SAN FRANCISCO (CN) — In a class action claiming Elon Musk misled Tesla investors with fraudulent tweets, a federal judge on Thursday appeared highly skeptical of the company’s argument that the CEO’s social media statements were “entirely truthful.”
Musk tweeted on Aug. 7, 2018, “Am considering taking Tesla private at $420. Funding secured.” In another tweet that same day, he stated “Investor support confirmed. Only reason why this is not certain is that it’s contingent on a shareholder vote.”
In nine consolidated lawsuits, lead plaintiff Glen Littleton and other investors claim they lost millions of dollars after the New York Times reported that Musk did not obtain funding commitments from the Saudi Arabia Public Investment Fund as he claimed in a follow-up Tesla blog post on Aug. 13, 2018.
The company’s share price dropped 9% on Aug. 17, 2018, erasing more than $5 billion in market value, according to the investors’ consolidated class action complaint.
After abandoning the privatization plan, Musk and Tesla were hit with a lawsuit by the Securities and Exchange Commission. The CEO and his company agreed to pay $20 million each to the SEC in a September 2018 settlement. The deal also required Musk to step down as board chairman for three years and to stop tweeting about Tesla business without preapproval from a company lawyer.
In January, investors in the consolidated lawsuit filed a motion for partial summary judgment asking U.S. District Judge Edward Chen to rule that Musk’s tweets violated federal securities law and that investors are entitled to recover damages.
During a virtual hearing Thursday, Chen asked Tesla’s attorney to explain how Musk’s “funding secured” statement could be read by investors to mean the transaction was incomplete and far from final.
“Funding had not been secured,” Chen said.
Tesla attorney Alex Spiro of Quinn Emmanuel said the whole tweet must be read in context, starting with Musk’s first words: “Am considering taking the company private.”
“That statement is demonstrably true,” Spiro said, adding that Musk’s “funding secured” statement was simply meant to convey that funding would not be a problem.
Spiro cited testimony by one witness of a “handshake deal” that occurred at a July 2018 meeting between Musk and the head of Saudi Arabia’s Public Investment Fund.
When asked if the $420 per share figure was discussed at that meeting, Spiro acknowledged it was not, but he said ample evidence exists showing that Musk considered taking the company private at that price.
“But it takes two to tango,” Chen replied. “If you don’t even have an understanding of the price … how can it be a deal, even if it’s just a handshake deal?”
Spiro argued that a jury, not a judge, should decide if the tweet was false because the statement's meaning is a factual dispute, which is not yet ripe for a legal conclusion. A reasonable jury could conclude that Musk meant “funding was not an issue” when he tweeted “funding secured," Spiro said.
Playing devil’s advocate, Chen asked a lawyer for the plaintiff class why Musk’s tweets should be interpreted so rigidly. Such statements could simply reflect that Musk received a strong verbal commitment or less than that when he met with a Saudi financier in July 2018.
Class counsel Nicholas Porritt of Levi and Korsinsky said Musk deliberately used the terms “funding secured” and “investor support confirmed” in the past tense, as if those obstacles to privatization had already been overcome. Musk made the statements with reckless disregard for the truth, Porritt argued.
“He had not talked to a single investor about taking the company private for $420 per share,” Porritt said.
The fact that Tesla’s stock price shot up instantly after Musk tweeted proves that investors relied on those statements, Pirrott added.
Tesla insists that Musk’s interest in taking the company private is what moved the market, not his statement suggesting that funding was secured.
Chen agreed it would be difficult to pin down which parts of Musk’s tweets affected investor behavior more than others.
“We don’t know which portion of that sentence was the one that really moved the market,” Chen said.
That dispute, Pirrott said, should be left for a jury to decide when it calculates how much investors are owed in damages. As to the falsity of Musk’s tweets and investors’ reliance on that information, Pirrott said such questions involve no factual disputes and can easily be decided as a matter of law.
“This is really the financial equivalent of shouting fire in a crowded cinema,” Pirrott said. “If these statements are not material, it’s hard to think what a material public statement is.”
Chen took the arguments under submission and did not indicate when he would rule.
Earlier this week, Musk asked a federal judge to terminate the SEC settlement that requires him to obtain preapproval for tweets about Tesla business. His lawyers argued that complying with the SEC’s “skewed conception of its authority” has become “impossible.”
Musk, the world’s richest man, is also asking the court to block the SEC from obtaining records to investigate his brother’s sale of $108 million in Tesla stock on Nov. 6, 2021, the day before Musk posted a Twitter poll asking if he should sell 10% of his stake in the company. Tesla's share price fell significantly the next day.