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01 Sep

Elon Musk Cites Twitter Whistleblower Report as Reason to Scrap Deal

Elon Musk’s lawyers argued that the recent whistle-blower report by Pieter Zatko, Twitter’s former security chief, provided additional reasons for Mr. Musk to walk away from his agreement to buy Twitter for $44 billion and asked to postpone his legal battle with the company while the claims were investigated.

The requests, revealed in regulatory and legal filings on Tuesday, are an effort by the billionaire to incorporate Mr. Zatko’s allegations in the coming trial that will determine whether Mr. Musk must complete the purchase. On Tuesday, Mr. Musk asked a judge to delay the trial for one month while his lawyers investigate the whistle-blower claims.

Mr. Zatko has accused Twitter of years of “material misrepresentation and omissions” about security and privacy protections built into its platform. Twitter executives have strongly rejected Mr. Zatko’s claims.

Twitter is suing Mr. Musk to force him to close the transaction, with a trial at the Delaware Chancery Court scheduled for October. In a court filing Tuesday, lawyers for Mr. Musk proposed moving the trial to November. The court has not yet ruled on whether to grant the request.

Twitter said that both Mr. Musk’s prior and new attempts to exit the deal were “invalid and wrongful” and that it would continue to push him to buy the company at the agreed-upon price.

Although both Mr. Musk and Mr. Zatko have accused Twitter of fraud, their allegations are not the same, making it difficult for Mr. Musk to include Mr. Zatko’s claims without legal maneuvering.

Mr. Musk’s lawyers appear to have been setting the groundwork for such an action. They highlighted Mr. Zatko’s allegations at a briefing in Delaware last week and disclosed in a court filing Monday that they had subpoenaed Mr. Zatko. The subpoena is one of more than 100 that lawyers for Mr. Musk and Twitter have issued ahead of the trial.

Mr. Musk has said Twitter’s public disclosures about the number of fake accounts on the platform — which he relied on when he agreed to purchase the company — were misleading, and were the basis of his initial rationale for walking away from the deal, expressed in a letter to Twitter in July.

But in the latest flurry of filings, Mr. Musk’s lawyers sought permission from the Delaware court to amend his countersuit against Twitter. He also pushed for more time for discovery, demanding more documents and information from Twitter.

It is up the judge overseeing the trial, Kathaleen St. J. McCormick, to allow him to do so. It is not clear that she would, given the trial is less than two months away.

In their latest letter, Mr. Musk’s lawyers write that Mr. Zatko’s allegations, if true, constitute a “material adverse effect” on the company, allowing Mr. Musk to break the agreement. The deal requires Twitter to comply with federal laws, and Mr. Zatko has accused it of being in breach of a 2011 consent decree with the Federal Trade Commission over its security practices. This would have “existential” consequences for Twitter’s business, according to the letter.

The letter also said that Twitter should have disclosed security weaknesses raised by Mr. Zatko in its documents filed with the Securities and Exchange Commission. The fact that it did not do so constitutes fraud, the letter said.

Several lawmakers have called on the F.T.C. to investigate Mr. Zatko’s claims. He is scheduled to testify before the Senate Judiciary Committee in September.

If Judge McCormick does not allow Mr. Musk to amend his countersuit, another, more unconventional option remains. He could lodge a federal lawsuit arguing that he has the right to walk away from the deal under laws governing the sale of securities. And he could ask that judge to postpone the deal until the case is settled. But the bar for federal securities fraud claims is high, and taking such action would risk angering the Delaware court overseeing Mr. Musk’s fight with Twitter.

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