Securities Class Action Lawsuit Filed Against Elon Musk, Tesla Over Tweets

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A perhaps ill-advised tweet sent on August 7 by Elon Musk has landed the Tesla CEO and the company in the crosshairs of a proposed class action lawsuit. 

The lawsuit explains that Musk, who owns or controls roughly 22 percent of Tesla’s stock shares, is prone to using Twitter to issue statements on behalf of the automaker. Musk, the case says, sometimes uses his tweets as a weapon against short sellers—those who borrow and then immediately sell stock shares they do not actually own with the hopes of purchasing said shares later at a reduced price before returning them to the lender while keeping the difference. Short sellers make money when a company’s share prices go down and incur a loss when shares go up, the case says. According to the lawsuit, Musk’s antagonistic tweets toward short sellers are often followed by price jumps for Tesla stock.

The timeline laid out in the lawsuit begins with an August 7 tweet from Musk that read:

“Am considering taking Tesla private at $20. Funding secured." 

Musk reportedly followed this tweet with several additional tweets in which he elaborated on his threat to take Tesla private while interacting with other Twitter users. This series of tweets “sparked a trading frenzy” that saw Tesla shares hit an intraday high of $387.46, the suit says, with overall trading volume ballooning to 30 million shares, or over $11 billion in purchases on the open market. Short sellers, the case continues, took to covering their positions at artificially high prices following Musk’s tweets. Moreover, non-short sellers who bought Tesla stock between August 7 and 8, 2018 also bought shares at artificially inflated prices, the suit claims.

What came next was a statement released by Tesla on its corporate blog that the lawsuit claims was materially false and misleading in that it failed to correct Musk’s claim that funding had been secured for taking the company private. Tesla’s non-correction was nothing short of market manipulation, the case alleges. From the complaint:

“By not correcting Defendant Musk’s misrepresentations, Tesla doubled-down on Musk’s earlier false and misleading funding statements, and continued to cause artificial inflation in the price of the Company’s stock. Additionally, in this statement, Defendant Musk expressly admitted that he is targeting short-sellers. Musk's frequent complaints about ‘relentless attacks from short sellers’ leaves no doubt whether or not he was intentionally trying to drive the price of Tesla shares higher, which would meet the definition of market manipulation and could carry possible criminal penalties.”

In another Tweet later on August 7, Musk reportedly stated “Investor support is confirmed. Only reason why this is not certain is that it’s contingent on a shareholder vote.” According to the complaint, this tweet was also false and misleading in that it affirmed the move to take Tesla private was “fully financed and guaranteed so long as shareholders assented.” The suit charges that not only did Musk issue a misstatement in saying taking Tesla private was fully financed, but that Musk was misleading in saying nothing could derail the move when, in truth, a number of factors could have put the shift on ice.

The lawsuit says that a subsequent public statement issued by several Tesla directors on August 8 again did nothing to correct Musk’s August 7 tweets.

“Because of [the defendants’] affirmative statements and market manipulation scheme, Tesla’s stock price stayed artificially inflated throughout the day of August 8, 2018, as well,” the case says, stating outright that because Musk has in fact not secured any funding, his statements indicating such are false.

The proposed class the lawsuit seeks to cover includes anyone who bought securities of Tesla, Inc. between 12:48 pm EST August 7, 2018 through and including the following day, August 8, 2018.

“As a result of [the defendants’] false and misleading statements, as well as their market manipulation, Tesla securities purchasers were injured to the tune of hundreds of millions of dollars,” the case claims.