Whistleblower Report Opens New Battlefield Between Elon Musk And Twitter

Twitter is increasingly cornered in its legal battle against Elon Musk. (photo: doc. pixabay)

JAKARTA - A whistleblower's complaint alleging that Twitter Inc lied to US federal regulators about the company's security risks could give Elon Musk new ammunition in his bid to get out of the social media company's planned $44 billion acquisition.

To this day, Musk's legal battle with Twitter continues to center on claims that the company misled billionaires about the number of bot and spam accounts on its platform.

The complainant and former Twitter head of security, Pieter “Mudge” Zatko, gives Musk a new angle to pursue in his legal battle later. Take, for example, the claim that Twitter failed to disclose weaknesses in the security and privacy of its data.

"This provides a different basis for fraud", said Ann Lipton, a professor at Tulane Law School, as quoted by Reuters.

It's unclear if and how Musk's team will use the information from Mudge, although Musk's attorney, Alex Spiro of law firm Quinn Emanuel Urquhart & Sullivan, said Tuesday, August 23 that a subpoena had been issued for Zatko.

"We found the exit and other key employees are now curious as to what we've found", Spiro said in a statement.

Legal experts say the whistleblower complaint has introduced uncertainty into Musk's row with Twitter, rather than dramatically changing the case that the company's legal experts say is in Twitter's favor.

"Volatility really helps if you don't play strong hands. It creates some possibility that something crazy might happen", said Eric Talley, a professor at Columbia Law School, of Mudge's complaint.

Musk, the world's richest man and chief executive of Tesla Inc, told Twitter in July that he was ending a deal 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 estimated at 5% in the company's filings. Musk said he relied on the filing when he offered to buy the company.

On Wednesday, August 24, Chancellor Kathaleen McCormick will hear arguments by both sides regarding access to the documents as part of the discovery process. Legal experts say Musk may present Mudge as a witness and show how his team can use the allegations to win over Twitter.

Whistleblower Zatko's complaint, published on Tuesday, claims that Twitter had falsely informed regulators that it had a solid security plan in place.

Zatko said he had warned colleagues that half of the company's servers were running outdated and vulnerable software, according to an edited version of his complaint.

Twitter Chief Executive Parag Agrawal told employees in a memo that the company was reviewing the claims. "What we have seen so far is a false narrative that is riddled with inconsistencies and inaccuracies, and presented without any important context", Agrawal said, as quoted by CNN.

Meanwhile, according to legal experts, claims that Twitter failed to disclose security and privacy risks could be easier to prove by Musk than accusations that Twitter misrepresented the number of spam accounts.

To win a spam claim, Musk must show that he relied on Twitter's disclosure of spam accounts. The company's deal specialists say this will be difficult as Musk cites beating spam as the main reason for buying the company.

In contrast, Zatko's allegations that the company withheld security information from investors and regulators could qualify as Twitter negligence, which does not require Musk to demonstrate reliance on company disclosures.

Musk, however, still needs to prove that Twitter's allegedly weak defenses against hackers are a material risk not being disclosed to investors.

To walk away from the acquisition without paying a $1 billion termination fee, Musk would have to demonstrate 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 the number of Zatko's claims to the MAE could matter for the trial.

"It's not opening up a new battlefield", said Talley. "It adds texture to the existing one."