Following Musk’s ‘Material Breach’ Letter, Texas AG Launches Probe Into Twitter Bots

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Attorney General Ken Paxton announced he launched an investigation into Twitter for potentially false reporting over its fake bot accounts. In turn, the AG’s office has issued a Civil Investigative Demand (CID) to investigate whether the social media platform reporting on real versus fake users is “false, misleading, or deceptive” under the Texas Deceptive Trade Practices Act.

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The move comes on the heels of the letter Elon Musk’s lawyers sent to Twitter on June 6, which said that the lack of information about its user base represented a “material breach” of the terms of the merger, according to a Securities and Exchange Commission (SEC) filing.

“I have a duty to protect Texans if Twitter is misrepresenting how many accounts are fake to drive up their revenue,” Paxton tweeted.

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The news sent shares of Twitter closing down 1.4% on June 6, and they were down 1.6% in pre-market trading on June 7.

“Twitter has received intense scrutiny in recent weeks over claiming in its financial regulatory filings that fewer than 5% of all users are bots, when they may in fact comprise as much as 20% or more. The difference could dramatically affect the cost to Texas consumers and businesses who transact with Twitter,” according to a press release.

The AG’s probe argues that bot accounts can not only reduce the quality of users’ experience on the platform but may also inflate the value of the company and the costs of doing business with it, thus directly harming Texas consumers and businesses. 

“Texans rely on Twitter’s public statements that nearly all its users are real people. It matters not only for regular Twitter users, but also Texas businesses and advertisers who use Twitter for their livelihoods,” Paxton said in the release. “If Twitter is misrepresenting how many accounts are fake to drive up their revenue, I have a duty to protect Texans.”

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The CID requires Twitter to turn over documents related to how it calculates and manages its user data and how these numbers relate to Twitter’s advertising businesses. Twitter has until June 27 to respond to the AG, according to the release.   

Marc Fagel, a securities law expert who previously served as regional director of the SEC’s San Francisco office, told CNBC that Paxton’s announcement was unusual.  

“States aren’t necessarily equipped to do this sort of sophisticated investigation,” Fagel told CNBC. “It’s one thing if you’re dealing with a local company, but if you’re talking about a national, publicly-traded company in another state, that’s the province of the SEC.”

In the letter to Twitter on June 6, Musk’s lawyers wrote that “based on Twitter’s behavior to date, and the company’s latest correspondence in particular, Mr. Musk believes the company is actively resisting and thwarting his information rights (and the company’s corresponding obligations) under the merger agreement. This is a clear material breach of Twitter’s obligations under the merger agreement and Mr. Musk reserves all rights resulting therefrom, including his right not to consummate the transaction and his right to terminate the merger agreement.”

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Last month, the richest man on the planet backpedaled on his initial offer, saying that spam and bots accounted for at least 20% of users on the social media platform, higher than the “less than 5%” Twitter had disclosed in filings, as GOBankingRates previously reported.

Several analysts are viewing Musk’s bots allegation as a way of either backing out of the $44 billion Twitter deal or lowering its price.

“We believe the announcement could lead to negotiations on price to avoid a big court fight,” Mandeep Singh, a Bloomberg Intelligence analyst said, according to Bloomberg.

And on June 6, Wedbush Securities analyst Dan Ives tweeted that Musk’s latest move “speaks to our thesis over past few weeks that spam/bot issue was going to be the “material breach” cited by Musk to try to get out of TWTR deal. $1 billion breakup fee; Twitter Board will fight this clearly.  Help remove a major overhang on Tesla; Twitter stock be under pressure.”

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Twitter shares have been taking a beating since the $44 billion acquisition was announced in April- they are down 17.5% in the past month, and down 7.2% year-to-date.

About the Author

Yaël Bizouati-Kennedy is a full-time financial journalist and has written for several publications, including Dow Jones, The Financial Times Group, Bloomberg and Business Insider. She also worked as a vice president/senior content writer for major NYC-based financial companies, including New York Life and MSCI. Yaël is now freelancing and most recently, she co-authored  the book “Blockchain for Medical Research: Accelerating Trust in Healthcare,” with Dr. Sean Manion. (CRC Press, April 2020) She holds two master’s degrees, including one in Journalism from New York University and one in Russian Studies from Université Toulouse-Jean Jaurès, France.

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