An image of Elon Musk is seen holding a smartphone placed over printed Twitter logos in this image illustration taken on April 28, 2022. Portal/Dado Ruvic/Illustration/
WILMINGTON, Delaware, August 23 (Portal) – A whistleblower’s complaint that Twitter Inc (TWTR.N) misled federal regulators about the company’s security risks could provide new ammunition for Elon Musk in his attempt to frame the company for $44 billion not to buy.
So far, Musk’s legal showdown with Twitter has focused mostly on claims that the company misled the billionaire about the number of bot and spam accounts on its platform.
The whistleblower complaint from Twitter’s former security chief Peiter Zatko gives Musk new perspectives on his lawsuit, including allegations that Twitter failed to disclose vulnerabilities in its security and privacy practices.
It provides “another basis for fraud,” said Ann Lipton, a professor at Tulane Law School.
It’s not clear if and how Musk’s team will use the whistleblower’s information, although Musk’s attorney, Alex Spiro with Quinn Emanuel Urquhart & Sullivan, said Tuesday that a subpoena had been issued against Zatko.
“We found his departure, and that of other key employees, odd given what we found out,” Spiro said in a statement.
Legal experts said the whistleblower complaint had unsettled Musk’s showdown with Twitter, rather than dramatically altering a case that corporate law specialists favor Twitter.
“Volatility is helpful when you’re not playing a strong hand. It creates the possibility that something crazy could happen,” Columbia Law School professor Eric Talley said of the whistleblower complaint.
Twitter stock is down about 5.9% in late trade to $40.44 a share.
‘ADD TEXTURE’
Musk, the world’s richest person and CEO of electric vehicle maker Tesla Inc. (TSLA.O), told Twitter in July that he was ending the agreement to buy the company for $54.20 a share.
Musk accused Twitter of fraudulently misrepresenting the true number of spam and bot accounts on its social media platform, which the company estimates at 5% in corporate filings. Musk said he relied on those documents when bidding to buy the company.
Twitter and Musk have since sued each other, with Twitter asking a judge in the Delaware Court of Chancery to order Musk to complete the deal. A trial is scheduled to begin on October 17.
On Wednesday, Chancellor Kathaleen McCormick will hear arguments from both sides about access to documents as part of the discovery process. Legal experts said Musk could file the whistleblower complaint and specify how his team could use the allegations.
Zatko’s whistleblower complaint, released Tuesday, claimed Twitter falsely told regulators it had a sound security plan.
Zatko said he had warned colleagues that half of the company’s servers were running outdated and vulnerable software, a redacted version of his complaint said. Continue reading
Twitter boss Parag Agrawal told employees in a memo that the company was investigating the claims. “What we’ve seen so far is a false narrative, fraught with inconsistencies and inaccuracies, and presented without meaningful context,” Agrawal said, according to a CNN report.
Claims that Twitter failed to disclose security and privacy risks may be easier to prove for Musk than claims that Twitter misrepresented spam account counts, legal experts said.
In order to defeat the spam claim, Musk must prove that he relied on Twitter’s disclosures about spam accounts.
Corporate transaction specialists have said this will be difficult as Musk cited fighting spam as the real reason for buying the company.
In contrast, Zatko’s claims that the company withheld safety information from investors and regulators could qualify as an omission that would not obligate Musk to rely on the company’s disclosures.
However, Musk has yet to prove that Twitter’s allegedly weak defenses against hackers pose a significant risk that hasn’t been disclosed to investors.
And to walk away from the acquisition without paying a $1 billion termination fee, he would have to demonstrate that the omission had a material adverse impact on Twitter.
A Material Adverse Effect (MAE) is an event that significantly reduces the long-term value of an acquisition.
Talley said whether Zatko’s claims amount to an MAE could be an issue for the trial.
“It doesn’t open a brand new front,” Talley said. “It adds texture to existing structures.”
Edited by Noeleen Walder and Deepa Babington
Our standards: The Trust Principles.
Tom Hals