The question of whether Tesla CEO Elon Musk is a fraud or is simply too careless with his words was the focus of a courtroom in San Francisco on Wednesday. Under the microscope was Musk’s infamous 2018 tweet stating that funding was “secure” to take Tesla private at a potential value of $420 per share. In a class action lawsuit that has been going on for two days, Tesla shareholders who traded the company’s stock in the days following Musk’s tweet are suing the executive for billions of dollars in damages.
The outcome of the process will depend on the language and intent of that tweet. Prosecutors claim it caused ordinary investors to lose money, and Musk’s lawyers claim the tweet was simultaneously true (he really did plan to take Tesla private) and a misstep (“funding secured” was the wrong choice of words).
The jury will have to decide whether: 1) Musk knowingly tweeted false information to influence Tesla’s stock price; 2) The tweets artificially inflated Tesla’s share price by playing up the status of funding for the deal; and 3) If yes, by how much.
Glen Littleton, a Tesla investor and lead prosecutor in the case, said Wednesday that he took Musk at his word and, fearing financial ruin, ended up liquidating anywhere from 90% to 95% of his holdings.
“I couldn’t afford to stay inside,” Littleton told the jurors.
His lawyers argued that he lost $3.5 million as a result.
Musk’s reputation is at stake
If Musk loses the case, he will likely be forced to part with a hefty chunk of cash. However, if the jury finds that Musk knowingly tweeted fraudulent information, the CEO’s already shaky reputation could be jeopardized.
Shareholders have lost faith in the star manager since he bought Twitter and have started screaming even louder in the void of the platform. In fact, some investors say that the Twitter dramas, including Musk selling Tesla stock to pay for Twitter business, may be part of the reason why the company’s stock price is down 65% by 2022.
Musk’s lawyers seem to be aware of this reputational damage. They offered to transfer the trial to Texas, which has been Tesla’s headquarters since 2021, arguing that Musk could not get a fair trial in San Francisco because of the jury’s likely bias against Musk after the executive took over Twitter and fired more people. than 3,750 employees.
U.S. District Court Judge Edward Chen rejected the offer, siding with shareholder attorneys who essentially said Musk had made his bed and could now lie in it.
In the 10-day period following the tweet (August 7 to 17), Tesla’s stock price shifted by about $14 billion.
A few days later, Musk backed off a bit in a blog post that explained why he wanted to take Tesla private. In the post, Musk said that based on several meetings with the Saudi Arabian sovereign wealth fund, he truly believed a deal had been struck and all it took was to get the process started — hence the fateful tweet.
As it turned out, the funding was not secured and in the days following the tweet, the Saudis backed out. Musk then accused the governor of the kingdom’s Public Investment Fund of throwing him “under the bus”. Meanwhile, the Saudi Fund invested $1 billion in Lucid Motors in September to launch the Air.
The whole debacle resulted in an investigation by the Securities Exchange Commission. Musk and Tesla settled that case without admitting wrongdoing, and they were jointly fined $40 million. Musk was forced to step down as chairman of Tesla’s board of directors, and the executive agreed to be less hasty with Tesla-related tweets that could affect public markets. (Though he didn’t keep that deal.)
“wrong and misleading”
Last April, Judge Chen ruled that Musk’s tweets were “false and misleading” and that Musk “made the statements recklessly with knowledge of their falsity.”
That could be good news for the plaintiffs trying to convince the jury whether the statements affected Tesla’s stock price, but this is a jury trial and so the outcome doesn’t depend solely on Chen. The jury will also have to determine whether they believe Musk acted knowingly and how much damages, if any, will be.
Musk’s lawyers argued on Wednesday that the CEO genuinely intended to take Tesla private and that in a split second he decided to tweet that he was considering doing so. He tweeted “funding secured” because he had just read a news article revealing that Saudi Arabia was investing heavily in the company.
“He decided in that hurried moment, imperfect or not, that disclosure was a better course of action,” Alex Spiro, Musk’s attorney, told jurors in his opening argument in San Francisco federal court. “He didn’t want there to be a leak.”
Spiro said the posts on Twitter had no impact on the market, and in fact, when details of the plan were revealed in a meeting following the tweet, Tesla’s stock soared.
Nicholas Porritt, the attorney representing Tesla shareholders, said Musk and Tesla’s tweet and other posts were “lies” that caused ordinary investors to lose millions of dollars.