Yahoo Finance

Tesla (TSLA) CEO Elon Musk raised the stakes in his court battle with Twitter (TWTR) on Friday, filing a counter lawsuit that accuses the social media company of fraud.

“He’s now really doubling down,” University of Iowa corporate and securities law professor Robert Miller says about Musk’s countersuit. “That’s a very strong claim, if true.”

In his countersuit made public on Friday, Musk’s lawyers detailed arguments first made in a July 8 letter to terminate Musk's agreement to acquire Twitter in a $44 billion merger. While legal scholars have noted weaknesses in those early arguments, Musk’s new fraud claims, if proven, could push Twitter into a more challenging defense.

In his new claims, Musk says Twitter defrauded him by minimizing the prevalence of fake or spam accounts on its platform in statements to the U.S. Securities and Exchange Commission. Twitter stands by its estimate that fake or spam accounts comprise fewer than 5% of its mDAUs, or monetizable daily active users, and notes that it reported to the SEC that the actual number could be higher.

Weeks after agreeing on April 25 to acquire Twitter’s outstanding stock at $54.20 per share, Musk posted on Twitter hinting of cold feet. Musk's termination letter followed, accusing Twitter of breaching the deal by withholding the methods it used in its public filings to estimate that less than 5% of its monetizable daily active users are fake accounts.

Twitter claims the bots issue is a pretext for backing out of the deal, and that Musk has torpedoed Twitter stock with a series of disparaging tweets. The social media site is suing to force Musk to go through with the deal.

Is the Botometer giving Musk accurate information?

To be sure, Miller says, Musk faces an uphill battle in his fight against Twitter. However, his fraud allegations could be strong, if proven, because they don't rely solely on the judge's interpretation of the heavily seller-friendly merger agreement. Instead, the judge must apply federal securities law that prohibits "materially false" statements — those that reasonable investors would likely view as significantly altering the total mix of information the company made available.

To prevail on a fraud claim, Musk must either show that in regulatory filings between Jan. 1 and April 25, Twitter knowingly made a materially false statement, or that Twitter knew its methodology had major problems yet continued to rely on it.

For his part, Musk alleges that he tested a limited set of user account data shared by Twitter using Indiana University's publicly available bot detection tool, Botometer. Using the tool, Musk says, his team estimated that false or spam accounts comprise around 33% of accounts in the data set, and at least 10% of Twitter’s monetizable daily active users.