Elon Musk and Tesla were sued for manipulating share prices with the chief executive officer’s bombshell tweet that he was thinking about taking the company private and that funding was secure.
Musk lied about funding so he could push shares higher and ambush short sellers betting against the company, according to the shareholder complaint, which was filed Friday as a securities-fraud class action in federal court in San Francisco.
Musk set off a firestorm with the 53-character post Aug. 7 on Twitter: “Am considering taking Tesla private at $420. Funding Secured.”
Am considering taking Tesla private at $420. Funding secured.— Elon Musk (@elonmusk) August 7, 2018
The stock initially shot up 11 percent to almost $380. Then it fell back, losing about 7 percent over two days, as doubts mounted about the feasibility of the going-private idea - and about Musk’s declaration that funding was already in place. Neither he nor anyone else has supplied evidence that it was.
“Musk’s statement that he had secured funding was especially material and significantly moved the market,” shareholder Kalman Isaacs said in the complaint.
“Because Musk has not secured financing, and has issued false and materially misleading information into the market, short sellers of Tesla stock were forced to cover their positions by purchasing shares at artificially inflated prices after 12:48pm on August 7, 2018. Obviously, all purchasers of Tesla securities were injured as well.”
Tesla declined to comment on the suit. Musk is Tesla’s largest shareholder, with a 20 percent stake in the company.
The US Securities and Exchange Commission is examining whether Musk’s “funding secured” tweet was meant to be factual, intensifying its scrutiny of Tesla’s public statements after the announcement, according to people familiar with the matter.
SEC enforcement attorneys in the San Francisco office were already gathering general information about Tesla’s public pronouncements on manufacturing goals and sales targets, according to the people who asked not to be named because the review is private.
Other investors have begun to file lawsuits as well. Eventually, the cases will be consolidated and go before a single judge.
Buying out shareholders at the price Musk quoted - almost 25 percent above where the stock was trading at the time of his initial tweet '-- would make the deal worth $82 billion. After adjusting for inflation, that’s more than the record-setting buyout of RJR Nabisco that closed in 1989.
A veteran shareholder lawyer in San Francisco said investors may have a viable claim against Tesla.
"Shareholders could potentially be misled if the statement omits material information,” attorney Joe Tabacco said.
“The market reaction shows Musk’s statement by itself was material. Anybody who purchased the stock on that news, if the news was in fact misleading, could have a claim, however, it would be very short class period."
Musk has a history of setting aggressive sales targets that critics have called unrealistic. Speculation had been swirling around Tesla and Musk’s disclosures amid the yearlong struggle the company had ramping up production of the Model 3 sedan, with Musk fielding a question on the company’s latest earnings call about whether a notice from a regulator was keeping him from being able to raise more capital.
Musk had raised the go-private possibility with the board last week, according to a statement from six of Tesla’s nine directors. They said he had “addressed the funding for this to occur,” without providing details.
Subscribe to Arabian Business' newsletter to receive the latest breaking news and business stories in Dubai,the UAE and the GCC straight to your inbox.