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Whistleblower Claims Could Weaken Twitter’s (NYSE:TWTR) Battle Against Musk

Story Highlights

A former security chief of Twitter has alleged that the company has mismanagement and governance issues. The claims, if true, could make Twitter’s win in the Musk takeover drama a distant dream.

Update (August 31)

In an interesting turn of events, Twitter Inc.’s (TWTR) ex-security chief Peiter Zatko has accused Twitter of reporting misleading information regarding its actual Monetizable Daily Active Users (MDAUs). Elon Musk now seeks to use Peiter’s allegations in court to strengthen his argument against Twitter in the takeover dispute.

Zatko filed a formal complaint with the Securities and Exchange Commission (SEC) in July, which was made public yesterday. The complaint was also submitted to the Federal Trade Commission (FTC) and the Justice Department, who will investigate the matter thoroughly. Following the news, TWTR stock fell 7.3% to close at $39.86 on August 23.

Whistleblower Claims Strengthen Musk’s Case

The timing of Zatko’s allegations surely strengthens billionaire Elon Musk’s court battle against Twitter. Musk has backed out of his $44 billion deal to buyout Twitter, raising concerns about the actual number of bots or spam accounts on the platform. Musk’s legal team has already subpoenaed Zatko to testify in the court.

Musk’s team believes that if Zatko’s allegations are true, then they would show that Twitter violated the terms of the buyout agreement, according to a Wall Street Journal report. That would then bolster Musk’s argument for seeking to terminate the deal. The five-day trial between Musk and Twitter is scheduled from October 17 in the Delaware Chancery Court.

On hearing the news, Musk shared a copy of the Washington Post report and tweeted “So spam prevalence *was* shared with the board, but the board chose not to disclose that to the public.”

Zatko claims that Twitter’s MDAUs only consider those accounts that are thought to view advertising. Thus, undercounting the prevalence of bots or spam on the site.

Zatko noted in his complaint, “There are many millions of active accounts that are not considered ‘mDAU,’ either because they are spam bots, or because Twitter does not believe it can monetize them. These millions of non-mDAU accounts are part of the median user’s experience on the platform.”

On the contrary, Twitter has been explicitly stating that they undertake proper scrutiny of bots and shut out a large number of bots on a daily basis. Their system involves multiple human reviews of thousands of accounts sampled at random over time. Twitter’s spokesperson denied the allegations, calling Zatko’s claims “false narratives” and “riddled with inconsistencies and inaccuracies and lacks important context.”

Zatko has stated that the issue was notified to Twitter’s Board but was not heeded. His complaint even notes that Twitter CEO Parag Agrawal has deliberately ignored the issue when confronted. Furthermore, Zatko has claimed that Twitter has ties with several foreign governments that employ spies on their payrolls and leak sensitive information.

Zatko was hired in 2020 by the then-CEO Jack Dorsey for his computer security prowess and for being a well-known hacker. However, he was fired in early 2022.

What Analysts Say about the Whistleblower

As per Wedbush analyst Daniel Ives, the whistleblower allegations have changed the dynamic of Twitter’s case, making it every bit more difficult for Twitter to prove its trustworthiness.

Ives quoted in an interview, “For Musk, it’s almost like a kid waking up on Christmas morning and seeing this under the tree… It gives the Musk camp a leg to stand on going into the court battle.”

Ives calls the timing of Zatko’s allegations “extremely interesting” and states that it is the “worst nightmare” for the Twitter Board.

The five-star analyst has a Hold rating on TWTR stock with a price target of $50, which implies 25.4% upside potential to current levels.

What is the Future of Twitter Stock?

Amid the ongoing buyout drama and a challenging courtroom battle, TWTR stock’s trajectory remains uncertain. The stock has been swinging wildly with each update on the Musk-Twitter Saga.

Analysts too, are cautious about Twitter and have a Hold consensus rating on the stock. This is based on two Buys versus 16 Holds. The average Twitter price forecast of $40.49 implies almost 3% upside potential to current levels. Meanwhile, the stock has lost 7.8% so far this year.

Ending Thoughts

Zatko’s allegations have surely added a new twist to the epic drama. A proper investigation into the matter will prove if these allegations are fully true or not. Even the Delaware Judge’s discourse on these allegations will decide on whose side the weighing scale is tilted.

Disclosure

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