three times higher.

Lawyers say securities laws allow Musk to change his mind and play hardball in negotiations. And because Musk is not a Twitter executive, he does not have the same legal obligations to its shareholders when making public statements about the company as Twitter insiders. But Musk is generally obliged not to mislead the market through misrepresentations or omissions, said lawyers.

In April, the SEC asked Musk whether the disclosure of his Twitter stake was late and why it indicated that he intended to be a passive shareholder. The SEC said his response should address public statements he made about whether Twitter adheres to free-speech principles, a regulatory filing shows. Musk refiled the disclosure to indicate he was an active investor.

Lawyers said the SEC would probably expand that query to explore whether Musk was honest in later public statements about his intentions for the deal and the spam issue.

Twitter claims that in a May 13 tweet Musk misrepresented its sample size for estimating spam accounts as only 100, even though earlier that day Twitter said in a private due-diligence meeting that it sampled a total set of about 9,000 accounts a quarter.

The social media group cited other “baseless” public Musk claims, including that Twitter’s fake users could be as high as 90% and that it had “lax” detection methods.

“The SEC will take a look and will want to know if he’s raising pretextual excuses and, essentially, misleading shareholders in the market,” said Robert Frenchman, a partner at Mukasey Frenchman.

The agency might explore whether Musk aims to hurt Twitter’s share price  so he can renegotiate the deal terms, said Howard Fischer, a partner at Moses & Singer and a former SEC attorney. “Arguably, his constant public comments ... could be seen as market manipulation.”