A lawyer suing Elon Musk on behalf of former Twitter (TWTR) shareholders says the Tesla (TSLA) CEO illegally saved about $150 million by delaying his disclosure of a major stake in the social media company.
On Tuesday, attorney Jacob Walker filed a proposed class action in Manhattan federal district court, alleging Musk’s untimely notice to the U.S. Securities and Exchange Commission caused certain Twitter shareholders to miss out on a gain of $10.66 per share.
The law requires investors to disclose stock purchases worth at least 5% of a company’s stock within 10 days. Musk missed the deadline by 11 days, arguably at the expense of investors who sold their stock before the Tesla CEO’s announcement pumped up its value.
Those who suffered damages, Walker said, sold their Twitter shares during a six-day window between March 24 — when Musk reached the 5% threshold — and April 4 when he filed late notice with the SEC.
“So at a minimum, he profited $150 million against the backs of common shareholders,” Walker said. More specifically, the lawsuit states Musk saved about $143 million on the price of his Twitter stock. “We are trying to remedy that unfairness by suing on behalf of those people who sold during those six days.”
According to Walker, many of the sellers’ shares went into Musk’s pocket, at an artificially deflated discount. About 15 million of the approximately 56 million shares sold during the six-day window when Musk kept shareholders in the dark, he said, were sold to Musk.
Walker estimates that the shareholders’ damages extend significantly higher than Musk’s alleged ill-gotten $150 million. “It’s not just those who sold to [Musk]. It’s those who sold at all during that time period, who lost money,” Walker said. “So I think damages are well north of $150 million dollars. They’re certainly, oh $250, $300, potentially $400 million.”
Before the case can move forward, the plaintiffs will need to convince a judge that they can show that Musk intentionally or recklessly filed late notice of his share purchases.
“I think we can do that just from the profit motive,” Walker said. “I know he’s a wealthy man. I know he’s the wealthiest man in the world. But there’s lots of good case law that indicates that even if you’ve got a lot of money, saving yourself $150 million is significant. and it certainly goes to his motive.”
Separately, Musk’s filings could provide the SEC with new hooks to allege more securities violations. SEC rules don’t just require shareholders who amass more than 5% of a company’s stock to file on time. They also require shareholders to disclose their intent as a passive or active shareholder — the latter designation indicating intent to directly or indirectly influence the company’s management or policies.
Musk’s April 4 filing with the SEC showed he had acquired a 9.2% stake as a passive investor in Twitter. The following day he filed another disclosure changing his passive investor role to an active one. In another about-face, Musk acknowledged, and then scrapped a day later, his agreement to join Twitter’s board of directors. His decision not to join the board has fueled speculation that he has plans for a hostile takeover.
Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis on Twitter @alexiskweed.
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