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Musk Faces Ticking Clock in Probing Twitter Whistleblower Claims

Sept. 8, 2022, 4:30 PM

A Delaware Chancery judge’s decision to hold Elon Musk to an October trial date over his attempt to abandon his $44 billion acquisition of Twitter Inc. keeps the billionaire and his team under a tight deadline as they hustle to investigate a whistleblower’s complaint.

Twitter has sued Musk, who’s also CEO of Tesla Inc., to get the deal done. Judge Kathaleen St. J. McCormick said Wednesday that Musk could amend his counter-claims to include allegations from Twitter’s former security chief, Peiter Zatko, who has accused the company of misleading investors about data protection issues.

But McCormick’s refusal to push back a trial in the case, set to start Oct. 17, is a significant win for Twitter because it doesn’t give Musk much time to explore Zatko’s allegations in discovery.

By keeping “a tight timeline, it makes it harder for Musk to dig up anything,” Tulane law professor Ann Lipton said.

The judge, who permitted Musk’s legal team only “incremental discovery” related to the new allegations, has already been annoyed by some of his legal team’s conduct during discovery in the case, Lipton noted.

“They know that she’s keeping an eye on how they conduct themselves in terms of the demands they make,” she said.

Unsure if the newly surfaced allegations are true, Musk’s team wants to go on a “grueling and expensive fishing expedition,” Twitter’s lawyers have said. With less than six weeks to trial, Musk has limited time to investigate.

Appeal Target

Musk’s efforts to abandon his planned acquisition of Twitter have focused on allegations the company undercounts spam and bots when calculating the number of monetizable daily users, a key company metric.

Zatko alleged Twitter made misrepresentations about its security systems and privacy. Zatko, who was fired by Twitter in January, also suggested the company could be implicated in “extensive” intellectual property violations.

Twitter has said the complaint presents a false narrative and is “riddled with inconsistencies and inaccuracies and lacks important context.”

Under Delaware law, amendments to complaints and counter-claims should be “freely given when justice so requires.” It is a lenient standard, attorneys say, and it’s rare for the other side to even oppose a motion to amend.

During a hearing this week, a lawyer for Twitter, William Savitt of Wachtell Lipton Rosen & Katz, appeared to recognize the likelihood that the amendments would be allowed, emphasizing that Twitter’s “principal concern” is to keep the expedited trial schedule.

Musk had asked for four weeks of additional discovery. While Twitter likely isn’t thrilled there are additional issues in the case, the company “desperately” wants to get the trial over with as fast as possible, Iowa law professor Robert Miller said.

“I think the people on the Twitter side are pretty happy about this outcome,” Miller said. “This is the most they could possibly have hoped for within reason.”

There is another potential upside for Twitter: had the court refused to allow Musk to amend, it would’ve given his lawyers an easy issue to target in a potential appeal, Lipton said.

“The Delaware Supreme Court is not going to interfere with scheduling decisions,” Lipton said. “But they might be concerned about a refusal to allow exploration of these new allegations.”

Risk of Delay

Zatko’s allegations will intensify an already arduous discovery process.

Andrew Rossman of Quinn Emanuel Urquhart & Sullivan LLP, an attorney for Musk, said during the Sept. 6 hearing that discovery was becoming a “complete trainwreck” and the Oct. 17 trial date wasn’t “remotely achievable.”

Meanwhile, Twitter’s team has dozens of lawyers working around the clock, and no one is getting much sleep, an attorney for Twitter, Bradley Wilson of Wachtell, said at the hearing. Twitter maintained the trial schedule was still feasible.

“There are teams and teams of lawyers on both sides,” said Bradley Foster, an attorney at Haynes and Boone LLP who isn’t involved in the case. “It’s not inconceivable for them to add this to the mix, along with everything else going on and still stick to the mid-October trial setting.”

The four-week delay Musk asked to investigate the whistleblower allegations risked “further harm to Twitter too great to justify,” McCormick said in her ruling.

McCormick has appeared to be frustrated with Musk’s legal team at times. Twitter asked for the names of people Musk spoke with about the deal. But Musk’s lawyers’ efforts to identify them were “suboptimal,” the judge said during the Sept. 6 hearing. She has also called one of their demands for Twitter user data “absurdly broad.”

McCormick hasn’t tipped her hand as to how she views the merits of the claims. She said Wednesday the “world will have to wait for the post-trial decision.”

Still, some experts in Delaware law are skeptical that the new allegations significantly increase Musk’s odds.

“We have somebody that’s expressing now buyer’s remorse,” said Case Western Reserve law professor Anat Alon-Beck. “And they’re trying everything they can pull out of the hat to say there’s fraud or something that amounts to a material adverse effect to get him out of the contract.”

“Those, in Delaware, are very hard claims to prove,” Alon-Beck said.

To contact the reporter on this story: Matthew Bultman in New York at mbultman@correspondent.bloomberglaw.com

To contact the editors responsible for this story: Keith Perine at kperine@bloomberglaw.com; Roger Yu at ryu@bloomberglaw.com