Tesla (TSLA) CEO Elon Musk will face a lawsuit from former Twitter (TWTR) shareholders over his stake-building in the social media website amid allegations that he kept share prices low by failing to disclose his purchases.
Marc Rasella, a former Twitter investor leading the proposed class action lawsuit in New York, alleges that, under U.S. Securities law, Musk should have made his 5% holding in Twitter public on March 24, ten days after the billionaire passed that threshold. Rasella sold a small amount of Twitter shares between March 25 and March 29.
Musk made his stake in Twitter known on April 4, when it had reached 9.2%, filing a 13-G form with the U.S. Securities and Exchange Commission that indicated his intention to be a 'passive' shareholder. The disclosure sent Twitter shares 27% higher on the session.
Within hours of Musk's original 13-G filing on Monday, typically used by passive investors who have no stated intention of exerting influence, or control, on the company in which they are invested, the billionaire Tesla TSLA CEO began to exert influence.
Less that a day after that, Musk revealed what seemed to be a broader intention to exert control, agreeing to a seat on the Twitter board for two years while at the same time acknowledging the opportunity to increase his holding to 14.9%.
The suit alleges Musk made "materially false and misleading statements and omissions" that ""artificially deflated" the price of Twitter stock.
Twitter shares were marked modestly higher in pre-market trading Wednesday, as well, after star fund manager Cathie Wood said she's been "cutting back" on her holdings in the micro-blogging website since the departure of former CEO Dorsey late last year, and sold shares in the group following Musk's disclosure of a 9.2% stake in the group.
Wood, who founded the Ark Innovation ETF (ARKK), told CNBC's Bob Pisani during an interview in Miami on Tuesday that, with or without Musk sitting on the board of directors, Twitter is going to face "a lot of management distraction" as it works to balance its advertising model against the need to police content on the self-proclaimed "“global town square”.
“Maybe the model isn’t right around advertising, maybe it is subscription,” said Wood, whose Ark ETF still owns a 1.8% stake in the group, compared to Musk's 9.1% holding, adding that "one thing for sure (in Musk's mind) is it should not include censorship. And I think he feels very strongly about that.”
Twitter shares were marked 1.8% higher in early Wednesday trading to change hands at $45.41 each, a move that extends the stock's April gain to around 15.5%.
