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Elon Musk sends letter to terminate Twitter deal after whistleblower report

Yahoo Finance’s Alexis Keenan joins the Live show to discuss the latest surrounding the Elon Musk vs. Twitter lawsuit.

Video Transcript

BRAD SMITH: We are also watching Musk here on the day two.

BRIAN SOZZI: Yeah. Elon Musk's legal team has sent a fresh letter to Twitter to scrap the billionaire's acquisition of the company in light of a whistleblower's recent complaints. Yahoo Finance legal correspondent Alexis Keenan is here with the details. Alexis.

ALEXIS KEENAN: Hey, Brian. Yeah, this is a letter that Musk's attorneys have sent, and it's filed in the SEC filings here. So that's where we're seeing it. And this is really additional justification for terminating the $44 billion merger between the two parties.

It's really more ammunition to that original letter that Musk's attorneys had sent to Twitter, terminating back on July 8. Now, this new letter, it's based largely on the publication of that whistleblower report that came from Twitter's former chief. The head of security Peiter Zatko, he filed that with US authorities, accusing Twitter of both lax security measures and also its executives of purposefully evading knowledge of its spam and bot numbers.

Now, this new letter says that Twitter is in breach of the merger agreement on six different parts. It goes after the company's representations at the time that the parties entered the contract. So let's take a look at what those six things are, according to Musk's lawyers.

They claim that Twitter in 2011, that FTC consent decree that it entered into over protecting user data, that they're in breach of that agreement, according to Zatko's claims. So they say that that violates part of the contract that's about representations that Twitter's in compliance with all applicable laws. Next, they say that-- claims that the company gave false and misleading information about security.

So again, pointing at Twitter's level of security measures that it's running day to day on the platform. They say that that breaches its representation, that it did not have any security problems in its financial statements. Also, saying that Twitter's CEO gave false and misleading reports to the board in order to cover up what they say are flagrant vulnerabilities in Twitter's security and data protection protocols.

That goes to part of the contract that Twitter represents it has no knowledge of fraud that involves anyone in the management levels. Also, some additional claims there by Musk's lawyers saying that the company failed to disclose what it should have seen as legal risks, representing in the contract that there was no threatened or pending lawsuits that the company was facing, and also, that it wouldn't face any government investigations that it knew of at the time.

And finally, their apparent lack of a license for Twitter's core machine learning. We're still trying to find out more about what that claim is exactly, but Musk seeming to think that there's an IP violation that also violates the merger agreement. All in all, they say these things could add up to not only breaches of certain representations that Twitter made in the contract but also could amount to a material adverse event effect that could impact Twitter and give Musk the right to terminate this contract.

But, guys, just-- this is more ammunition. Musk's lawyers point out that the parties believe that their original claims still stand, but this is just in addition to those claims. So Musk here coming out in full force and using that Zatko complaint to back it up.

BRAD SMITH: Where are we at within the broader proceedings for the courts and where they're going to actually allow this into evidence? And where within those proceedings would Musk's lawyers continue to kind of make their case and ultimately get some type of decision?

ALEXIS KEENAN: Right. So right now, we're square in the middle of the discovery process, and that's the part where the two parties-- Twitter and Musk-- they exchange information. And they're fighting a lot about that. They fought about it last week. And in fact, just yesterday, along with this letter, there are also filings with the court where Musk's lawyers are saying, even though Twitter was required to turn over a certain information about its spam and bot data, that they're not getting what they want.

And so there's a lot of back and forth with the parties about how much Twitter actually has to hand over. They're fighting hard. There are additional filings as of yesterday. Whether those will go to oral arguments like they did last time around, we'll have to see.

But this trial is close approaching at the end of October, so there is a lot to do before then.

BRAD SMITH: Alexis, thanks so much for breaking this all down, continuing to keep us up to speed on all of the proceedings here with this case. Appreciate it.