Elon Musk’s act is putting pressure on regulators to revamp the safeguards and investors now seem to be at risk.
Last week, the multi-billionaire was sued by Twitter Inc .investors claiming he manipulated the company’s stock price downward, as the chief executive of electric carmaker Tesla Inc. mounts a $44 billion takeover bid for the social media platform.
The investors claimed that Musk saved himself $156 million (which… may or may not make sense) by failing to disclose that he had purchased more than 5% of Twitter by March 14. Also, they asked to be certified as a class and to be awarded an unspecified amount of punitive and compensatory damages.
In addition to that, they named Twitter as a defendant, arguing the company had an obligation to investigate Musk’s conduct, though they are not seeking damages from the firm.
What exactly is “Stock Manipulation”?
Stock Manipulation is the attempt to artificially inflate or depress the price of a company’s stock with the use of untrue or misleading statements. While not illegal, it is considered unethical and against the regulations that are implemented on a national level by the Security Exchange Commission (SEC).
A classic example would be a company buying back its own shares in order to make the stock price appear higher than it is. Another one would be to encourage a stock purchase by an investor while actually betting against that investment (naked short selling). If successful, this would result in an artificial boost in the price of a stock, which – after unwinding – causes significant losses for substantial players.
How did Musk manipulate Twitter stock?
The investors said Musk continued to buy the stock after that, and ultimately disclosed in early April that he owned 9.2% of the company, according to the lawsuit, filed on Wednesday in San Francisco federal court.
The investors accused Musk of engaging in market manipulation and buying the Twitter stock at an artificially low price by delaying his disclosure of his stake in Twitter. At the core of the issue is Musk’s 11-day delay in revealing that he purchased a 9.1 percent stake in Twitter before announcing the acquisition plan. The delay in buying the stock allowed the Tesla CEO to buy shares at a lower price — saving him roughly $140 million — as the rest of the market remained in the dark about what he was doing.
Now, investor advocates are pointing to Musk as an urgent example of why the Securities and Exchange Commission should crack down on the practice. The agency has been making attempts to shorten the deadline for big shareholders like Musk to disclose their positions but is facing resistance from Wall Street lobbyists.
The investors have claimed that the recent drop in Tesla’s stock has put Musk’s ability to finance his acquisition of Twitter in “major peril” since he has pledged his shares as collateral to secure the loans he needs to buy the company.
Tesla’s shares were trading at around $713 on Thursday afternoon, down from above $1,000 in early April. And they were closed at 759.63 at the end of Friday.
According to a report in the Wall Street Journal earlier this month, the timing of Musk’s disclosure of his stake has already triggered an investigation by the U.S. Securities and Exchange Commission (SEC).
The SEC requires any investor who buys a stake exceeding 5% in a company to disclose their holdings within 10 days of crossing the threshold.
Giving emphasis to Musk’s May 13 tweet stating the buyout was “temporarily on hold” until Twitter proved that spam bots accounted for less than 5% of its users, the investors also claimed that such public criticism by Musk of the company amounted to an attempt to further drive the share price down.
On Wednesday, Musk pledged an additional $6.25 billion in equity financing to fund his bid for Twitter, a sign he is still working to complete the deal.
Earlier this month, Musk was sued in Delaware Chancery Court by a Florida pension fund seeking to halt the deal on the basis that some other big Twitter shareholders were supporting the buyout, a violation of Delaware law. However, Heresniak’s lawsuit does not seek to stop the takeover.
This charge of stock manipulation against the billionaire could now make it difficult for him to raise more capital privately, as the investors are likely to seek damages and an additional payout from Musk’s lenders as well.
In a regulatory filing this month, Twitter indicated that Musk had started discussing a takeover as early as March 27.