SAN FRANCISCO (CN) — A federal judge won’t let Tesla duck a lawsuit brought by investors claiming founder Elon Musk’s infamous 2018 tweet about taking the company private caused its stock price to plummet.
The investors say Musk was openly hostile toward short-sellers in the months leading up to Aug. 7, 2018, when he posted on his Twitter account, “Am considering taking Tesla private at $420. Funding secured.”
The tweet sparked a flurry of questions from shareholders and the press. On Tesla’s blog, Musk explained his rationale as an attempt to protect the company from market volatility.
“First, a final decision has not yet been made, but the reason for doing this is all about creating the environment for Tesla to operate best. As a public company, we are subject to wild swings in our stock price that can be a major distraction for everyone working at Tesla, all of whom are shareholders,” he wrote.
“Being public also subjects us to the quarterly earnings cycle that puts enormous pressure on Tesla to make decisions that may be right for a given quarter, but not necessarily right for the long term. Finally, as the most shorted stock in the history of the stock market in the history of the stock market, being public means that there are large numbers of people who have the incentive to attack the company.”
Tesla’s stock fell by roughly 7% the following day, after a Wall Street Journal report that the U.S. Securities & Exchange Commission was investigating Musk’s tweet.
On Aug. 13, 2018, Musk posted on the Tesla blog that he had secured funding to take the company private from Public Investment Fund in Saudi Arabia and that he had confirmed its interest in funding a private transaction for Tesla at a meeting in July. Musk also tweeted that both Silver Lake and Goldman Sachs were helping him with the deal.
But as it turned out, that funding was contingent on Tesla building a plant in the Middle East, a condition some members of Tesla’s board of directors considered to be a “non-starter.”
When the Wall Street Journal reported on Aug. 15 that the SEC had subpoenaed Tesla regarding Musk’s tweets, Tesla’s stock fell by another 2.5% to $338.69. By Aug. 17, the price had dropped to $305.50.
Musk backpedaled on Aug. 24, posting on the Tesla blog that he had told the board he believed it best that Tesla remain public. But the damage had already been done. The SEC filed a complaint against Musk in September and Tesla agreed to pay $20 million in penalties.
Nine lawsuits were filed in August and September 2018. U.S. District Judge Edward Chen consolidated them into one action and appointed Glen Littleton as the lead plaintiff.
On Wednesday, Chen ruled that Littleton sufficiently showed he was misled by Musk’s Aug. 7 tweet about secured funding, a notion Musk encouraged through subsequent public conversations on Twitter, confirming that yes, $420 was the price at which he would take Tesla private, that investors could still invest, and that investors supported the idea.
“All of this assumed that funding was not a condition,” Chen wrote, adding, “[A] reasonable stock investor could believe that Tesla had secured funding for the going-private transaction at $420 per share.”
Chen also found investors were able to show that Musk knew the funding wasn’t secured and that his statements were false at the time he made them, despite Tesla’s claims that they were merely “aspirational.”
He also found Musk’s statements likely caused the decline in Tesla’s stock price, causing losses to both short-sellers and long-term investors.
“The rise and fall of Tesla’s stock prices corroborated with the timing of the alleged false and misleading statements, all of which occurred within a less-than-two-week period, and which suggests Mr. Musk’s false statements were the proximate cause,” Chen wrote.
Tesla did not respond to an email requesting comment on the ruling.