Tesla (NASDAQ:TSLA) CEO Elon Musk is once again in the spotlight, although this time not for good reason. On Tuesday, Block & Leviton, a law firm, filed a class-action lawsuit against Musk on behalf of a group of former Twitter (NYSE:TWTR) shareholders. The lawsuit claims that Musk was able to acquire TWTR stock at lower prices since he delayed filing a 13G form. A 13G form is required to be filed with the U.S. Securities and Exchange Commission when a person or group acquires a passive 5%-or-higher stake in a public company. Furthermore, the lawsuit states that Musk had acquired a 5% stake by March 14, which means that the deadline to file the form was on March 24. However, Musk did not file a 13G form until April 4.
TWTR Stock Holders Sue Elon Musk
From April 1 to April 4, the price of TWTR stock increased by 27%. Investors should note that April 2 and April 3 occurred over the weekend when the market was closed. Therefore, Twitter shareholders who sold their shares between March 24 and before the April 4 13G filing disclosure “missed the resulting share price increase as the market reacted to Musk’s purchases.” The Washington Post reports that the delayed filing allowed Musk to purchase shares at an “artificially low price” and netted him an additional $156 million.
However, the lawsuit may not be an easy win. University of Michigan securities law professor Adam Pritchard told The Washington Post that individual shareholders have no right to sue Musk. That’s because public disclosure of equity holdings “is a regulatory requirement and not something he legally owes to Twitter’s shareholders.”
Musk also made an error when filing the 13G form in April. The form stated that Musk owned 73.4 million shares, or a 9.2% stake. Then, the next day, Musk filed a 13D form, which converted his ownership from passive to active. Converting ownership status from passive to active is 100% legal. However, the number of shares on the filing changed to 73.1 million, indicating a 9.1% stake. Musk disclosed on Twitter that the “Initial share number filed was incorrect.”
SEC May Fine Musk for Late Twitter Disclosure
Georgetown Law Professor Urska Velikonja believes that the late filing could “lead to a per-violation civil penalty of up to $207,183.” While this is a drop in the bucket for the world’s richest man, Musk is already in hot waters with the SEC due to a tweet last year that asked his followers if he should sell Tesla stock.
Last month, the SEC proposed a new rule to reduce the deadline for the disclosure of a 5% stake to five days after the event instead of 10. SEC Chair Gary Gensler explained that:
“The filing of Schedule 13D can have a material impact on a company’s share price, so it is important that shareholders get that information sooner.”
On the date of publication, Eddie Pan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
