The lawsuit accuses Elon Musk of delaying the disclosure of his stake in Twitter so he could buy more shares at lower prices.
Elon Musk’s huge Twitter investment took a new twist Tuesday with the filing of a lawsuit alleging that the colourful billionaire illegally delayed disclosing his stake in the social media company so he could buy more shares at lower prices.
The complaint in New York federal court accuses Musk of violating a regulatory deadline to reveal he had accumulated a stake of at least 5 per cent.
Instead, according to the complaint, Musk didn’t disclose his position in Twitter until he’d almost doubled his stake to more than 9 per cent. That strategy, the lawsuit alleges, hurt less wealthy investors who sold shares in the San Francisco company in the nearly two weeks before Musk acknowledged holding a major stake.
In a proposed class action filed in Manhattan federal court, the shareholders said Musk, the chief executive of electric car company Tesla, made "materially false and misleading statements and omissions" by failing to reveal he had invested in Twitter by March 24 as required under federal law.
Twitter shares rose 27 per cent on April 4, to $49.97 (around €46) from $39.31 (€36), after Musk disclosed his stake, which investors viewed as a vote of confidence from the world's richest person in San Francisco-based Twitter.
Former shareholders led by Marc Rasella said the delayed disclosure let Musk buy more Twitter shares at lower prices, while defrauding them into selling at "artificially deflated" prices.
The lawsuit seeks unspecified compensatory and punitive damages.
A lawyer for Musk had no immediate comment. Tesla is not a defendant.
US securities law requires investors to disclose within 10 days when they have acquired 5 per cent of a company, which in Musk's case would have been March 24.
Twitter announced on April 5 that Musk would join its board of directors, but this week said he had decided not to.
By not joining the board, Musk, a prolific Twitter user, can keep buying shares without being bound by his agreement with the company to limit his stake to 14.9 per cent.
Some analysts have suggested Musk could push Twitter to make changes, or even pursue an unsolicited bid for the company. Musk is worth $265.1 billion (€245 bilion), according to Forbes magazine.