Elon Musk filed an amended to his Schedule 13D SEC filing on Monday that sent Twitter’s stock tumbling. His amendment included a letter written by his law firm stating Twitter continues to avoid compliance with Musk’s request to turn over active user data. Since mid-May, Musk has sought specific data as part of his due diligence process for the purchase of Twitter. What he wants is a sample cross-section of active users so he can determine, using his own methodology, the percentage of spammers, bots, and fake accounts on the platform.
Questioning Twitter
Unlike print or TV outlets — that use third-party auditors to measure their audience — Twitter self-reports their users, and advertisers rely on that internal report to determine their ad spend. Elon Musk doesn’t believe their self-report is accurate.
After a May 2nd Reuters report stating Twitter made claims that “false or spam accounts represented fewer than 5% of its monetizable daily active users,” Musk countered with this public statement:
“Twitter deal temporarily on hold pending details supporting calculation that spam/fake accounts do indeed represent less than 5% of users,” then added:
“Still committed to acquisition.”
Since Elon Musk went public with the hypothesis that Twitter’s active user base is likely exagerrated, the price of Twitter stock lost more than half its value (Refer to graph below).
The Letter
On Monday, June 6, through a letter composed by his law firm, Musk lays claim that Twitter continues to stonewall on providing active user data. The SEC filed letter states:
“Mr. Musk does not agree with the characterizations in Twitter’s June 1 letter. Twitter has, in fact, refused to provide the information that Mr. Musk has repeatedly requested since May 9, 2022 to facilitate his evaluation of spam and fake accounts on the company’s platform. Twitter’s latest offer to simply provide additional details regarding the company’s own testing methodologies, whether through written materials or verbal explanations, is tantamount to refusing Mr. Musk’s data requests. Twitter’s effort to characterize it otherwise is merely an attempt to obfuscate and confuse the issue. Mr. Musk has made it clear that he does not believe the company’s lax testing methodologies are adequate so he must conduct his own analysis. The data he has requested is necessary to do so.
“As noted, under various terms of the merger agreement, Twitter is required to provide data and information that Mr. Musk requests in connection with the consummation of the transaction. Twitter’s obligations to provide Mr. Musk with information is not, as the company’s June 1 letter suggests, limited to a “very specific purpose: facilitating the closing of the transaction.” To the contrary, Mr. Musk is entitled to seek, and Twitter is obligated to provide, information and data for, inter alia, “any reasonable business purpose related to the consummation of the transaction” (Section 6.4). Twitter must also provide reasonable cooperation in connection with Mr. Musk’s efforts to secure the debt financing necessary to consummate the transaction, including by providing information “reasonably requested” by Mr. Musk (Section 6.11). Mr. Musk’s requests for user data not only satisfies both criteria, but also meets even Twitter’s narrowed interpretation of the merger agreement, as this information is necessary to facilitate the closing of the transaction.”
Read the complete letter filed by Musk in his June 6th Schedule 13D amendment.
Texas Attorney General Announces Investigation into Twitter
Mere hours after Musk’s SEC filing became public, Attorney General of Texas, Ken Paxton, tweeted the following:
“Today I’m investigating Twitter for potentially misleading Texans on the number of its “bot” users. I have a duty to protect Texans if Twitter is misrepresenting how many accounts are fake to drive up their revenue.”
In his press release, Paxton states there’s now an open investigation into Twitter for potentially reporting false information on real active users, that the number of non-human accounts may comprise 20% or more of all user accounts. Representing a false user number to businesses advertisers could be in violation of the Texas Deceptive Trade Practices Act.
Today I’m investigating Twitter for potentially misleading Texans on the number of its “bot” users. I have a duty to protect Texans if Twitter is misrepresenting how many accounts are fake to drive up their revenue.https://t.co/OZbwdV3pnY
— Texas Attorney General (@TXAG) June 6, 2022
Texas Attorney General’s Office Sends Twitter a Civil Investigative Demand Letter
Included with the AG’s press release is a reference document few have reported on: the Civil Investigation Demand Letter. Within this demand letter, not only does the AG’s office layout their intent to investigate Twitter for deceptive practices, but Schedule C requests a list of twenty-three types of information Twitter is legally bound to provide by June 27, 2022. Items on the list include:
- The number of active users on Twitter since 2017;
- The number of ‘monetizable daily active users’ ;
- All internal documents that define ‘monetizable active users’;
- Methodologies Twitter uses to calculate ‘false or spam accounts’;
- Documents related to any complaints made by advertisers to Ad Reach being inflated;
- Documents showing the number of Texas-based advertisers in 2021 and 2022.
Texas Attorney General Ken Paxton (below) speaks at the Austin Police Association.
Is Musk Assisting the Texas AG?
What are the odds of Elon Musk filing an amended 13D with the SEC on the same day the Texas AG announces an investigation into Twitter for fraud?
The coincidence of these two events happening within hours may suggest that Musk and Paxton are working in concert. Is there something more here that has yet to be reported? We expect more will be made known in July.
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