Analysis: Why Elon Musk’s battle with Twitter may lead to more SEC scrutiny

WASHINGTON, July 14 (Reuters) – Twitter Inc. (TWTR.N) The combat with Elon Musk to implement his $44 billion deal to purchase the social media platform might draw scrutiny from the US securities regulator on whether or not Musk misled the market through the deal.

Twitter on Tuesday requested a Delaware courtroom to order the president of Tesla Inc and the world’s richest individual to finish the merger, beginning what guarantees to be one of many largest authorized confrontations in Wall Avenue historical past. Learn extra

On Friday, Musk stated he terminated the deal as a result of Twitter violated the settlement by not responding to requests for details about pretend accounts or spam on the platform, which is important to its enterprise. Learn extra

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In its lawsuit filed on Tuesday, Twitter not solely alleges that Musk was actually holding again for monetary causes and violated the phrases of the deal, but additionally that Musk broke US securities guidelines by not disclosing his 9% holding to Twitter on time.

Twitter additionally claims that by inventing a “narration” about its spam accounts, Musk mishandled Twitter’s dealing with of the issue and its communications with the social media firm, “with equally deceptive implications concerning the potential for completion of the merger and about Twitter’s operations.”

Twitter shares have been on a wild journey since Musk revealed his stake within the firm on April 4, leaping 27% initially and rising to just about $52 when the deal was agreed on April 25, earlier than dropping to about $37 on Wednesday. .

Authorized consultants say the case might draw scrutiny from the US Securities and Trade Fee (SEC), which has been in battle with Musk because the billionaire tweeted in 2018 that he had secured funding to take Tesla particularly when the SEC discovered he had not . . The company already has a number of investigations open into Musk, in keeping with courtroom filings and media studies. Learn extra

“Once you’re coping with knowledge about public firms that have an effect on inventory costs, the SEC antenna is skyrocketing,” stated Stephen Crimmins, companion at Davis Wright Tremaine LLP and former SEC litigant. “So the Securities and Trade Fee ought to look into the matter, and extra importantly, Musk’s latest historical past with the SEC.”

The Securities and Trade Fee and Twitter declined to remark. Musk’s representatives didn’t reply to requests for remark.

Twitter estimates that about 5% of its customers are pretend accounts, though unbiased researchers estimate that the quantity could also be thrice larger. Learn extra

Common “non-essential” claims

Certain sufficient, the securities legal guidelines enable Musk to alter his thoughts and play hardball in negotiations. As a result of Musk isn’t a Twitter CEO, he doesn’t have the identical authorized obligations to shareholders when making public statements concerning the firm as Twitter insiders. Nonetheless, legal professionals stated, Musk has a basic authorized obligation to not mislead the market by way of materials misrepresentations or omissions.

In April, the Securities and Trade Fee requested Musk if the disclosure of his Twitter stake was overdue and why it indicated he meant to be a passive shareholder, including that his response ought to handle public statements he made about whether or not Twitter adheres to the ideas of free speech. The regulatory submitting seems. Musk reinstated the disclosure to point that he’s an energetic investor.

Attorneys stated the Securities and Trade Fee will doubtless broaden this question to discover whether or not Musk was honest in his subsequent public statements about his intentions relating to the deal and the spam case.

Twitter, for instance, claims that in a Could 13 tweet, Musk distorted Twitter’s pattern dimension to estimate spam accounts as solely 100, although Twitter clarified earlier that day in a particular due diligence assembly. It sampled a complete pool of about 9,000 accounts per account. a fourth.

The social media firm additionally cited different “unsubstantiated” public claims later made by Musk, together with that pretend Twitter customers may very well be as excessive as 90%. On Could 17, Musk tweeted that the deal “cannot transfer ahead” till he had extra info.

That tweet was inquired by the Securities and Trade Fee, asking why Musk had not adjusted his regulatory papers to mirror the obvious change within the standing of the transaction, in keeping with a file posted to the SEC’s database on Thursday indicating that the company was monitoring Musk’s statements concerning the deal.

Musk’s legal professionals stated the tweet didn’t require an modification as a result of, whereas he needed extra knowledge about spam accounts, Musk’s plans for the deal remained unchanged.

“The SEC goes to have a look and wish to see if he’s making excuses, basically deceptive market shareholders,” stated Robert Frenchman, companion at Mukasey Frenchman LLP.

Howard Fisher, a companion at Moses & Singer and a former lawyer at SEC, stated the company may discover whether or not Musk goals to harm Twitter’s inventory worth, with a view to renegotiating the phrases of the deal.

“It may be argued that his continued public feedback … may very well be thought of market manipulation,” he added.

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(Reporting by Michael Value in Washington) Further reporting by Katanga Johnson in Washington Enhancing by Matthew Lewis

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