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Elon Musk may have 'waived due diligence' in Twitter deal lawsuit: Lawyer

Berenzweig Leonard, LLP, Managing Partner Seth Berenzweig joins Yahoo Finance Live to discuss the ongoing lawsuit between Twitter and Tesla CEO Elon Musk.

Video Transcript

RACHELLE AKUFFO: We turn to Berenzweig Leonard LLP Managing Partner Seth Berenzweig. Good to see you, Seth. So with these latest bombshells coming from this whistleblower, then, how much could this potentially move the needle here?

SETH BERENZWEIG: Well, it's pretty significant. This really dropped like a bombshell here in Washington, and it is still reverberating through the congress and the agencies. But as far as the Delaware case is concerned, it really has had, I believe, a very dramatic impact. Keep in mind that before this was disclosed, Twitter was really on a roll.

It had some important early motions in terms of getting the judge to basically slam dunk their requests for an expedited trial, expedited discovery. This is going to go to trial in mid-October, which is very fast. And they were really kind of looking like they were on a cakewalk, because it's a very difficult case to prove that Twitter engaged in malfeasance in order to be able to misstate its bot traffic, among other things.

Well, all of a sudden, we wake up this morning to a whole different picture. We have this whistleblower complaint by Peter Zatko, who is represented by a well-known whistleblower law firm-- and, in addition to some startling comments from people such as Chuck Grassley in the Senate saying this might even rise to a national security level, this really changes the entire narrative on a number of issues. I agree with the statement made a moment ago that it affects, for example, the bots issue.

And what Mr. Zatko is saying is that the company knowingly misrepresented the bots. He says that it's not the stated 5% level. He said it's roughly 30% because of how they calculate these so-called MDAUs-- monetizable daily active users. He says that they are twisting the data to focus on the accounts that are actively looking at advertising.

But he points out that, by definition, purposefully ignores fake accounts and bots. So he's saying that is an active manipulation of the data. This is basically a gift from the heavens that's dropped into Elon Musk's lap and really immediately changes the contour and the context of this big lawsuit.

SEANA SMITH: Well, Seth, I guess what exactly needs to be proven? Because how does Musk then prove the extent to which he did rely on the bots claim when making this deal initially?

SETH BERENZWEIG: Well, what he would have to establish, which is not easy-- so this case is going to be a close call-- but he'll have to show that both he and all the other fellow investors were purposefully deceived as it relates to bot traffic and things that had a material impact on the operation and the viability of the company. So in other words, that the company engaged in a practice of purposeful deception, that they, as Mr. Zatko alleges, purposefully deceived the board, purposefully filed information that it knew or should have known was inaccurate at the time for their quarterly filings and things of that nature-- then not only does he have a little bit of leverage now on the MDAU issue, but there are other things that he can leverage as well.

For example, the whistleblower complaint alleges that the company failed to properly license various aspects of important software that Twitter uses to activate their AI capabilities. Well, there's a provision in this deal, which is typical in the M&A world, that says that the company reps and warrants that it has not intentionally or knowingly violated the intellectual property rights of another company. That's usually a toss away.

Well, if this allegation is true, then this is just something else that fell right into Elon Musk's lap. So there are a variety of issues. And really, the entire context of this case may have changed overnight.

DAVE BRIGGS: If only he'd had you as his attorney, though when he signed his contract waiving due diligence, though. I can't get around the fact that he said in this contract he was willing to accept their estimates and their reports. And their SEC filing acknowledges that it may not be right. They may be just in the ballpark, if not exactly even close. Do I have it right?

SETH BERENZWEIG: No, you're absolutely right. And not only are you spot on, but you're really highlighting something that is such a big deal as to the uniqueness of this case and why this is such an unforced error by Twitter. It is unbelievably rare in the mergers and acquisitions community, in the deal space, to have waived due diligence.

Elon Musk, who always beats to his own drum, waived due diligence. It is not a condition to closing. That is unbelievable. That should have made this case a cakewalk for Twitter.

But you're absolutely right. And as a result of that-- now, he has to show some kind of purposefully deceptive and misleading conduct as it relates to things like the bots. So you're absolutely right. And it would really be stunning-- this is a real significant change of events and a real u-turn in a case in a trial that is really coming up in a couple of weeks.

DAVE BRIGGS: Five days in Delaware going to be good-- Twitter shares down about 6% on the day. Berenzweig Leonard Managing Partner Seth Berenzweig, good to see you, sir. Thank you.