- An ex-Twitter employee filed a complaint accusing the company of a slew of acts of misconduct.
- Legal experts told Insider that the claims are unlikely to help Musk win Twitter's lawsuit against him — but it could increase the odds of a large settlement.
- Twitter sued Musk in July over his attempt to back out of a $44 billion buyout of the company.
Elon Musk may have found new ammunition in his legal fight against Twitter, thanks to a whistleblower's recent complaint — but legal experts told Insider that it's unlikely to be a silver bullet.
The whistleblower's claims could, however, convince the social media giant to agree to a large settlement from the Tesla CEO instead of forcing him to buy it outright.
The 84-page complaint, published by The Washington Post on Tuesday, was written by renowned hacker and former Twitter security chief Peiter Zatko. He accused the company of general mismanagement, "lying" to Elon Musk about spam accounts on its site, and having poor security practices that could violate a previous FTC settlement agreement.
A Twitter spokesperson told Insider the allegations are "riddled with inaccuracies" and that Zatko was fired for "ineffective leadership and poor performance."
Six legal experts told Insider that Zatko's complaint could play right into Musk's legal strategy, fueling accusations he already floated against the social media company. But whether the Delaware court, which is in charge of ruling on Twitter's lawsuit against Musk, will take Zatko's accusations seriously is another matter entirely.
Since Twitter sued Musk in July over his attempt to back out from a $44 billion purchase agreement, Musk has accused Twitter of operating a "scheme" to mislead investors regarding the company's prospects and intentionally "miscounting" the number of spam accounts on the site. Meanwhile, Twitter has said Musk's complaints are merely an excuse for him to walk away from the deal.
"It's certainly less than ideal for Twitter to have a former employee making claims like this now — and they raise Twitter's risk in a general sense," Matthew Schettenhelm, senior litigation analyst at Bloomberg Intelligence, told Insider. "But when you dive into the details, they don't give me a reason to think Musk has an edge in the Delaware case."
The whistleblower likely won't help Musk score an outright win
"I don't think it will change who wins if the case goes to trial, but it might increase the chances of Twitter agreeing to settle for a large payment instead of going all the way and forcing Musk to buy the company," Erik Gordon, a professor at the University of Michigan's Ross Business School, told Insider.
The judge in the lawsuit, Kathaleen St. J. McCormick, will likely be open to the idea of Zatko's testimony being included in the case, but Musk's legal team will have its work cut out for them lending credibility to his claims, several experts said.
"Zatko's claims may bolster and provide clarity to Musk's claims, but until those claims are substantiated and proven, those claims are just assertions," Paul Marino, an M&A lawyer at Sadis and Goldberg LLP, told Insider. "It is unclear as to whether Musk will be able to prove those claims and/or how he could prove those claims."
On the other hand, Twitter's firing of Zatko in January is a move that now "looks more ominous," Angelo Zino, senior industry analyst at CFRA Research, said in a note.
"Although we still believe Twitter has the upper hand leading up to the Musk trial, we think it provides Elon with some much needed ammunition that could help him build a case against Twitter (or provide some leverage if seeking a settlement) regarding the inaccuracies of the bots/fake accounts," Zino said.
Twitter is likely to downplay Zatko's allegations and attempt to keep him out of the case altogether, Nancy DePodesta, a partner in the White Collar and Government Enforcement practice at Saul Ewing Arnstein & Lehr, told Insider.
"We can expect Twitter to try to discredit Zatko as a disgruntled former employee who was terminated by Twitter and now has an axe to grind," DePodesta said.
Musk did not respond to a request for comment ahead of publication, but he acknowledged the allegations on Twitter. His legal counsel representing him in the lawsuit, Alex Spiro, told The Post that "we have already issued a subpoena for Mr. Zatko, and we found his exit and that of other key employees curious in light of what we have been finding."
Twitter's stock has already fallen over 5% since the whistleblower report was released.
The FTC could issue penalties in the 'billions'
Schettenhelm said the ex-security chief's complaint raises the risk that the FTC could pursue civil penalties over Twitter's allegedly lax security practices, penalties that "theoretically reach the billions" — an issue several experts said could help Musk get out of the purchase agreement if he successfully argues it's a material adverse effect (MAE,) which is legal-speak for something that has had a concretely negative effect on the business.
But that argument is far from a slam dunk.
Schettenhelm said the agency's investigation is unlikely to wrap up before October, when the Delaware court is expected to rule in Musk's legal battle. And he's skeptical that the court will find the risk of a high-dollar FTC penalty to be a material adverse effect, which Ann Lipton — a business law professor at Tulane University Law School — agreed with.
"The violation itself is probably not an MAE, but if it results in other financial consequences for the company or seems likely to do so, that would qualify," Lipton said.