By TOM KRISHER, AP Business Writer
DETROIT (AP) — U.S. securities regulators are questioning Twitter about how it determines the number of fake accounts on its platform.
In June, the Securities and Exchange Commission questioned the company about its methodology for calculating fake or spam accounts and “the underlying judgments and assumptions used by management.”
Twitter says it has 238 million active monthly users and about 5% of the accounts it sells ads on are fake, either spam or bots. The SEC would be interested in the two figures because Twitter uses them to attract advertisers, whose payments represent just over 90% of the company’s revenue.
The SEC’s Corporate Finance Division posed the questions in a June 15 letter, shortly before Tesla CEO Elon Musk raised the issue as grounds for withdrawing from a deal to buy Twitter for $44 billion. of dollars. Musk claimed that Twitter underestimated the number of fake accounts, which inflates the number of real users.
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Such questions can be routine, and it was unclear whether the SEC had opened a formal investigation into Twitter’s fake accounts. Neither the SEC nor Twitter would comment on Wednesday.
The Palo Alto, Calif.-based law firm Wilson Sonsini responded to the SEC in a June 22 letter stating that the company believed it had properly disclosed the methodology in its filed 2021 annual report.
The letter says Twitter makes its estimates of fake accounts with an internal review of sample accounts. The number of fake accounts “represents the average of fake accounts or spam in the samples during each monthly analysis period for a quarter,” the letter states.
He added that less than 5% of Twitter’s “monetizable” daily active users were fake accounts in the fourth quarter of last year, the period the SEC had surveyed.
The letter was leaked in a filing released by the SEC on Wednesday, a day after Twitter’s former chief security officer alleged the company misled regulators about its weak cybersecurity and security defenses. its negligence in trying to root out fake accounts that spread misinformation.
Peiter Zatko, who served as Twitter’s chief security officer until his firing earlier this year, filed the whistleblower complaints last month with the SEC, the Federal Trade Commission and the Ministry of Justice. The legal non-profit organization Whistleblower Aid, which works with Zatko, said he had exhausted all attempts to resolve his issues at the company before he was fired in January.
One of Zatko’s most serious accusations is that Twitter violated the terms of a 2011 FTC settlement by falsely claiming that it had stricter measures in place to protect the security and privacy of its users. Zatko also accuses the company of deception involving its management of “spam” or fake accounts.
As lawmakers escalated calls to investigate Zatko’s allegations, the Senate Judiciary Committee announced Wednesday that Zatko would testify at a hearing on September 13 – the same day Twitter shareholders are due to vote on the pending takeover. of the company by Musk. Twitter’s Board of Directors Recommends Approval of Takeover.
A trial on Twitter’s lawsuit is scheduled for October.
Twitter said on Tuesday that Zatko was fired for “ineffective leadership and poor performance” and said “the allegations and opportunistic timing appear designed to attract attention and harm Twitter, its customers and its shareholders.” The company called its complaint a “false narrative” that is “tricked with inconsistencies and inaccuracies and lacks significant context.”
Musk called off the sale in July, alleging Twitter failed to provide a detailed methodology for calculating fake accounts. Twitter filed a lawsuit in Delaware Chancery Court, asking a judge to order Musk to make the purchase, and Musk filed a countersuit.
Musk agreed in April to buy Twitter and take it private, offering $54.20 a share and pledging to loosen the company’s control of content and weed out fake accounts. As part of the deal, Musk and Twitter had agreed to pay the other a $1 billion severance fee if either was responsible for the deal collapsing.
In its response to the SEC, Twitter said the review of fake accounts is done manually by humans who verify thousands of them. Accounts are chosen at random and employees use a complex set of rules “that define spam and platform manipulation”. An account is considered fake if it violates one or more of the rules, the letter states. Fake accounts are investigated by several trained employees, he said.
The SEC also questioned Twitter’s disclosure that it overestimated 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 asked why the company did not consider it a weakness in its financial reporting and controls.
In response, Twitter said the overstatement of accounts had no impact on its financial statements and that the overstatement was less than 1% of its average daily users.
Twitter’s share price rose just over 2% in trading late Wednesday.
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