'Investors Suffered Harm!' Elon Musk Faces Lawsuit Over Late Disclosure of Twitter Stake

The U.S. Securities and Exchange Commission (SEC) has filed a lawsuit against tech billionaire Elon Musk, alleging that he failed to disclose his acquisition of more than 5% of Twitter’s stock within the legally required timeframe.

The lawsuit, filed with the U.S. District Court for the District of Columbia, accuses Musk of delaying the disclosure to regulators, which allowed him to purchase additional shares at artificially low prices, ultimately causing financial harm to Twitter shareholders.

Origin

Musk reached an acquisition deal with Twitter in April, 2022 but over the ensuing weeks, he raised concerns over spam accounts on the platform, claiming Twitter had not provided him with an accurate estimate of their number. Twitter rebuked that claim, saying it has provided Musk with information in accordance with conditions set out in the acquisition deal.

In May, when Musk said the deal was on “temporary hold” over bot concerns, Dan Ives, a managing director of equity research at Wedbush, an investment firm, said the grievance could serve as a pretext for Musk to renegotiate or abandon the deal amid a market downturn that had proven especially pronounced for tech stocks.

Over the course of the saga, Musk has been cast as a suitor, critic and legal adversary of Twitter, where he boasts 115 million followers.

Late January 2022, Musk begins investing in Twitter, according to information filed with the Securities and Exchange Commission in April.

By March 14 2022, Musk’s stake in Twitter reaches 9.2%, making him the largest shareholder in the company, according to a securities filing.

By Oct. 28, 2022, Musk closes a deal to acquire Twitter on the final day before the Delaware Chancery Court trial would have moved forward.

Some of Twitter’s top executives were fired, including CEO Parag Agrawal, chief financial officer Ned Segal, chief legal officer Vijaya Gadde and general counsel Sam Edgett, according to a source.

Musk said that he will forgo any significant content moderation or account reinstatement decisions until after the formation of a new committee devoted to the issues.

“Twitter will be forming a content moderation council with widely diverse viewpoints,”

Musk tweeted.

“No major content decisions or account reinstatements will happen before that council convenes.”

The Allegations Against Musk
According to the SEC, Musk began acquiring Twitter shares in early 2022, surpassing the 5% ownership threshold on March 14, 2022. Federal securities laws mandate that investors disclose such acquisitions within 10 days to ensure transparency for shareholders. However, Musk only disclosed his 9% stake on April 4, 2022—11 days past the deadline.

The delayed announcement allegedly gave Musk a significant financial advantage. On the day his stake was disclosed, Twitter’s stock price surged by 27%, reflecting the market’s reaction to the news. The SEC claims that Musk’s actions enabled him to purchase shares at prices that did not yet account for his substantial ownership and intentions for the company.

“Because Musk failed to timely disclose his beneficial ownership, he was able to make these purchases from the unsuspecting public at artificially low prices, which did not yet reflect the undisclosed material information of Musk’s beneficial ownership of more than five percent of Twitter common stock and investment purpose,” the SEC stated.

The regulator estimates that Musk underpaid Twitter investors by at least $150 million during this period. Shareholders who sold their stock before Musk’s disclosure suffered economic harm, the SEC added.

Demands and Response
The SEC is seeking to recover the $150 million that it claims Musk underpaid, along with additional penalties. However, Musk’s lawyer, Alex Spiro, has dismissed the lawsuit as baseless. In a recent statement, Spiro called it a “sham” and a “single-count ticky-tack complaint” that is part of a “multi-year campaign of harassment” against Musk.

Musk, known for his contentious relationship with regulators, has faced SEC scrutiny before. In 2018, the SEC sued him over a tweet claiming he had secured funding to take Tesla private. That case resulted in a $20 million fine, Musk stepping down as Tesla’s chairman, and an agreement to subject some of his social media posts to legal review.

Broader Implications
The lawsuit comes as the SEC undergoes a leadership transition. Current SEC Chair Gary Gensler is set to step down on January 20, the same day President-elect Donald Trump will take office. Trump, who has close ties to Musk, has nominated Paul Atkins, a former SEC commissioner, as Gensler’s successor. The change in administration has cast uncertainty over the future of the case.

Musk, a vocal advocate of free speech and a prominent figure in the tech world, completed his acquisition of Twitter in October 2022 for $44 billion. Following the purchase, he rebranded the platform as X. The SEC’s case has reignited public debate about Musk’s influence and his approach to regulatory compliance.

Impact on Twitter and Shareholders
The allegations have also drawn attention to the rights of shareholders and the importance of timely disclosures in maintaining market fairness. By delaying the announcement of his stake, Musk allegedly deprived investors of the ability to make informed decisions.

“Musk’s actions ultimately allowed him to underpay by at least $150 million for shares he purchased after his beneficial ownership report was due,”

the SEC stated in its filing.

The lawsuit underscores the importance of transparency in financial markets and highlights the potential consequences of regulatory breaches, even for high-profile figures like Musk.

As the legal battle unfolds, it remains unclear how the change in SEC leadership will impact the case. Advocacy groups and financial analysts are closely watching the developments, given Musk’s history of challenging regulators and his influential role in the tech industry.

For Musk, who has often positioned himself as a disruptor willing to challenge the status quo, the outcome of this lawsuit could have significant implications for his business ventures and public image.