Elon Musk’s unusual entanglement with Twitter — which he now wants to buy — has caught the attention not just of Silicon Valley and the social media world, but also some securities lawyers.
Even before Mr. Musk announced on Thursday morning that he had offered to buy Twitter for about $43 billion, his amassing last month of a big block of shares of the social media company caught the eye of a law firm that is suing the billionaire.
On Tuesday, the law firm Block & Leviton filed a federal lawsuit against Mr. Musk on behalf of several Twitter shareholders who they said may have suffered losses while the Tesla chief executive was building a more than 9 percent equity stake in Twitter. The lawsuit is seeking class action status and contends that investors in Twitter who sold shares late last month may have lost out on potential gains because Mr. Musk did not promptly disclose his large ownership stake.
The civil complaint noted that Mr. Musk disclosed he had amassed a 9 percent stake in Twitter — making him the company’s largest shareholder — on April 4, even though he had begun building his stake much earlier. When Mr. Musk finally disclosed his stake in Twitter, the price of the company’s shares surged to $49.97 from $39.31. The lawsuit contends Mr. Musk should have disclosed in a regulatory filing by March 24 that he had acquired a 5 percent equity stake in Twitter.
The Securities and Exchange Commission requires investors to publicly disclose that they have taken an equity stake of 5 percent or more in a company within 10 days of acquiring the shares — a rule mainly intended to force investment managers like hedge funds to disclose their actions in the market.
The lawsuit said that by not making the required filing within that time frame, Mr. Musk saved money by buying Twitter shares at a cheaper price. And he deprived investors who sold shares before the disclosure of the chance to benefit from the price gain.
Ever since Mr. Musk took his big financial position in Twitter, Wall Street and securities lawyers have speculated that the S.E.C. could look into whether the billionaire violated any securities laws by not promptly disclosing his stake.
If the S.E.C. were to investigate the delayed disclosure, it would likely have to consider whether Mr. Musk had the intent to violate the 5 percent filing rule or if it was an inadvertent mistake or oversight.
The S.E.C. declined to comment. An attorney for Mr. Musk was not immediately available for comment.
Dennis Kelleher of Better Markets, a corporate and regulatory transparency watchdog, said regulators had an obligation to look into the disclosure issue to send a message that all investors are treated the same.
“The rule of law breaks down if billionaires get to play by a different set of rules,” he said.
In February, the S.E.C. proposed halving the time frame within which investors must publicly disclose taking a 5 percent equity stake in a company from the current 10 days to five.
Robert Jackson Jr., a former S.E.C. commissioner and now a professor at New York University School of Law, said the apparent delay in disclosure by Mr. Musk could be relevant with regards to the Williams Act — a five-decade-old law that set ground rules for takeover attempts that are deemed unsolicited or hostile.
“The Williams Act was designed to protect investors in exactly this situation — where an acquirer secretly buys shares he then uses as a toehold to launch a bid for the entire company,” said Mr. Jackson, co-director of N.Y.U.’s Institute for Corporate Governance and Finance. “If this isn’t a case that raises Williams Act concerns, it’s hard to know what would be.”
Mr. Musk’s takeover bid for Twitter comes just weeks after he launched an effort to end a four-year-old settlement with the S.E.C. that required his posts on Twitter to be reviewed for potential market moving information by officials at Tesla — the electric car company he runs. The settlement with the S.E.C. resulted from a post on Twitter that Mr. Musk had made about having funding lined up to take Tesla private when in fact he did not have the financing in hand.
Mr. Musk has been frustrated ever since about the settlement and the need for his posts on Twitter to be reviewed. In a court filing, Mr. Musk’s lawyer said the ongoing terms of the settlement amounted to an “unconstitutional restraint on Mr. Musk’s speech.”
Ephrat Livni contributed reporting.