Former Twitter Security Chief (TWTR) has filed a whistleblower complaint with allegations that, if substantiated, could make it easier for Elon Musk to back out of his $44 billion deal to buy the social media company.
Peiter “Mudge” Zatko, a widely respected hacker who was fired in January, sent a 200-page complaint to federal officials accusing Twitter’s top executives of violating laws and regulations by covering up lax security and evading resources to fully understand its prevalence. fake news. bills. The issue of fake accounts plays a central role in the legal battle between Musk and Twitter, which is suing him in an attempt to force him to abide by the deal.
The whistleblower’s allegations of fake accounts present a considerable shift in the lawsuit, scheduled for trial in Delaware Chancery Court starting Oct. 17. favor, with the chancellor of Delaware ordering Musk to go ahead with the deal.
“That changes everything,” University of Iowa law professor Robert Miller said of the allegations. “This is like a godsend for Musk. The whistleblower’s complaints, if true… are exactly what Musk needs to get out of the deal. I mean, tailor-made.”
‘The moment is incredible’
Weeks after agreeing on April 25 to acquire the outstanding shares of Twitter for $54.20 a share, Musk posted on Twitter hinting he was scared. A termination letter from its lawyers followed, accusing Twitter of violating the agreement by withholding methods used in its public records to estimate that less than 5% of its 238 million monetizable daily active users or “mDAUs ” are fake or spam accounts. Musk and his lawyers say they suspect the number is higher.
If Zatko’s claim is correct, Miller and two other legal experts told Yahoo Finance that it would make it easier for Musk to accuse Twitter of fraud and, in turn, use the fraud claim as a basis for exiting the settlement. Musk had previously faced a tough argument in the allegation that Twitter violated a contractual information-sharing duty to deliver data that supports its estimate because Musk waived his right to additional due diligence. And without access to Twitter’s data, Musk would have a hard time proving that Twitter’s regulatory records misrepresented its mDAUs.
Musk’s lawyers also allege that Twitter exaggerated its number of users, causing the company to experience a “material adverse effect” — another hard-to-prove legal standard that, in rare instances, allows a buyer to terminate a merger if the operations a target’s commercials change significantly. .
Now Musk is armed with a witness who can bolster his case, according to Case Western Reserve University law professor Anat Beck.
“Musk’s lawyers will try to use [Zatko] to show fraud or misrepresentation and attempt to circumvent the material adverse effect issue,” Beck said. “The timing is incredible for Musk’s case.”
In an email to Yahoo Finance, a Twitter spokesperson raised skepticism about this moment, calling it “opportunistic” and noting that Zatko had been fired in January based on “ineffective leadership and poor performance.”
“What we’ve seen so far is a false narrative about Twitter and our privacy and data security practices, rife with inconsistencies and inaccuracies and lacking important context,” the Twitter spokesperson said.
Widener University Delaware Law Professor Lawrence Hamermesh says that now that Zatko’s allegations are on the line, Musk’s case is no longer based on assumptions about fake Twitter account numbers, which Musk himself has admitted is not. have enough data to prove it.
Instead, he will have the opportunity to obtain testimony from Zatko, who claimed that Twitter executives did not have the tools to know how many fake accounts were run on their network, a claim that conflicts with Twitter’s regulatory records that say that the company is behind its spam and bot counting methods.
“If it works out, Musk’s case looks a lot better,” Hamermesh told Yahoo Finance. “I don’t think he really had much of an affair without it.”
In addition to any viable evidence from Zatko, Musk would still need more to prevail in a fraud claim, lawyers say. The Tesla boss must prove that Twitter knowingly made a materially false or misleading statement about the false account estimates and also show that he trusted about inaccurate information. Material statements are those that significantly impact Musk’s expectations under the contract.
It’s a little harder for Musk to show that he trusted depictions of bots or spam, Miller said, because he claims he always knew Twitter had more than the estimated percentage of bots. However, if Musk can convince the judge that the problem was worse than he expected, or that he relied on Twitter operating within the law when it didn’t, Musk could terminate the contract.
Chester Spatt, a former chief economist and director of the SEC’s Office of Economic Analysis, said he can view Zatko’s complaint as a real problem for Twitter if it shows that Twitter’s leadership knew the company had made false statements to regulators.
“Twitter’s leadership is basically being accused of lying and, in particular, that those lies would have indirectly permeated regulatory documents that investors should reasonably trust,” Spatt said. “It’s a statement that the executives knew and that they systematically lied. That’s what I think could quickly create the problem.”
In an email to Yahoo Finance, John Tye, director of outreach for Whistleblower Aid, an organization that provides legal representation to Zatko, said, “Mudge stands up for everything in his outreach, and his career in ethical and effective leadership speaks for itself. . The focus should be on the facts exposed in the disclosure, not on ad hominem attacks against the whistleblower.”
Twitter shares closed at $39.86 on Tuesday, down 7.3% from the previous day’s close.
Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis on Twitter @alexiskweed.
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