You may already have seen the news that Judge Charles Breyer refused to dismiss claims against Elon Musk arising out of l’affaire Twitter.  Specifically, a class of shareholders alleged that Musk’s desperate efforts to get out of the deal – including his accusation of spam and his insistence that Twitter violated its contractual obligations by refusing to provide him with information – depressed the price of Twitter stock by creating uncertainty regarding closing.  As a result, some investors were harmed by selling stock too soon.  In Pampena v. Musk, 2023 WL 8588853 (N.D. Cal. Dec. 11, 2023), Judge Breyer dismissed claims based on several of Musk’s statements, but sustained others.  He reasoned:

The May 13 tweet reads as follows: “Twitter deal temporarily on hold pending details supporting calculation that spam/fake accounts do indeed represent less than 5% of users.” … Defendant represented to a reasonable investor that the Twitter deal was on hold—and would not close—until Twitter provided information supporting its bot calculations. Or, put another way, a reasonable investor could have plausibly understood that Twitter was obligated to provide Defendant with the requested information for the deal to close…. The Court finds that Defendant’s statement did give an impression materially different from the state of affairs that existed. Plaintiffs have plausibly alleged that Defendant waived due diligence as a condition to the Merger Agreement, and thus that Twitter had no obligation under the Merger Agreement to provide information supporting its bot calculations. Because Twitter did not have an obligation to provide this data to Defendant under the terms of the Merger Agreement, Defendant’s representation that Twitter did have this obligation in order for the deal to close was false.

…

Plaintiffs state the Defendant “baselessly” announced that fake and spam accounts make up at least 20% of Twitter’s users during the “All in Summit,” a tech conference in Miami. Plaintiffs argue that each of Defendant’s statements misled investors in “represent[ing] that [Defendant] had some right to data or to cancel the Merger agreement thereto, which he did not.”… Even if Defendant’s statement was literally true based on his “random sample” calculation or some other means of data analysis, the complaint plausibly alleges that the statement misled the investing public to believe that Defendant received—and was basing his statement on—bot user data from Twitter, which was not the case…. In light of Defendant’s May 13, 2022 tweet that the deal was on hold pending details that spam/fake accounts represent less than 5% of users, a reasonable investor would likely find Defendant’s access to and findings about Twitter’s data to be material to their investment decision-making. Moreover, Defendant’s statement suggested that Twitter had significantly more bot users than reported in its most recent SEC filings, a fact which would certainly be material to an investor given the nature of Twitter’s business.

….

Plaintiffs argue that Defendant’s May 17, 2022 tweet that the number of fake accounts on Twitter could be “much higher” than 20% and that the deal “cannot move forward” was false because it created the impression that Defendant was entitled to due diligence and that he had the right to terminate the merger. The tweet is composed of two parts: (1) Twitter is made up of 20% fake/spam accounts, which Defendant thinks could be higher than 20%, and (2) the deal cannot move forward until the Twitter CEO shows proof that the spam accounts are less than 5%… it is reasonable that investors would infer that Defendant, the next day, tweeted about user data because he actually received evidence from Twitter “demonstrating that Twitter’s SEC filings were false and that the number of fake accounts exceeded 5%.” For the same reason, Plaintiffs have adequately alleged that this tweet would alter the “total mix” of information available to investors, and is therefore material.

The second statement is materially false or misleading for the same reasons that the May 13, 2022 tweet is materially false or misleading. Plaintiffs plausibly allege that Defendant waived due diligence as a condition to the Merger Agreement, and thus that Twitter did not have an obligation to provide him with “proof” that spam accounts make up less than 5% of users.  In contrast, the statement that the deal “cannot move forward” until he receives “proof of <5%” fake/spam account implies that Twitter did have an obligation to provide this data to Defendant and that Defendant was able to terminate the deal absent Twitter doing so. Accordingly, the Court concludes that Plaintiffs have adequately pleaded a material misrepresentation with respect to this tweet.

Among other things, Musk alleged that the plaintiffs could not demonstrate loss causation, because the “truth” was never revealed.  Now, I mean, that doesn’t make … sense … in a depressed stock case.  The truth doesn’t have to be revealed for a depressed price case in order to show losses; the losses occur when you sell your stock too cheaply even if the truth is never revealed to the market and remains a secret.  This is not like an inflated price case, where you buy at the inflated price but so long as the price remains high, you can sell and recoup the overpayment.  But, nonetheless, Judge Breyer held that the plaintiffs sufficiently alleged a connection between the statements and their losses because:

With respect to the statements that the deal was “temporarily on hold” (the May 13, 2022 tweet) as well as the statement that the deal “cannot move forward” until Twitter showed proof of its bot-user claims (within the May 17, 2022 tweet), Plaintiffs adequately plead loss causation through corrective disclosure…. Plaintiffs have plausibly alleged that when Defendant announced that he would move forward with the deal—after a public battle with Twitter about the Merger Agreement and absent any apparent resolution around his due diligence requests—the market reasonably reacted to the “truth” that Twitter never had the obligation to provide the bot-account information to Defendant.

Now, the interesting thing here is that the claims sustained were based on Musk’s statements on May 13, 2022, May 16, 2022, and early May 17, 2022.  But the merger agreement was filed on an 8-K on April 26.  And at that point, everyone on the planet was aware of what Twitter’s obligations were and were not.  There was, you may recall, something of a public conversation about that very issue.  So it was a bit … surprising … to see Judge Breyer conclude that the truth about Twitter’s obligations was only revealed when Musk caved in Delaware. 

That said, I’ve read Musk’s briefing and he seems more devoted to claiming that Twitter did, in fact, owe additional information under the merger agreement than to claiming that any mischaracterizations were immaterial because the public could evaluate Twitter’s obligations themselves.  So.  There you go.

But here’s the fun part.

There is another putative securities class action currently pending in the Central District of California, Baker v. Twitter, that also arises out of Musk’s efforts to get out of the Twitter deal.  This case, however, alleges that Twitter committed fraud with respect to its spam counts, and that Musk’s accusations revealed the truth.  The entire predicate of the action is that Musk himself admitted Twitter’s statements were false, and Musk’s accusations were sufficiently credible to sustain a complaint, given his access to internal information.  And the court agreed!  In August, the court held that one of Musk’s accusations – that Twitter lied about removing identified spam from the mDAU – had a sufficient basis to allege fraud on the part of Twitter.  See Baker v. Twitter, 2023 WL 6932568 (C.D. Cal. Aug. 25, 2023).  The court dismissed the complaint for failure to allege loss causation, but plaintiffs are repleading.  And, of course, since Musk now owns Twitter, he’s going to be the one who has to defend against the fraud accusations if the case goes much further.

Which means, we could have parallel securities class actions, both based on Musk’s accusations that Twitter committed fraud, one claiming the accusations were false, the other claiming they were true – and Musk is (directly or indirectly) liable for damages in both.

Anyhoo, I’ll just conclude by (once again) plugging my paper on Twitter v. Musk, Every Billionaire is a Policy Failure, now forthcoming in the Virginia Law & Business Review.