Elon Musk May Lose Millions in Twitter Lawsuit

In a new lawsuit filed in California, Elon Musk might be liable to Twitter shareholders for hundreds of millions of dollars.

I am attorney Jay Farrow and I was asked the question today about a new lawsuit that was filed in federal court in California by a shareholder seeking class action certification against Elon Musk and others for securities violations, unjust enrichment. And I was asked, how does how does a shareholder make a company sue a CEO or in this case, an individual who was looking to purchase shares of the company based upon statements that they made?

Well, it’s called the shareholders derivative action. And what that means is, as a as a class of shareholders or a couple of shareholders can file a lawsuit against an individual like Elon Musk for violations of law and they do that in their capacity as shareholders. A lot of times companies, if you can imagine, are run by the same scoundrels that are making the decisions as to what the company does and what the company invests in.

And the shareholders sit by because, you know, other than their individual shareholder voice that they have as a percentage of the company, they really have no power unless they attempt to file what’s called a shareholders derivative action. Now, in these actions, the shareholders ask the company, in this case it’s Twitter to file a lawsuit against someone like Elon Musk.

In other circumstances, though, the shareholders of a corporation could be ten shareholders, and let’s say they’re minority shareholders, but the majority shareholders are taking money out of the corporate coffers for personal benefit, buying summer homes, buying boats. You know, I’ve seen a lot of what the people at the top can take from these corporate accounts and call it, you know, regular business expenses, when, in fact, you know, it’s for a personal family vacation or for one of their, you know, pet projects, like, you know, like a Lamborghini.

So when when this happens, when there’s when there’s deception at the highest levels, believe it or not, as a shareholder of a corporation, you can file a lawsuit in the name of the corporation against the CEO or the COO or the corporate officer that is causing damage to the corporation. In some instances, like here with Elon Musk, the shareholders of Twitter are saying, hey, when Elon Musk came in to this particular purchase arrangement with Twitter, he then started to make a lot of representations about Twitter that were that they claim to be false, which hurt Twitter’s share value.

So the shareholders or this one in particular, this filed this lawsuit, is hoping to hold Elon Musk accountable for these statements. If, in fact, they were false, because evidently under California law there there are ramifications for making false statements about a security in order to benefit oneself. Now, here in Florida, we have exactly the same type of of laws.

There are also federal laws about making statements about stocks right before, let’s say, a stock offering. And these statements are known to be inflated, but the people at the top bet on them. And it’s called a pump and dump scheme many times, especially in the penny stock arena, you have CEOs who will make their own press releases and send out these press releases and say that the company is going to be acquiring certain assets.

And in fact, they may be acquiring the assets, but at the same time, they may not actually be purchasing the assets. For example, a CEO might might announce that they obtained a license to use certain intellectual property that’s going to take this company to the moon. But in fact, they get the license, but they never pay for it.

And as soon as everybody finds out that the licenses are paid for, the stock goes to zero. But in the meantime, the people that invested or had the majority of shareholders, like the top people, make a lot of money on this type of information. So this is called like the classic pump and dump excuse me. It’s called the classic pump and dump scheme.

In this particular scenario, though, this is not a pump and dump scheme per se. What the shareholder seemingly is alleging is that these statements that were made by Elon Musk were made to make the deal between him purchasing Twitter a little bit more sweet. And in the meantime, he lessened the value of the Twitter shares, according to an article that I saw today, down around 12%.

So you might imagine a company the size of Twitter and the value goes down 12%. Well, if that’s attributable to some false statements that were made by someone with that type of authority, he could be liable for for damages to the individual shareholders of Twitter. But we’ll see how that one plays out in that particular case. But in some of the work that we do, there’s not as many shareholders as you would find in a Twitter.

Sometimes there’s ten, sometimes there’s 15, maybe 100. What happens if you can if you know that the information that’s given every single year at the corporate event, that that gives the profits and the losses and the information and tells the people that work for the company, you need to buy this stock. It’s going to it’s going to keep going up forever.

It’s an unbelievable investment opportunity. And you guys get the benefit of this because you actually work for this corporation. We don’t offer it to anybody else. This is going to be your retirement. So what happens in an instance when you recognize that the people at the top have been over inflating, those stocks and you’re thinking to yourself, well, as a minority shareholder, what can I do?

I mean, I have no power. Well, that’s not necessarily true, because you can actually file a lawsuit on behalf of yourself and the corporation to go after whomever at the top or in the middle that is making up this false information to inflate the stock to enrich themselves. So believe it or not, as a shareholder of a company, you have a lot of power.

You do have a lot of say. And yes, it’s going to depend upon, you know, what your stock of classes or the class of stock that you own. It might have to do with the purchase agreement that you have with the stock. But what’s important to know is that you have rights everywhere in every state. There are violations of law that happen on a statutory basis when somebody makes a false representation in connection with the sale of a security like a stock.

So I was asked this today and I was like, you know, people are going to listen to this story and think to themselves, how does this one shareholder come up with the idea to file its own lawsuit in the name of Twitter to go after someone like Elon Musk? Well, it’s based upon what’s known as a a shareholder derivative action.

And in this particular instance, like I said in the beginning of this video, if he’s found to be liable for these false statements under under the applicable law, yes, he could be liable for hundreds of millions of dollars. But that’s going to be, you know, played out through litigation. There’s multiple steps between then and now, and nobody knows what goes on behind closed doors.

And everybody likes to point the finger at someone like Elon Musk or someone with a lot of money. So, you know, I would be careful with, you know, what you what you read in the papers and what you see. But the takeaway is, yes, it’s absolutely possible to use your powers as a shareholder to enforce rights, to have the company actually, the company sue the bad guys, even the CEO or the vice president or the president for taking action that is self-serving and against the interest of the company and ultimately against the interests of the shareholder.