Twitter v. Musk: Blowing Whistles or Blowing Smoke?

Mudge Zatko’s allegations look more like a hit piece than a real whistleblowing claim

I thought I could expand my writing into other risk arbitrage.  I thought wrong. 

We didn’t know when it would come.  We didn’t know what form it would take.  But we knew there would be more.  

For those following the Twitter v. Musk saga, there has been no shortage of drama.  If you took a short social media detox, or even a short nap, you may have missed subpoenas being lobbed from both sides, with the latest being Musk’s pretty broad requests for his friend, Jack Dorsey.  As I have said multiple times, it’s a bit strange for friends to publicly accuse friends of fraud, but I like to imagine that, for billionaires, those accusations are met with a conversation which might go something like this:

“Jack, I’m accusing you of fraud because I mis-timed my acquisition and need to get out of this agreement.  Oh, and I’ll need all of your texts, emails, Whatsapp messages, sticky notes, and/or romantic musings in your diary relating to spam or bots.”

“Musk, you rascal! Knight to E4!”

While entertaining, the back-and-forth has largely been, up to this point, exactly that—entertainment.  The likelihood of Musk finding anything that says:

“Dear bot counting team,

Keep up the good work on the fraud!

xoxo,

Jack”

was always going to be pretty low.  Similarly, the likelihood of Twitter finding something in David Sacks’s texts which says:

“No problem, Elon.  Happy to shoot off some tweets to make Twitter look bad once I move my bowels. BRB.”

was only slightly higher, but generally inconsequential given Twitter’s already strong legal position.  Judging by the recent discovery decisions, it seems Chancellor McCormick thinks so, too.

The only real chance Musk has to change his stars is a Material Adverse Effect (“MAE”) coming to his rescue; a white knight in the form of a cataclysmic event. It would have to be something so profound and unexpected that it would justify tanking an otherwise rock-solid merger agreement.  Something like Musk’s financial backers becoming completely insolvent or global nuclear war sending us back to the stone age might do the trick.  A real Hail Mary.  

And gosh darn, wouldn’t you know it—a potential MAE just emerged from the woodwork!  It was completely random and doesn’t appear at all like a coordinated effort with the Musk team******.  It’s also completely coincidental that the Chancery Court has previously stated that a whistleblower claim could, at least in part, constitute an MAE.

Today’s revelation of assertions made by Peiter “Mudge” Zatko are a possible needle-mover in the Twitter v. Musk litigation, as indicated by $TWTR closing 7.32% down on the day.  This is because, though the disclosure is not particularly well-supported with evidence, the claims Zatko makes are sizable enough to have their own gravitational orbit, and they were made to the SEC, FTC, and DOJ. 

Who exactly is Zatko, and what does he claim?  Peiter Zatko (affectionately known as “Mudge” in the hacker community) was Twitter’s head of security from November 2020 until January 2022, when he was let go from his post shortly after Parag took the Twitter reins.  He was originally tasked with tightening up the Twitter platform after several famous people couldn’t tweet for a bit.  His past affiliations include L0pht (a high profile hacker think-tank), DARPA, and BBN Technologies (a government contractor).  Now, in a complaint filed a few months after his termination, he claims:

1. Twitter made false statements to the FTC,

2. Twitter violated SEC rules,

3. Twitter made fraudulent and material misrepresentations to shareholders, and

4. Twitter not only acted negligently as to, but even complied with foreign governments to “infiltrate, control, exploit, surveil and/or censor the Twitter platform.”

So really just some totally run-of-the-mill, low-key accusations.

How will this affect the Twitter v. Musk Chancery litigation?  It’s hard to tell at this point, but we should have some clarity in the next week or so.  Already, Twitter’s Parag Agrawal has issued a statement to employees about the allegations, downplaying the disclosure as a distraction and noting that Zatko was fired for “ineffective leadership and poor performance.”  No doubt Twitter’s internal compliance team is going to have a few sleepless nights ahead as they fulfill their investigation obligations, regardless of the allegations’ merits.  But whether or not the SEC, FTC, and DOJ (any other 3 letter orgs I missed??) decide to pursue this is still up in the air.  If they don’t, Zatko could still petition Congress to take action.  All in all, it is a near-perfectly timed accusation which could trigger a stay in the Chancery litigation until a resolution is achieved.  That being said, Chancellor McCormick might see right through this; she continues to give every indication that she thinks Musk is just playing games:

taken from Chancellor McCormick’s August 23, 2022 discovery ruling

If we’re trying to be scientific about it, the chance Twitter wins the Chancery lawsuit has objectively gone down (even if I think the market is overreacting). This is a potential MAE. However, if Twitter does win at the Chancery, there’s an argument to be made that Zatko’s disclosure has actually increased Twitter’s chance of obtaining specific performance. Between Musk’s tweets, the whistleblower claim, and everything else that has happened over the last few months, the damage to Twitter is increasingly incalculable. The very reductionist math goes:

(Win chances down) x (Specific Performance chances up) x ($54.20) = [Roughly where we were yesterday?]

******So has Musk gotten lucky? Like, really lucky? Or is there f*ckery afoot? Tin foil hats aside, it does look like a coordinated attack. We’ll probably never know, since I assume Musk wouldn’t be stupid enough to have his team reach out to Zatko directly and with a paper trail. Crazier things have happened, I guess. But there are more than a few red flags here. 

Of note is that the Musk team scheduled a deposition with Zatko before the whistleblowing disclosure was made.  This isn’t entirely unjustified, given Zatko’s position within the business as Security Lead reporting to the CEO, but it certainly looks suspicious.  After all, spam/bots isn’t really a security concern, so much as it is a general usability concern, and Musk hasn’t been beating the drums of security in his responses or counterclaims.  Nonetheless—and most egregiously—Zatko’s disclosure is dripping with references to bots and spam despite the core of his claim being the “security, privacy, and integrity” of the Twitter platform.  Just look at these claims, which not only reference Musk by name, they include an entire section (Section II) titled “Lying about Bots to Elon Musk.”  It’s almost as if Zatko has a large, vicarious axe to grind:

As a reminder, I continue to be long $TWTR. I have neither added to nor sold on these events, but will continue to watch everything unfold.  At this point, I see this as providing additional entry-points, and as a much greater risk to the timing of any Chancery judgment, rather than as a risk to the outcome itself, though that is subject to change.