Elon Musk Twitter Deal: Billionaire Facing Class Action Alleging Violation of Federal Trade Laws

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Social media lawyers say Tesla CEO Elon Musk — who just reached a tentative deal to buy Twitter for $44 billion — could face a fine of tens of millions in court over a class action’s accusation that he failed to disclose his holding in the social media company in a timely manner. 

Musk revealed on April 4 of this year that he had acquired a 9.2% stake in Twitter. This resulted in shares of the social media company soaring — however, federal trade laws require investors to notify the Securities and Exchange Commission (SEC) after surpassing a 5% stake in a company within 10 days, which Musk is accused of failing to do. 

In response to this, a class action lawsuit has been brought against Musk by Twitter shareholders. 

The lawsuit alleges that Musk did not reveal his 9.2% holding Twitter to other shareholders or to the SEC by March 24th (once his ownership crossed the 5% threshold that requires disclosure).

The lawsuit is seeking to be certified as a class action representing Twitter shareholders who sold shares between March 24 and April 4, a process that could take a year or more. 

The plaintiff, Marc Bain Rasella, claims Musk’s delay artificially dampened Twitter’s share price, cheating investors who sold stock before he eventually disclosed the investment at the beginning of April.

Essentially, Musk’s delay in notifying the SEC made him richer at the expense of other investors, the suit alleges. 

​​Rasella claims Musk is in violation of the Securities Exchange Act of 1934, and is demanding a jury trial and requesting an award of compensatory and punitive damages for himself and all class members. 

Musk spent about $2.6 billion on Twitter stock: His regulatory filings show that he bought a little more than 620,000 shares at $36.83 apiece on Jan. 31 and then continued to accumulate more shares on nearly every single trading day through April 1. Musk held 73.1 million Twitter shares as of the most recent count.

Jacob Walker, one of the lawyers that filed the lawsuit against Musk, told The Associated Press he hadn’t reached out to the SEC about Musk’s alleged violations about the disclosure of his Twitter stake. 

“I assume the SEC is well aware of what he did,” Walker said.

Aron Solomon, chief legal analyst for Esquire Digital, told Top Class Actions that Musk could personally be liable for damages. 

“As to the issue of liabilities, let’s put things into two baskets: The first is easy. That’s Elon Musk as a shareholder. Whether he owns 9.2%, as he does now, or acquires more or fewer shares,  Musk’s liability is limited to his investment,” Solomon told Top Class Actions. 

According to Solomon, unless a shareholder provides personal guarantees to the business — which is highly unlikely and generally only done to help a much smaller company secure a loan or other working capital — Musk’s liability won’t extend beyond the risk of his shares one day being worth nothing.

“The other basket is the class action basket. Assuming that either the plaintiff who filed suit this week or any other prospective plaintiff can succeed in certifying a class and the action moves forward, there’s a possibility that Musk could be personally liable for damages to the class,” Solomon said. 

Anyone who sold Twitter shares between March 24 and April 1 can be part of this current class action — investors can argue Musk’s failure to disclose his increased stake in the company to the SEC deprived them of up to a 27% gain on investment.

The class action alleges Musk saved approximately $143 million on his Twitter purchases by delaying the filing of the required Schedule 13G/D and purchasing additional shares at deflated prices.

“Were a court to be sympathetic to this case, it could cost Musk tens of millions probably at a minimum,” Solomon said. 

Ian Corzine, a social media lawyer, told Top Class Actions that at this point, it’s impossible to accurately gauge Musk’s liabilities because the class action is not formed yet.

“The one thing to remember is that the lawsuit alleges fraud. The relevant question in short is, ‘Did Elon intentionally not file the 13d1 to affect harm to plaintiffs?’ It’s going to be hard to prove with direct evidence — i.e., probably no memo from Elon saying ‘Delay the 13d1 so we can make/save some money,’” Corzine told Top Class Actions. 

Corzine says the plaintiffs may ultimately have to amend the complaint to allege a negligent misrepresentation cause of action. 

“This may fit more with what actually happened – Elon failed to act as a reasonable billionaire would and this caused damages to plaintiffs,” Corzine said. 

JustAnswer lawyer Francine Levitov told Top Class Actions the major issue in this case would be whether Musk intended to miss the disclosure deadline or whether it was a mistake.

“If Musk loses his suit, he would have to compensate investors who sold their shares between the two dates in question,” Levitov said. Rumors that the billionaire intends to purchase the entire company fuel the suit, the controversy surrounding Musk’s acquisition, and the clamor for him to be held to the same standard of accountability as would be those without his vast assets.” 

As of Monday, Twitter had agreed to sell to Musk for around $44 billion in cash. However, the deal is far from finished. It could take months for Musk to actually become the owner of Twitter, and as Quartz reported, he arguably already violated his agreement with the social media company not to post disparaging tweets about it.

Musk has made it clear that he believes Twitter’s guidelines are too restrictive, and he has suggested that under his ownership, Twitter will be more permissive with content. He has also proposed opening up Twitter’s algorithm to public review so users can understand how it makes decisions.

“His purchase of Twitter to take it private makes an essential service even less transparent and more unaccountable,” said Adam Connor, a former Facebook employee and vice president for technology policy at the Center for American Progress. “Musk’s Twitter takeover is a flashing red light on why the centralization of our online spaces in the hands of a select few billionaires is so dangerous.”

Musk now oversees the most valuable American car company, a leading private aerospace business, a tunneling company recently valued at more than $5 billion, a brain-chip startup and now, a social network with hundreds of millions of users.

Possible legal ramifications and class action lawsuit aside, Musk intends to overhaul Twitter. 

He plans to prioritize free speech; Musk has argued social networks should not remove comments that, while offensive, are still legal.

Musk wants to create an edit button so users can change their tweets, but there is the fear that adding an edit button feature would be weaponized by bad actors. 

The billionaire has also said he wants to eradicate spam bots (fake accounts that are programmed to respond to tweets on certain topics). “If our twitter bid succeeds, we will defeat the spam bots or die trying!” Musk tweeted last week.

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