Catch-22 often refers to a dilemma where the only way out is barred by an intrinsic problem or an extrinsic rule. Interestingly, this is exactly where Elon Musk currently finds himself. Entrapped by his desire to stealthily build up an initial stake in Twitter, the CEO of Tesla might now have to hoist himself by his own petard, so to say, as per the musings of one law professor.
Before delving further, let’s go over where things currently stand in the Elon Musk vs. Twitter saga, which is headed for a legal showdown in the Delaware Court of Chancery in October. At the heart of this dispute lies Musk’s decision to simply walk away from a legally binding agreement to acquire Twitter at $54.20 per share while citing the uncertainty around the quantum of bots or fake accounts that constitute a part of Twitter’s monetizable Daily Active Users (mDAUs) metric as the casus belli. Twitter, on the other hand, believes that its inability to definitively measure its mDAUs does not constitute a valid reason for Musk’s abandonment of the deal.
Recently, a whistleblower complaint by Twitter’s head of security came to the fore, further muddying the proverbial waters around this saga. Peiter “Mudge” Zatko, who was the social media giant’s security tzar and was fired back in January for allegedly raising the issue of chronic mismanagement at Twitter – including security lapses, technical shortcomings, and non-compliance with an already-signed privacy agreement with the Federal Trade Commission (FTC) – had filed this complaint with the US Congress back in July. Critically, Mudge alleged that Twitter’s executives have neither the resources nor the willingness to investigate the true quantum of bots that populate the social media platform. Bear in mind that Twitter has already signed a non-disclosure agreement (NDA) with Mudge. However, Congressional whistleblower complaints are not covered by NDAs, hence this latest addition to the ongoing saga between Elon Musk and Twitter.
So, why is this whistleblower complaint important? Well, the Delaware Court of Chancery has now allowed Elon Musk to incorporate Mudge’s whistleblower complaint in his counterclaim against the social media giant.
Recently, in his testimony at a Senate sub-committee hearing, Mudge identified two critical shortcomings at Twitter:
“First, they don’t know what data they have, where it lives, or where it came from. And so, unsurprisingly, they can’t protect it. And this leads to the second problem, which is the employees then have too much access to too much data and too many systems.”
With the background over, let’s discuss why one law professor believes that Elon Musk is holding back his arguments against Twitter.
Elon Musk’s Haste in Acquiring an Initial Stake in Twitter Is Now Coming To Haunt Him
Professor Ann Lipton is the associate dean for faculty research and a Michael M. Fleishman associate professor in business law and entrepreneurship at Tulane University Law School. Recently, she penned a long thread on the Elon Musk vs. Twitter saga.
So I keep thinking about the Zatko allegations in the amended complaint (I assume the amended amended version, which is still confidential, differs only w/r/t the severance allegations) https://t.co/bIaJlwJT9R
— Ann “No Relation” Lipton (@AnnMLipton) September 22, 2022
In relation to Mudge’s whistleblower complaint, Elon Musk needs to show that the allegations add up to a Material Adverse Effect – a materiality threshold to measure the negative effect of an event on the target business or a contract. Moreover, Musk’s fraud claims against Twitter require that he furnish a fraudulent statement made by the social media giant.
And Twitter didn’t make any. It never said it was in compliance with the FTC order, and it openly warned that there were risks to its IP, security, etc.
— Ann “No Relation” Lipton (@AnnMLipton) September 22, 2022
Interestingly, Professor Lipton believes that Twitter dotted all the i’s from a legal viewpoint, as it never claimed to be in compliance with the FTC order and disclosed risks to its intellectual property, security, user privacy, etc.
As a workaround, Elon Musk’s lawyers can claim that the risk disclosures themselves were “misleading because they suggested these were only potential problems, rather than ones that were actually occurring.”
But a good plaintiffs’ lawyer would also argue that simply remaining silent about Zatko’s omissions was itself fraud, because this was information required to be disclosed under Item 303 of Regulation S-K:https://t.co/NYX8JMoxJ0 pic.twitter.com/LwGJMnxBss
— Ann “No Relation” Lipton (@AnnMLipton) September 22, 2022
Professor Lipton claims that a good plaintiff’s lawyer would also contend that by choosing not to disclose the specific risks flagged by Mudge, Twitter committed a fraudulent act. However, Elon Musk’s lawyers have not raised this point so far.
But now it occurs to me Musk himself is conflicted. Right now, he’s being sued for failing to disclose his initial stake in Twitter – it’s the same argument, fraud by omitting required information.
— Ann “No Relation” Lipton (@AnnMLipton) September 22, 2022
Professor Lipton then goes on to argue that a plausible explanation for this shortcoming might be the lawsuit that Elon Musk is facing for failing to disclose his initial stake in Twitter in a timely manner.
Can you imagine if in a future world, plaintiffs bring a failure-to-disclose case against Tesla and argue that Musk previously admitted that omitting required info counts as fraud?
— Ann “No Relation” Lipton (@AnnMLipton) September 22, 2022
After all, if the CEO of Tesla were to now take the position that omission equates to fraud, he might himself end up on the docket for choosing to withhold – to be read as an omission – the disclosure related to his initial stake in Twitter.
Do you think that this is a plausible explanation for why Elon Musk’s legal team is not throwing aggressive legal punches at this stage? Let us know your thoughts in the comments section below.
The post Catch-22: Here Is Why One Law Professor Believes That Elon Musk Is Deliberately Diluting His Arguments in the Twitter Case by Rohail Saleem appeared first on Wccftech.
