The @twitter banner displayed on the exterior of the New York Stock Exchange. Photographer: Scott Eells/Bloomberg
The @twitter banner displayed on the exterior of the New York Stock Exchange. Photographer: Scott Eells/Bloomberg

When Twitter shares plummeted a week ago as the lock-up period ended for the company's insiders, it was not immediately clear who was selling, especially since founders Jack Dorsey and Evan Williams, as well as chief executive Dick Costolo, said they wouldn't. Data from Securities and Exchange Commission Form 4 filings, which insiders have to post every time they make a deal, take a few days to surface. Now they have, and an arcane move by what used to be Twitter's biggest outside shareholder may explain what's going on.

RTLC Management, owner of 85.17 million Twitter shares, or 14.4 percent of the microblogging platform's stock, filed three Form 4 statements1 to report transactions that took place on May 6, the day trading volume in Twitter reached a record for this year. The transactions were not sales, but rather "pro rata liquidating distributions." RTLC Management liquidated itself, handing all of its Twitter shares to underlying entities with names such as RT-FF SM II and RT Spartan III. Most of them list the same address in Birmingham, Michigan, and the RT in the names derives from Rizvi Traverse, the investment vehicle of Suhail Rizvi, a secretive Indian-born financier who helped Hugh Hefner take Playboy Enterprises private and who has recently been taking stakes in technology companies.

With the transactions, Rizvi, who is said to employ a person to hunt down his photographs on the Web and have them removed, made sure that any subsequent sales of Twitter stock by his entities would not require Form 4 notifications, because none of the new shareholders would hold more than 10 percent of the company's stock. Rizvi's clients who acquired Twitter shares alongside him include JPMorgan Chase and Saudi Prince Alwaleed bin Talal. If they were sellers of stock last week, or if they decide to disinvest at some later date, their transactions won't ping the SEC's radar.

The Wall Street Journal did a reconstruction last year of how Rizvi's fund ended up as Twitter's biggest investor. He made friends with former Google executive Chris Sacca, who managed to persuade Williams to sell 8 percent of Twitter three years ago. With the help of JP Morgan and Prince Alwaleed, Rizvi picked up more shares from other insiders, spending about $400 million.

Even at the lowest closing price this year of $30.66, reached on May 7, RTLC's stake was worth $2.61 billion, a sixfold return on that investment. We will probably never know how much of that windfall Rizvi and his partners realized this month, but if they cashed out to any significant extent, it means that the insider sales that drove down Twitter's price occurred in early 2011, not in May 2014, after the lock-up ended.

The money made by Rizvi and his backers is money lost by Williams and the other insiders who sold back then. Apart from the paper gain they would have made by holding on to their stakes -- Williams would have owned more than 17 percent of Twitter rather than his current 9.37 percent -- they may have prevented the sheer price drop in early May.

Letting in opportunistic financial investors such as Rizvi in the late stages of a startup is probably never a good idea. They don't contribute anything to the company, and they may not stick around if they see a profitable exit. Had Williams and the others waited a few years, Twitter could have been a hotter stock now.

As for Rizvi, he is said to be the newest investor in Jawbone, the maker of fitness bands. Wearable technology may well be the next big thing, and Rizvi is placing bets all over the board looking for one. He also owns stock in social network aggregator Flipboard and mobile payments company Square. When other people remember Twitter's post-lock-up drop, he will remember perhaps the most successful deal of his career so far.

1 Here are the links to the statements: one, two, three.

To contact the author of this article: Leonid Bershidsky at lbershidsky@bloomberg.net.

To contact the editor responsible for this article: magilbert@bloomberg.net.