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Why Elon Musk’s Twitter fight could draw more SEC scrutiny

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Twitter’s fight with Elon Musk to implement his $44 billion deal to purchase the social media platform could attract scrutiny from the US securities regulator over whether Musk has misled the market in the course of the course of the deal.

Twitter on Tuesday asked a Delaware court to order the Tesla boss and world’s richest person to finish the merger, setting in motion what guarantees to be one among the most important legal showdowns in Wall Street history. 

On Friday, Musk said he was terminating the deal because Twitter violated the agreement by failing to reply to requests for information regarding fake or spam accounts on the platform, which is key to its business performance. 

In its Tuesday lawsuit, Twitter not only alleged that Musk was really backing out for financial reasons and that he broke the terms of the deal, but that Musk also broke US securities rules by failing to reveal his 9% holding in Twitter on time.

Twitter also claims that in contriving a “narrative” about its spam accounts, Musk misrepresented Twitter’s handling of the problem and his communications with the social media company, “with equally misleading implications in regards to the likelihood that the merger could be accomplished and about Twitter’s operations.”

Twitter’s shares have been on a wild ride since Musk disclosed his stake in the corporate on April 4.REUTERS

Twitter’s shares have been on a wild ride since Musk disclosed his stake in the corporate on April 4, jumping 27% initially and rising to just about $52 when the deal was agreed on April 25, before falling to around $37 on Wednesday.

Legal experts say the case could attract scrutiny from the Securities and Exchange Commission, which has been locked in a feud with Musk for the reason that billionaire tweeted in 2018 that he had funding secured to take Tesla private when the SEC found he didn’t. The agency already has several open probes into Musk, in response to court filings and media reports.  A regulatory filing Thursday showed the SEC sent a letter toMusk last month asking for clarification over among the tweets the billionaire sent in regards to the deal.

“If you’re coping with statements about public corporations that have an effect on stock prices, the SEC’s antenna goes sky- high,” said Stephen Crimmins, a partner at Davis Wright Tremaine LLP and a former SEC litigator. “So the SEC’s got to be taking a look at it, and all of the more so due to Musk’s recent history with the SEC.”

The SEC and Twitter declined to comment. Representatives for Musk didn’t reply to requests for comment.

Twitter estimates that around 5% of its users are fake accounts, although independent researchers estimate the number might be thrice higher. 

‘Baseless’ public claims

To make sure, the securities laws allow Musk to vary his mind and to play hardball in negotiations. And since Musk just isn’t a Twitter executive, he doesn’t have the identical legal obligations to its shareholders when making public statements in regards to the company as Twitter insiders. Nevertheless, Musk has a general legal obligation to not mislead the market through material misrepresentations or omissions, said lawyers.

Elon Musk The SEC may additionally explore whether Musk aimed to harm Twitter’s share price.REUTERS

In April, the SEC asked Musk whether the disclosure of his Twitter stake was late and why it indicated that he intended to be a passive shareholder, adding that his response should address public statements he had made about whether Twitter adheres to free-speech principles, a regulatory filing shows. Musk refiled the disclosure to point he was an energetic investor.

Lawyers said the SEC would likely expand that question to explore whether Musk had been honest in his subsequent public statements about his intentions for the deal and the spam issue.

Twitter alleges, for instance, that in a May 13 tweet Musk misrepresented Twitter’s sample size for estimating spam accounts as just 100, although earlier that day Twitter had explained in a non-public due diligence meeting that it sampled a complete set of roughly 9,000 accounts per quarter.

The SEC queried that tweet, asking why Musk had not amended his regulatory paperwork to reflect the apparent change within the status of the transaction, in response to a filing made public on the SEC’s corporate database on Thursday which suggests the agency has been tracking Musk’s statements in regards to the deal.

Musk’s lawyers said the tweet didn’t require an amendment because, despite his desire for more data on spam accounts, Musk’s plans for the deal had not modified.

“The SEC will have a look and can need to know if he’s raising pretextual excuses and, essentially, misleading shareholders out there,” said Robert Frenchman, a partner at Mukasey Frenchman LLP.

The agency may additionally explore whether Musk aimed to harm Twitter’s share price, with the aim of renegotiating the deal terms, said Howard Fischer, a partner at Moses & Singer and a former SEC attorney.

“Arguably, his constant public comments … might be seen as market manipulation,” he added.

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