Elon Musk's Advice-of-Counsel Defense Faces Test in Twitter Lawsuit

Investors suing Elon Musk are crying foul in a class action over the billionaire's delayed disclosure of his Twitter stake in early 2022, arguing that he wants to escape liability by citing legal advice he received from two prominent law firms without providing details about it.

 

Attorneys for the plaintiff, an Oklahoma firefighters pension fund, said on Monday that Musk and his co-defendants should be forced to clarify whether they will rely on legal counsel’s involvement to argue they acted in good faith. They accused Musk of using a "classic 'sword and shield' strategy" by invoking their lawyers' advice as a defense while also refusing to turn over documents relating to that defense, citing attorney-client privilege.

 

Lawyers at Bernstein Litowitz Berger & Grossmann asked US Magistrate Judge Gabriel Gorenstein in Manhattan federal court to compel Musk to "provide a binding election as to any reliance on counsel or good faith defense" before he is scheduled to give testimony in the case early next month, and to extend a deadline for producing evidence.

 

The dispute could shape Musk's defense in the securities fraud case, potentially forcing him to choose between exposing internal legal communications or forgoing a potentially powerful defense.

 

Musk and the other defendants are represented by a team of lawyers from Quinn Emanuel Urquhart & Sullivan, including Alex Spiro, a top partner at the firm. Musk had also hired lawyers from McDermott Will & Emery days before he amended a key filing in April 2022 that revealed his 9.2% stake in Twitter.

 

Defense lawyers in the case, including Spiro, did not immediately respond to requests for comment, nor did lawyers at Bernstein Litowitz.

 

Spokespersons for Quinn Emanuel and McDermott Will & Schulte also did not immediately respond. McDermott Will & Emery merged with Schulte Roth & Zabel earlier this month.

 

The lawsuit accuses Musk of defrauding Twitter shareholders who sold stock in the social media company at artificially low prices because they were kept in the dark about Musk's growing share.

 

Musk eventually purchased Twitter for $44 billion in October 2022, and renamed it X.

 

Musk has said he had intended to reveal his Twitter stake at the end of 2022, but disclosed it promptly after realising he misunderstood the US Securities & Exchange Commission's disclosure rule. He has denied wrongdoing and said this was "not a scheme to defraud."

 

If the defendants plan to cite their good-faith reliance on legal counsel as a defense, then Bernstein Litowitz said the plaintiffs want to see those documents before deposing Musk and a top aide, Jared Birchall. Birchall and Musk's depositions are currently scheduled for August 25 and September 4, respectively.

 

Bernstein Litowitz also said that Gorenstein could "bar defendants’ reliance on counsel as any part of their defenses at trial."

 

The SEC filed a similar civil lawsuit against Musk in January, during the waning days of the Biden administration. That lawsuit is still pending -- last month, the agency and Musk agreed to give the billionaire more time to respond to the SEC's allegations.

 

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