An image of Elon Musk on a smartphone is seen over printed Twitter logos in this photo illustration taken April 28, 2022. REUTERS/Dado Ruvic/Illustration/
Sign up now for FREE, unlimited access to Reuters.com
Sign up
WILMINGTON, Del., Aug 23 (Reuters) – A whistleblower’s complaint that Twitter Inc ( TWTR.N ) misled federal regulators about the company’s security risks could provide Elon Musk with fresh ammunition in his attempt not to buy the company for 44 billion dollars.
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 by former Twitter security chief Peiter Zatko gives Musk new angles to pursue in his legal battle, including claims that Twitter failed to disclose weaknesses in its security and data privacy.
Sign up now for FREE, unlimited access to Reuters.com
Sign up
It provides “a different basis for fraud,” said Ann Lipton, a professor at Tulane Law School.
It’s unclear whether 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 to Zatko.
“We find his departure and that of other key employees curious in light of what we have been finding,” Spiro said in a statement.
Legal experts said the whistleblower’s complaint introduced uncertainty into Musk’s showdown with Twitter, rather than dramatically transforming a case that corporate law experts have said favors Twitter.
“Volatility is useful if you’re not playing a strong hand. It creates some potential for something crazy to happen,” Eric Talley, a professor at Columbia Law School, said of the whistleblower’s complaint.
Twitter shares were down about 5.9% in late trading at $40.44 a share.
“ADD TEXTURE”
Musk, the world’s richest person and chief executive of electric vehicle maker Tesla Inc ( TSLA.O ), said on Twitter in July that he was ending the deal 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 has estimated at 5% in corporate filings. Musk said he relied on those documents when he offered to buy the company.
Twitter and Musk have sued each other, with Twitter asking a Delaware Court of Chancery judge to order Musk to close the deal. The trial will begin on October 17.
On Wednesday, Chancellor Kathaleen McCormick will hear arguments from both sides about access to the documents as part of the discovery process. Legal experts said Musk could raise the whistleblower’s complaint and indicate how his team might use the allegations.
Zatko’s whistleblower complaint, which was made public Tuesday, alleged that Twitter had falsely told regulators that it had a robust security plan.
Zatko said he had warned colleagues that half of the company’s servers had outdated and vulnerable software, according to a redacted version of his complaint. Read more
Twitter Chief Executive Officer Parag Agrawal told employees in a memo that the company is reviewing the claims. “What we have seen so far is a false narrative that is full of inconsistencies and inaccuracies, and presented without significant context,” Agrawal said, according to a CNN report.
Claims that Twitter failed to disclose security and privacy risks could be easier for Musk to prove than allegations that Twitter misrepresented the number of spam accounts, legal experts said.
To prevail on the spam claim, Musk must show that he relied on Twitter’s disclosures about the spam accounts.
Specialists in corporate deals have said that will be difficult, as Musk cited the spam defeat as the reason for buying the company.
Conversely, Zatko’s allegations that the company withheld security information from investors and regulators could qualify as an omission, which would not require Musk to rely on the company’s disclosures.
Musk, however, would still have to prove that Twitter’s allegedly weak defenses against hackers were a material risk that was not disclosed to investors.
And to walk away from the acquisition without paying a billion-dollar cancellation fee, it would have to show that the omission had a material adverse effect 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 at trial.
“This does not open a new battlefront,” Talley said. “It’s adding texture to existing ones.”
Sign up now for FREE, unlimited access to Reuters.com
Sign up
Editing by Noeleen Walder and Deepa Babington
Our standards: the Thomson Reuters Trust Principles.
Tom Hals
Thomson Reuters
Award-winning reporter covering US courts and law from the COVID-19 pandemic to high-profile criminal trials and Wall Street’s biggest failures with over two decades of international financial news experience in Asia and Europe.