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The Twitter whistleblower could help Musk by adding “volatility” to the legal battle




An image of Elon Musk is seen on a smartphone placed on printed Twitter logos in this photo illustration taken April 28, 2022. REUTERS/Dado Ruvic/Illustration/

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WILMINGTON, Del., Aug 23 (Reuters) – A whistleblower’s complaint that Twitter Inc ( TWTR.N ) misled federal regulators about the company’s security risks could give Elon Musk new ammunition in his bid to get out of buying the company for 44 billion dollars.

Until now, Musk’s legal battle with Twitter has primarily centered around allegations that the company misled the billionaire about the number of bot and spam accounts on the platform.

The whistleblower complaint by Twitter’s former security chief Peiter Zatko gives Musk new angles to pursue in his legal battle, such as allegations that Twitter failed to disclose security and privacy weaknesses.

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That provides “another basis for fraud,” said Ann Lipton, a professor at Tulane Law School.

It is 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 to Zatko.

“We found his exit and other key employees curious in light of what we have found,” Spiro said in a statement.

Legal experts said the whistleblower’s complaint introduced uncertainty into Musk’s settlement with Twitter, rather than dramatically transforming a case that corporate law specialists have said favors Twitter.

“Volatility is useful if you don’t play a strong hand. It creates some possibility for something crazy to happen,” Eric Talley, a professor at Columbia Law School, said of the whistleblower.

Twitter’s stock fell about 5.9% in late trading to $40.44 a share.

“ADD TEXTURE”

Musk, the world’s richest person and chief executive of electric car maker Tesla Inc ( TSLA.O ), told Twitter in July that he was closing the deal to buy the company for $54.20 a share.

Musk accused Twitter of falsely misrepresenting the true number of spam and bot accounts on its social media platform, which the company has estimated at 5% in its corporate filings. Musk said he relied on those filings when he offered to buy the company.

Twitter and Musk have since sued each other, and Twitter has asked a judge at the Delaware Court of Chancery to order Musk to end the deal. A trial is set to begin on October 17.

On Wednesday, Chancellor Kathaleen McCormick will hear arguments from the two sides about access to 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 it had a solid security plan.

Zatko said he had warned colleagues that half of the company’s servers were running outdated and vulnerable software, according to a redacted version of his complaint. read more

Twitter CEO Parag Agrawal told employees in a memo that the company is reviewing the allegations. “What we have seen so far is a false narrative that is full of inconsistencies and inaccuracies, and presented without important context,” Agrawal said, according to a CNN report.

Claims that Twitter failed to disclose security and privacy risks may be easier for Musk to prove than allegations that Twitter misrepresented the number of spam accounts, legal experts said.

To win on the spam claim, Musk must show that he relied on Twitter’s disclosures about spam accounts.

Corporate deal specialists have said this will be tough since Musk cited defeating spam as the main reason for buying the company.

By contrast, Zatko’s claims that the company withheld security information from investors and regulators could qualify as an omission, which would not require Musk to show confidence in the company’s disclosures.

However, Musk will 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 $1 billion termination fee, he would have to show that the omission had a material negative effect on Twitter.

A material negative effect (MAE) is an event that significantly reduces the long-term value of an acquisition.

Talley said whether Zatko’s claim constitutes an MAE could be an issue for the trial.

“This does not open a whole new battlefront,” Talley said. “It adds texture to the existing.”

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Editing by Noeleen Walder and Deepa Babington

Our standards: Thomson Reuters Trust Principles.

Tom Hals

Thomson Reuters

Award-winning reporter covering US courts and laws from the COVID-19 pandemic to high-profile criminal trials and Wall Street’s biggest failures with more than two decades of experience in international financial news in Asia and Europe.



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