Adding to the drama surrounding Elon Musk, the world’s richest man, and Twitter, the social media platform that he may or may not be buying, a San Francisco law firm has filed a class action against Musk accusing him of intentionally driving down the price of Twitter shares through a series of false and misleading statements.
The suit was filed in federal court in San Francisco on behalf of Twitter’s shareholders and describes in detail the story of Musk’s on-again, off-again, plan to buy Twitter.
According to the plaintiffs’ complaint, Musk, the CEO of Tesla Inc., planned to finance the $44 billion acquisition of Twitter by pledging some of his holdings in Tesla so he could borrow the purchase price.
However, the falling price of Tesla shares allegedly caught Musk in a financial squeeze and he responded by trying to drive the price of Twitter down so he could either get out of the deal or buy the company for less. The lawsuit seeks to hold Musk accountable for the loss in the value of Twitter’s shares from the allegedly manipulative behavior.
Musk is a prolific Twitter user. He has 90 million followers and is the eighth-most followed person on the platform.
In the past, his seemingly impulsive tweets about his business plans have landed him in hot water with the U.S. Securities and Exchange Commission. In 2018, he entered a consent decree with the SEC that required him to get pre-approval of certain tweets from an internal controls committee at Tesla.
Stealth acquisition
The complaint says that Musk began buying shares in Twitter in January of this year. By March 5, he had acquired more than 5 percent of Twitter’s stock and therefore was required to file a form with the SEC disclosing the amount of his stake.
Allegedly, Musk did not file the form for 10 days, during which he purchased half a billion dollars’ worth of Twitter’s stock at prices that did not reflect Musk’s growing stake in the company.
The complaint alleges that Musk saved $156 million by failing to file the disclosure. The complaint quotes David Kass, a finance professor at the University of Maryland School of Business, stating “I really don’t know what’s going through his mind. Was he ignorant or knowledgeable that he was violating securities law?”
On April 4, Twitter invited Musk — now the largest single shareholder with 9.2 percent of its shares — to join its board.
Twitter and Musk shared the news by a joint tweet on April 5, however on April 9, before his appointment became effective, Musk advised Twitter that he had changed his mind. He would not be joining the board but would be making an offer to take Twitter private.
On April 13, Musk made a “best and final” offer to buy Twitter for $54.20 per share or roughly $44 billion. The communication said that if his offer was not accepted, “I would need to reconsider my position as shareholder.”
Twitter accepted the offer on April 24 and the next day entered an acquisition agreement in which Musk allegedly waived his right to conduct due diligence on the purchase. Twitter’s stock closed at $51.70 on April 25.
Musk planned to borrow the funds to buy Twitter from a variety of sources, including several bank syndicates. Many of the loans were to be secured by shares in Tesla.
When the Twitter acquisition was announced, Tesla was trading at near $1,000 but by May 12, the value of the stock had declined by 27 percent and the decline “threatened a margin call on Musk’s Tesla stock which was pledged as collateral for his $12.5 billion loan from Morgan Stanley and other banks,” the complaint says.
Plunging prices
The complaint alleges that “in response to these problems and the plunging value of Tesla stock, Musk promptly acted to disparage Twitter in a false and baseless manner … In doing so, Musk hoped to drive down Twitter’s stock price and then use that as a pretext to attempt to re-negotiate the Buyout price.”
On May 13, Musk tweeted that the buyout was “temporarily on hold,” pending information on whether “spam/fake accounts do indeed represent less than 5 percent of users.”
The complaint alleges that the tweet was misleading because nothing in the acquisition papers conditioned the transaction on having less than 5 percent spam/fake accounts. Moreover, Musk allegedly knew all about Twitter’s issues with such accounts and, having waived due diligence, did not have the right to put the transaction on hold.
Nonetheless the stock price of Twitter plunged.
Over the next several days, Musk continued to tweet about the issue with spam and fake user accounts.
By Wednesday, Twitter’s stock was trading at $35.76, down $15 a share from April 25. (Over the same period, Tesla’s shares declined from $998 to $628.)
The complaint asserts that Twitter shareholders have lost $8 billion in value since the deal was announced.
The plaintiffs assert claims against Musk under California corporation law, including making false and misleading statements in connection with the purchase or sale of securities.
The lawsuit was filed by Cotchett, Pitre & McCarthy LLP, the San Francisco firm known, among other things, for its work on behalf of consumers.