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Elon Musk is anticipated to testify in a shareholder lawsuit in San Francisco on Wednesday, where he faces allegations of making deceptive statements that negatively impacted Twitter’s stock value prior to his $44 billion acquisition of the social media giant in 2022.
The legal action, initiated in October 2022, was filed in the U.S. District Court for the Northern District of California. It represents Twitter shareholders who sold their shares between May 13 and October 4, 2022, just weeks before Musk completed his purchase of Twitter.
The lawsuit alleges that Musk breached federal securities regulations by issuing false public statements strategically designed to lower Twitter’s stock price.
The billionaire, who is also the CEO of Tesla, had initially agreed in April 2022 to purchase Twitter and transition it to a private company.
However, on May 13, Musk announced that his acquisition plans were “temporarily on hold” as he sought to determine the exact number of spam and fake accounts on the platform.
Twitter’s stock tumbled as a result.
A few days later, he tweeted that the deal “cannot go forward” and claimed that almost 20% of Twitter accounts were “fake,” according to the lawsuit.
Musk’s May 13 tweet – “Twitter deal temporarily on hold pending details supporting calculation that spam/fake accounts do indeed represent less than 5% of users” – was “false because the buyout was not, in fact, ‘temporarily on hold,’” the lawsuit says.
That’s because Twitter did not agree to put the deal on hold, and there was nothing in the merger agreement the two parties signed that allowed Musk to put it on hold, according to the lawsuit.
In the following weeks, Musk continued to try to delay or get out of the deal, which the lawsuit claims he did in the form of false, disparaging statements about Twitter’s business that drove the San Francisco company’s stock down sharply.
In July 2022, Musk doubled down on the bots issue and said he would abandon his offer to buy Twitter after the company failed to provide enough information about the number of fake accounts.
That’s even though the lawsuit notes that Musk waived due diligence for his “take it or leave it” offer to buy Twitter. That means he waived his right to look at the company’s nonpublic finances.
The stock closed at $36.81 on July 8, when Musk tweeted he was abandoning the deal over the fake accounts issue. That’s 32% below Musk’s offer price of $54.20 per share.
“To try to renegotiate the price or delay the merger, Musk made materially false and misleading statements and omissions, and engaged in a scheme to deceive the market, all in violation of the law,” the lawsuit says.
The problem of bots and fake accounts on Twitter wasn’t new. The company had paid $809.5 million in 2021 to settle claims it was overstating its growth rate and monthly user figures.
Twitter also disclosed its bot estimates to the Securities and Exchange Commission for years, while also cautioning that its estimate might be too low.
Twitter sued Musk to force him to complete the deal, and Musk countersued.
On Oct. 4, Musk offered to go through with his original proposal to buy Twitter for $44 billion, which Twitter accepted.
The deal closed later that month. In the ensuing months, Musk slashed the company’s workforce, gutted its trust and safety team and rolled back content moderation policies.
In July 2023, he renamed Twitter as X.
This isn’t the first time that Musk has been dragged into court to defend himself against allegations of duping investors with his social media posts.
Three years ago, Musk spent about eight hours testifying in a San Francisco federal trial about his plans to buy Tesla – the electric automaker that he still runs as publicly traded company – for $420 per share in a proposed 2018 deal that never materialized. A nine-member jury absolved Musk of wrongdoing in that case.
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