U.S. District Judge Andrew Carter has ruled against billionaire entrepreneur and X owner Elon Musk, denying his request to dismiss a proposed class-action lawsuit filed by X investors. The lawsuit alleges that Musk defrauded these investors before acquiring the company last year when the platform was still named Twitter.
Judge says Elon Musk can be sued for Twitter securities fraud https://t.co/P8Q2GsNOTo ANDFJOE
— Life as it goesTM (@lifeasitgoes12) October 4, 2023
The lawsuit revolves around Musk’s failure to disclose a 5% ownership stake in Twitter within the required timeframe set by the U.S. Securities and Exchange Commission. Specifically, Musk concealed his ownership stake for 11 days past the SEC deadline. This failure to disclose is at the heart of the legal dispute.
After Musk’s acquisition, Twitter was rebranded as “X” in a colossal $44 billion deal. The investors, primarily led by an Oklahoma firefighters pension fund, allege that Musk’s delay in disclosing his ownership stake allowed him to save over $200 million.
During this time, they claim that Musk quietly engaged in discussions with the company’s executives about his future plans for the company, all while keeping his ownership concealed. This alleged secrecy resulted in the investors selling their shares at artificially lower prices.
Musk’s defense argued that, given his extensive responsibilities as the CEO of Tesla and SpaceX, as well as the founder of Neuralink and The Boring Company, any failure to adhere to SEC rules was purely inadvertent. They emphasized that Musk was one of the busiest individuals globally, making compliance challenging.
However, Carter found this argument unconvincing, pointing out that Musk made time to be active in purchasing Twitter shares, discussing Twitter’s future on social media and holding meetings with Twitter insiders. Hence, he believes the serial entrepreneur must face most of the allegations in the fraud lawsuit filed against him.
Furthermore, the judge highlighted that Musk had previously demonstrated an understanding of the 5% disclosure requirement, even testifying about it under oath and complying with similar rules for his other companies, including Tesla.
While an attorney for the plaintiffs chose not to comment, it’s evident that this legal battle is far from over.
The SEC mandates that investors disclose their acquisition of a 5% stake in a company within 10 days of the transaction. In this case, Twitter’s shares surged by 27% on April 4, 2022, rising from $39.31 to $49.97 when Musk finally revealed his 9.2% stake. This disclosure effectively valued Twitter at $54.20 per share.
The plaintiffs had also argued that Musk was a temporary insider at the time of the stock purchase due to his meetings and communications with Twitter executives. However, Carter dismissed this claim, citing insufficient evidence to support the existence of a confidentiality agreement or Musk’s involvement in material decisions for Twitter, which would classify him as an insider.