Twitter-Musk drama could mark a turning point in US tech regulation

The news: Twitter shareholders approved Elon Musk’s $44 billion takeover, despite the billionaire's attempt to abandon the agreement.

  • The news boosted the platform’s stock price by 0.8%, making Twitter the second-best S&P 500 performer on a day when US equity markets took the steepest nosedive in over two years, per Bloomberg.
  • The approval coincided with Twitter’s former security chief Peiter Zatko testifying to Congress that the company systematically misled the public, regulators, and its own board about cybersecurity vulnerabilities.
  • The allegations include claims that Twitter compromised national security by allowing foreign agents working for Beijing and other governments to work at the company, per The Wall Street Journal.
  • A Twitter spokesperson said Zatko’s allegations “are riddled with inconsistencies and inaccuracies.”
  • Zatko is expected to meet with the Federal Trade Commission (FTC), which could fine Twitter for data security failures.

The plot thickens: Recent developments bode well for Musk’s defense against Twitter’s lawsuit for backing out of the purchase deal. But the outcome of the trial set for October 17 is far from certain.

  • A judge ruled that Musk can use Zatko’s allegations in his defense, which could allow him to make a connection between Twitter’s security failures and his ostensible concerns about the number of spambots on the platform.
  • But the defense strategy’s effectiveness might depend on the outcome of a potential investigation into the allegations.
  • Musk was already aware of the spambot problem, saying that combatting it was part of his takeover plan.
  • The connection between Musk’s countersuit claim that Twitter wasn’t transparent about the extent of the bot problem and Zatko’s testimony could be seen as tenuous.
  • The allegations do mean that Musk has more going for him in the outcome of the case beyond just the leverage of his richest-person-in-the-world status.
  • Yet it's notable that markets responded more to Tuesday's shareholder approval than to the whistleblower testimony.
  • Additionally, several hedge fund managers, including Greenlight Capital and Pentwater Capital Management, have purchased stock, options, or bonds, betting that Musk will lose the case, per Bloomberg.

What’s next? Regardless of the case’s outcome, the dispute could be the beginning of a turning point in US tech regulation, which might mean more headaches for the economically struggling sector.

  • Tuesday’s congressional hearing elicited bipartisan concerns about the national security issues posed by Twitter's alleged security lapses.
  • It underscores the gap between tech regulations by European and other countries and the US government.
  • The weight of Musk’s persona could shine a spotlight on the issue of tech regulation in the US and pressure lawmakers to act.