Cotchett Pitre & McCarthy and Bottini & Bottini filed suit today on behalf of Twitter shareholders against Elon Musk for allegedly manipulating the market for Twitter stock. After first agreeing to buy Twitter for $54.20 per share on April 25, 2022, Musk began denigrating Twitter and then trying to renegotiate the deal. Musk’s false statements and tweets have resulted in an $8 billion loss of market capitalization for Twitter shareholders, who are forced to go along for the ride and games, according to the suit.
The lawsuit alleges that Musk engaged in a series of intentional acts that harmed investors. First, Musk violated securities law by failing to timely disclose his increasing ownership of Twitter. He secretly amassed more than 5% of Twitter shares starting in January 2022 without disclosing it publicly, as he was required to by SEC rules. When Musk eventually got around to it, he purposely left out his intention to join Twitter’s Board or potentially buy the company outright. Musk then issued an ultimatum letter offering to buy Twitter for $54.20 per share or Musk would sell his 9.2% stock in Twitter. On April 25, 2022, Musk and Twitter announced the buyout without all the details or prior misconduct by Musk.
Musk pledged his Tesla shares as collateral for $12.5 billion in loans to finance part of the purchase price. Musk also initially sold roughly $8.5 billion of Tesla shares to raise funds for the buyout. But then Tesla shares began a steep decline that did not abate, dropping 37% after the announcement of the buyout, causing Musk to stop selling his shares. Musk is on the hook for billions more to complete this buyout both from his own cash and lenders. Tesla’s policies limit Musk’s ability to pledge his Tesla shares as collateral for personal loans to no more than 25% of the loan value, which threshold was breached as Tesla shares continued to plummet.
The lawsuit alleges that Musk came up with a plan to extricate himself from this dilemma by making false public statements about Twitter and the buyout to lower the price of Twitter shares. Musk made a series of these false statements that created leverage for himself to renegotiate or back out of the buyout by purposely casting doubt on whether the Twitter deal would go forward.
As alleged in the complaint, on May 13, 2022, just before the market opened, Musk tweeted that the buyout was “temporarily on hold” to manipulate the market. The buyout was not on hold and there is no provision in the contract that allows Musk to unilaterally put the deal on hold.
Musk then stated in a series of tweets that the buyout would be contingent on the number of fake accounts on Twitter. His tweets escalated and Musk later tweeted that the deal “cannot go forward” unless Musk was satisfied. Musk had no right to cancel the buyout or conduct an investigation into the number of fake accounts because Musk waived due diligence in the buyout contract. Musk was also well aware that Twitter had a certain amount of “fake accounts” and accounts controlled by “bots.”
According to the lawsuit, Musk’s statements and conduct violate the California Corporations Code, which prohibits market manipulation. Specifically, the lawsuit alleges that Musk purposefully manipulated Twitter securities to lower their value. The lawsuit alleges that Musk’s sudden interest in fake accounts is a pretext to back out of the buyout or further lower the $54.20 buyout price. The existence of fake accounts, likely in high numbers, is not surprising. Twitter paid over $800 million to settle a lawsuit that alleged that Twitter had misrepresented facts about its user and growth rate. Twitter has also publicly disclosed there are fake and duplicate accounts. Musk has pointed out that the fake accounts were one of the reasons he wanted to buy Twitter.
“Musk’s wrongful conduct has not only substantially harmed Twitter’s shareholders by causing Twitter’s stock to crater by approximately 25%, but it has also substantially harmed Twitter’s employees.” (Complaint).
– Frank Bottini, Partner at Bottini & Bottini.
“Musk’s disregard for securities laws demonstrates how billionaires can skirt the law and the tax code to build their wealth at the expense of the average American.”(Complaint).
– Anne Marie Murphy, Partner at Cotchett, Pitre & McCarthy
Twitter’s shares have declined significantly as a direct result of Musk’s tweets and his invitation for the SEC to investigate Twitter. The lawsuit seeks remediation for the shareholders who suffered the harm done.
The case is Heresniak v. Musk, Case No. 3:22-cv-03074 (USDC – Northern District of California)
About Cotchett, Pitre & McCarthy, LLP
Cotchett, Pitre & McCarthy engages exclusively in litigation and trials and has earned a national reputation for its dedication to prosecuting or defending socially just and economic fraud actions. To learn more about the firm, visit www.cpmlegal.com.
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