Elon Musk Faces a Class Action Lawsuit Over Twitter Stake — Here's Why

Tesla’s CEO Elon Musk isn't a stranger to controversies. He has faced several lawsuits including one due to calling British caver Vernon Unsworth a “pedo guy” and another due to falsely claiming that he arranged funding to take Tesla private.

Earlier in April, Musk disclosed a 9.2 percent stake in microblogging site Twitter. Like most of Musk’s actions, even the Twitter stake has led to controversy. Musk is facing a class-action lawsuit over the Twitter stake. What’s the controversy all about and why is Musk being sued?

On April 4, Musk disclosed that he has taken a 9.2 percent stake in Twitter. The stock price has been sagging for over a year. As expected, Twitter stock soared after the announcement. Markets expected Musk to push for constructive changes at the company which would add stockholder value.

Several Twitter stockholders have sued Musk for the delay in disclosing his Twitter stake. The laws require that any entity taking a 5 percent or higher stake in a public company should reveal the stake within 10 days. This means that Musk should have disclosed the stake by March 24. However, the mercurial Musk who's often at odds with regulators, waited until April 4 to reveal the stake.

The lawsuit is captioned Rasella v. Elon Musk, No. 1:22-cv-03026 (S.D.N.Y.) and is filed in the District Court for the Southern District of New York. The lawsuit calls for compensation for Twitter investors who sold the stock between March 24 and April 4 and therefore lost out on the gains.

Musk and SEC haven’t had a good relationship. In his typical way, Musk calls SEC as “Shortseller Enrichment Commission.” The U.S. securities regulator removed Musk from the position of Tesla’s chairman after his infamous “taking Tesla private tweet.” Musk also had to pay a $20 million fine, which is a tiny fraction of his massive net worth.

As part of the agreement, Musk’s price-sensitive tweets about Tesla were to be approved by the company’s attorney. The process hasn’t been followed apparently and Musk’s attorney has asked a Manhattan federal judge to discard that agreement.

Several of Musk’s tweets have impacted Tesla’s stock price. In 2020, he tweeted that he thought Tesla's stock price was too high. It's unusual for a company’s CEO to call a stock overvalued. As expected, Tesla stock crashed after the tweet.

In 2021, Musk held a Twitter poll on whether he should sell a 10 percent stake in Tesla. Tesla stock tumbled after the tweet and the SEC is investigating the case. Musk wants even that investigation dropped.

Musk has managed to avoid authorities more often than not. He put pressure on local health officials to get the Fremont plant reopened at a time when the U.S. was battling the first COVID-19 wave.

With the Twitter stake, Musk seems to have crossed a line by not disclosing the stake in time. We’ll have to wait and see how tough the SEC gets with him.