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US securities regulators are questioning how Twitter counts fake accounts on its platform.
In June, the Securities and Exchange Commission asked the company about its methodology for calculating fake or spam accounts and “the underlying judgments and assumptions used by management.”
The agency’s corporate finance division made the request in a letter dated June 15, shortly before Tesla CEO Elon Musk raised the issue as a reason to back out of a deal to buy Twitter for $44 billion.
Such questions can be routine, and it was unclear whether the SEC has opened a formal investigation into the fake Twitter accounts. Messages seeking comment were left with the agency and Twitter on Wednesday.
Palo Alto, Calif.-based law firm Wilson Sonsini responded in a letter dated June 22 that the company believes it adequately disclosed the methodology in its 2021 annual report.
The letter states that Twitter conducts its estimates of fake accounts using an internal review of sample accounts. The number of fake accounts “represents the average fake or spam accounts in samples during each monthly analysis period during the quarter,” the letter said.
He added that less than 5% of Twitter’s “monetizable daily active users or users,” or mDAUs, were fake accounts in the fourth quarter of last year, a period the SEC questioned.
The letter was made public in a filing with the SEC on Wednesday, a day after Twitter’s former security chief claimed the company misled regulators about its poor cyber protections and its negligence in trying to root out fake accounts that spread misinformation.
Peiter Zatko, who served as Twitter’s chief security officer until he was fired earlier this year, filed a whistleblower complaint last month with the SEC, the Federal Trade Commission and the Department of Justice. Whistleblower Aid, a legal nonprofit that works with Mr. Zaťek, said he had exhausted all attempts to resolve his problems within the company before he was fired in January.
Among Mr. Zaťek’s most serious allegations is that Twitter violated the terms of a 2011 FTC settlement by falsely claiming that it had implemented stricter measures to protect the security and privacy of its users. Mr. Zaťko also accuses the company of fraud that involves handling “spam” or fake accounts, an allegation that is at the heart of Mr. Musk’s attempt to back away from taking over Twitter.
Twitter said on Tuesday that Mr Zaťko had been fired for “ineffective leadership and poor performance”, saying that “the allegations and opportunistic timing appear designed to attract attention and cause damage to Twitter, its customers and its shareholders”. The company called his complaint a “false story” that is “riddled with inconsistencies and inaccuracies and lacks important context.”
Mr Musk revoked the sale in July, claiming that Twitter had failed to provide a detailed methodology for calculating fake accounts. But Twitter sued in Delaware Chancery Court, asking a judge to order Mr. Musk to make the purchase.
Twitter has set Sept. 13 as the date for shareholders to vote on Mr. Musk’s expected buyout of the company, and the board is recommending approval.
The Twitter lawsuit is scheduled for trial in October.
Mr. Musk agreed in April to buy Twitter and take it private, offering $54.20 a share and pledging to loosen controls on the company’s content and remove fake accounts. As part of the settlement, Musk and Twitter agreed to pay the other a billion dollars in settlement if either was responsible for the collapse of the deal.
In its response, Twitter said that checking for fake accounts is done manually by people who check thousands of them. Accounts are selected at random and staff use a comprehensive set of rules “that define spam and platform manipulation.” An account is considered fake if it violates one or more rules, the paper said. Fake accounts go through a multi-stage check and are investigated by several trained employees.
The SEC also disputed Twitter’s disclosure that it overstated the number of monetizable accounts from the first quarter of 2019 to the end of last year. The agency wrote that the error persisted for three years and questioned why the company did not consider it a weakness in its financial reporting and controls.
In response, Twitter said that the overvaluation of accounts had no impact on its financial statements and that the overvaluation amounted to less than 1% of its monetizable daily average users.
