Where’s Warren Zevon when we really need him?

It turns out that not everyone cheered as Elon Musk accumulated enough stock on the sly to become the largest single shareholder in Twitter. A group of Twitter shareholders have filed a lawsuit against Musk that accuses the billionaire of deliberately violating SEC regulations to hide his purchases and profit at their expense. Musk’s profit off of that “mistake” could be as high as $150 million:

Marc Bain Rasella filed the lawsuit against Musk for alleged securities fraud in Manhattan federal court on Tuesday, according to a Bloomberg report.

The suit alleges that Musk was required to disclose his stake in Twitter by March 24, but he did not until April 4.

Twitter shares rose 27% on April 4, to $49.97 from $39.31, after Musk disclosed his stake, which investors viewed as a vote of confidence from the world’s richest person in Twitter.

Former shareholders led by Marc Rasella said the delayed disclosure let Musk purchase more Twitter shares at lower prices while defrauding them into selling at “artificially deflated” prices. The lawsuit seeks unspecified compensatory and punitive damages.

This came up last week, and could very well be a problem for Musk. The estimated difference between Musk’s purchases after he hit the 5% reporting level and when he finally did disclose his ownership level on purchases as required came up to $156 million. That might be chump change to a man worth close to $300 billion, but those represent real losses for people who sold shares without knowledge of Musk’s intent to buy into Twitter to become an active investor.

Actually, scratch the “chump change” remark, because even for a multibillionaire, $156 million ain’t chump change. If it was, Musk would have filed the correct paperwork at the correct time and paid the higher stock price. Billionaires don’t get to be billionaires by ignoring $156 million on the table, folks.

The lawsuit will be interesting to watch, but equally so the Securities and Exchange Commission responsible for enforcing the regulation that Musk allegedly violated. It might be tough to prove intent, as this Politico report yesterday points out, but the SEC may have to try anyway or risk being marginalized. They also use “chump change” in their analysis. The problem is that the SEC treats these kinds of violations as chump chum:

By law, investors must notify the SEC within 10 days if they surpass a 5 percent stake in a company. According to his second filing — which changed his status from a “passive” to an “active” investor — Musk passed that threshold on March 14, meaning he should have disclosed it by March 24. But he didn’t disclose the large stake he was amassing until April 4 — a delay that allowed him to continue purchasing stock at a price of about $39 a share in the intervening 11 days. Once he did disclose his 9.2 percent stake, Twitter’s share price shot up to over $50 a share.

The delay brought Musk about $150 million at the expense of selling shareholders, according to Galloway. …

The latest alleged filing violations are themselves not necessarily the type of actions that usually result in highly aggressive action from the SEC.

Still, “there is a real problem with folks filing the wrong files, and if they let Musk get away with this, then others may claim that there’s something known as selective enforcement,” said Harvey Pitt, who headed the SEC under President George W. Bush.

If that’s the case, then the SEC has a “selective enforcement” problem in either direction. They could force Musk to cough up the difference and distribute it to the shareholders who sold to Musk without the proper disclosure. That would likely moot the lawsuit, as the plaintiffs would no longer have standing, and make the SEC look strongest. Alternately, they could fine Musk and give the plaintiffs evidentiary support for prevailing in the lawsuit, but that’s messier and less certain. If they just slap him on the wrist in a no-admission plea deal (so to speak), it will make the SEC look weak. Given their ongoing feud with Musk, bet on the big-bite strategy.

Either way, this is not much more than a speedbump for Musk. He’ll lose the marginal profit he gained from his disclosure violation, but that won’t keep him from continuing to buy up Twitter if he decides to pursue a hostile takeover. Now that this pursuit is common knowledge, the investors assume the normal risks of selling and buying Twitter stock. The rest of us can watch to see whether Musk’s clear threat of an eventual hostile takeover will force Twitter’s board to make significant policy changes regarding free expression on their platform. And of course, we can also pass the popcorn and root for Musk to succeed in at least that much of his ambitions.