Twitter whistleblower could help Musk by adding ‘volatility’ to legal battle

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

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WILMINGTON, Delaware, Aug 23 (Reuters) – A whistleblower’s complaint that Twitter Inc. (TWTR.N) misleading federal regulators about the company’s security risks could provide Elon Musk with new ammunition in his bid not to buy the company for $44 billion.

So far, Musk’s legal confrontation with Twitter has mostly centered on claims the company misled the billionaire about the number of bot and spam accounts on its platform.

Former Twitter security chief Peiter Zatko’s whistleblower complaint gives Musk new angles to pursue in his legal battle, such as claims that Twitter hasn’t disclosed its security weaknesses and data privacy.

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

It’s unclear if and how Musk’s team will use the whistleblower’s information, although Musk’s attorney, Alex Spiro with Quinn Emanuel Urquhart & Sullivan, said on Tuesday that a subpoena had been issued to Zatko. .

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

Legal experts said the whistleblower complaint introduced uncertainty into Musk’s confrontation with Twitter, rather than dramatically transforming a case that corporate law scholars said favored Twitter.

“Volatility is helpful if you’re not playing a strong hand. It creates the possibility of something crazy happening,” Columbia Law School professor Eric Talley said of the whistleblower’s complaint.

Twitter’s stock was down about 5.9% in late trading at $40.44 per share.

‘ADD TEXTURE’

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

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

Twitter and Musk have since sued each other, with Twitter asking a Delaware Court of Chancery judge to order Musk to make the deal. A trial is scheduled to begin on October 17.

On Wednesday, Chancellor Kathaleen McCormick will hear arguments from both sides on access to documents as part of the discovery process. Legal experts said Musk could raise the whistleblower’s complaint and how his team could use the allegations.

Zatko’s whistleblower complaint, which was made public on Tuesday, claimed Twitter falsely told regulators it had a strong security plan.

Zatko said he 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 chief executive Parag Agrawal told employees in a memo that the company is reviewing the claims. “What we have seen so far is a false narrative riddled with inconsistencies and inaccuracies, and presented without significant context,” Agrawal said, according to a CNN report.

Allegations 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 have said.

To prevail on the spam allegation, Musk must show that he relied on Twitter’s disclosures regarding spam accounts.

Corporate transaction experts said that would be tough since Musk cited anti-spam as the very reason for buying the company.

By contrast, Zatko’s claims that the company withheld security information from investors and regulators could be considered an omission, which would not require Musk to prove he relied on the company’s disclosures. .

Musk, however, would still need 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 amounted to a material adverse effect on Twitter.

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

Talley said whether Zatko’s claims amounted to an EAW could be an issue for the trial.

“It doesn’t open up a whole new battle front,” Talley said. “It adds texture to the existing ones.”

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Editing by Noeleen Walder and Deepa Babington

Our standards: The Thomson Reuters Trust Principles.

Tom Hall

Thomson Reuters

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

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