Class action alleges secret Twitter stock scheme ahead of Musk’s SEC testimony.
After months of loudly protesting a subpoena, Elon Musk has once again agreed to testify in the US Securities and Exchange Commission’s investigation into his acquisition of Twitter (now called X).
Musk tried to avoid testifying by arguing that the SEC had deposed him twice before, telling a US district court in California that the most recent subpoena was “the latest in a long string of SEC abuses of its investigative authority.”
But the court did not agree that Musk testifying three times in the SEC probe was either “abuse” or “overly burdensome.” Especially since the SEC has said it’s seeking a follow-up deposition after receiving “thousands of new documents” from Musk and third parties over the past year since his last depositions. And according to an order requiring Musk and the SEC to agree on a deposition date from US district judge Jacqueline Scott Corley, “Musk’s lament does not come close to meeting his burden of proving ‘the subpoena was issued in bad faith or for an improper purpose.'”
“Under Musk’s theory of reasonableness, the SEC must wait to depose a percipient witness until it has first gathered all relevant documents,” Corley wrote in the order. “But the law does not support that theory. Nor does common sense. In an investigation, the initial depositions can help an agency identify what documents are relevant and need to be requested in the first place.”
Corley’s court filing today shows that Musk didn’t even win his fight to be deposed remotely. He has instead agreed to sit for no more than five hours in person, which the SEC argued “will more easily allow for assessment of Musk’s demeanor and be more efficient as it avoids delays caused by technology.” (Last month, Musk gave a remote deposition where the Internet cut in and out, and Musk repeatedly dropped off the call.)Advertisement
Musk’s deposition will be scheduled by mid-July. He is expected to testify on his Twitter stock purchases prior to his purchase of the platform, as well as his other investments surrounding the acquisition.
The SEC has been probing Musk’s Twitter stock purchases to determine if he violated a securities law that requires disclosures within 10 days from anyone who buys more than a 5 percent stake in a company. Musk missed that deadline by 11 days, as he amassed close to a 10 percent stake, and a proposed class action lawsuit from Twitter shareholders has suggested that he intentionally missed the deadline to keep Twitter stock prices artificially low while preparing for his Twitter purchase.
In an amended complaint filed this week, an Oklahoma firefighters pension fund—which sold more than 14,000 Twitter shares while Musk went on his buying spree—laid out Musk’s alleged scheme. The firefighters claim that the “goal” of Musk’s strategy was to purchase Twitter “cost effectively” and that this scheme was carried out by an unnamed Morgan Stanley banker who was motivated “to acquire billions of dollars of Twitter securities without tipping off the market” to curry favor with Musk.
As a seeming result, the firefighters’ complaint alleged that Morgan Stanley “pocketed over $1,460,000 in commissions just for executing” the “secret Twitter stock acquisition scheme.” And Morgan Stanley’s work seemingly pleased Musk so much that he went back for financial advising on the Twitter deal, the complaint alleged, paying Morgan Stanley an “estimated $42 million in fees.”
Messages from the banker show he was determined to keep the trading “absofuckinglutely quiet” to avoid the prospect that “anyone sniff anything out.”
Because of this secrecy, Twitter “investors suffered enormous damages” when Musk “belatedly disclosed his Twitter interests,” and “the price of Twitter’s stock predictably skyrocketed,” the complaint said.
“Ultimately, Musk went from owning zero shares of Twitter stock as of January 28, 2022 to spending over $2.6 billion to secretly acquire over 70 million shares” on April 4, 2022, the complaint said.
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What Musk should have done, the complaint said, is follow SEC requirements and timely file a disclosure that “reports critical information regarding significant ownership interests in, and potential takeovers of, a company.” When enacting that rule, Congress said that it was “the only way that corporations, their shareholders and others can adequately evaluate … the possible effect of a change in substantial shareholdings,” the complaint said.
Instead of filing a timely disclosure, Musk allegedly hid his trades from the market, apparently helping him save more than $200 million on his acquisitions of Twitter shares from March 25, 2022, to April 4, 2022.
Musk’s financial advisors were intent on keeping the trading secret, the complaint alleged, but at one point, Musk posted tweets that almost gave his apparent scheme away. Then, after warnings from wealth advisors, Musk posted “misleading” tweets suggesting that he was going to launch a Twitter competitor—allegedly to throw anyone off the trail who might have suspected that he was actually preparing to buy Twitter.
“Musk misleadingly represented to the public that he was ‘giving serious thought’ to ‘building a new social media platform,’ which helped further conceal that he was pursuing an active role at Twitter and also aided his scheme by keeping the price of Twitter securities artificially low,” the lawsuit said.
It’s unknown how many Twitter shareholders may have been affected by the alleged price manipulation, the complaint said. But during that brief period, “Twitter’s daily trading volume averaged approximately 48 million shares a day and peaked as high as 269 million shares on April 4, 2022.” And “as of February 10, 2022, Twitter had 800,641,166 shares of common stock outstanding and held by non-insiders,” the complaint noted.
“Every single one of these trades occurred at artificially depressed prices due to Defendants’ willful concealment of Musk’s Twitter interests, misleading statements in service of this scheme, and refusal to comply with” securities laws, the complaint said.
The firefighters fund now seeks to recover damages, feeling “cheated out of the true value of their securities” by Musk’s alleged scheme. The firefighters hope a jury will award damages covering losses, plus interest, for all Twitter shareholders determined to be affected.
Musk has failed to get the lawsuit tossed so far, Bloomberg reported, but has argued that it “has no legal merit and is merely an attempt to ‘harness the spectacle’ around” his $44 billion acquisition of Twitter.
Discovery in each case probing Musk’s stock purchases will likely continue influencing the other. And while Musk tried to diminish the SEC probe as being just about a “days-late filing,” Corley rejected that characterization in her court filing, pointing out that the SEC is also investigating “numerous filings in April and May 2022” and “whether Musk violated” securities laws intended to protect shareholders from being blindsided by a company’s acquisition.
