Elon Musk sued by Twitter shareholders over failure to disclose stock purchase on time

Elon Musk
The lawsuit seeks unspecified compensatory and punitive damages. Photo credit: Getty Images

Elon Musk was sued on Tuesday, US time by former Twitter shareholders who claim they missed out on the recent run-up in its stock price because he waited too long to disclose a 9.2 percent stake in the social media company.

In a proposed class action filed in Manhattan federal court, the shareholders said Musk, the chief executive of electric car company Tesla, made "materially false and misleading statements and omissions" by failing to reveal he had invested in Twitter by March 24 as required under federal law.

Twitter shares rose 27 percent on April 4, to US$49.97 from US$39.31, after Musk disclosed his stake, which investors viewed as a vote of confidence from the world's richest person in San Francisco-based Twitter.

Former shareholders led by Marc Rasella said the delayed disclosure let Musk buy more Twitter shares at lower prices, while defrauding them into selling at "artificially deflated" prices.

The lawsuit seeks unspecified compensatory and punitive damages.

The Washington Post reported the late disclosure had earned the controversial Musk an extra US$156 million (NZ$226m).

It could lead to more problems between Musk and the Securities and Exchange Commission (SEC), which is already investigating his sale of Tesla shares late last year and his refusal to abide by a 2018 agreement with the agency.

A lawyer for Musk had no immediate comment. Tesla is not a defendant.

US securities law requires investors to disclose within 10 days when they have acquired five percent of a company, which in Musk's case would have been March 24.

Twitter announced on April 5 that Musk would join its board of directors, but this week said he had decided not to.

By not joining the board, Musk, a prolific Twitter user, can keep buying shares without being bound by his agreement with the company to limit his stake to 14.9 percent.

Some analysts have suggested Musk could push Twitter to make changes, or even pursue an unsolicited bid for the company.

Rasella said he sold 35 Twitter shares for US$1,373, or an average price of US$39.23, between March 25 and 29. Musk is worth US$265.1 billion, according to Forbes magazine.

The case is Rasella v Musk, US District Court, Southern District of New York, No. 22-03026.

Reuters / Newshub