Elon Musk is headed to trial next week over his infamous tweet claiming he had secured funding to take Tesla private at $420 a share. A 10-day civil trial with jury selection scheduled for Tuesday, January 17, is set to begin in US District Court for the Northern District of California.
The class-action lawsuit alleges Musk harmed investors with this tweet from August 7, 2018: "Am considering taking Tesla private at $420. Funding secured." Additional statements by Musk and Tesla reinforced the false impression given by Musk's going-private claim, the lead plaintiff says.
"As a result of the turmoil in the prices for Tesla stock, options, and bonds caused by Musk and Tesla's statements, investors lost billions of dollars from August 7, 2018 to August 17, 2018," lead plaintiff Glen Littleton's trial brief in October said. "These damages include losses resulting from the effect on the prices of Tesla securities immediately following the August 7, 2018 tweets, that was then corrected from August 8, 2018 to August 17, 2018 as the falsity of the tweets was realized by investors... Absent Musk and Tesla's fraudulent statements, these losses would not have been suffered by Tesla investors."
Law professor Robert Miller told Ars he thinks Musk will lose and that the only outstanding question is how much he'll have to pay in damages. "Elon's going to lose, and he's going to lose for a significant amount. We're just talking about exactly how much," said Miller, who is the F. Arnold Daum chair in corporate finance and law at the University of Iowa College of Law. The case will determine "how much of the inflation and deflation is attributable to the fraud," he said.
Another expert agrees. "Everything is lined up for a plaintiffs' win here," Minor Myers, a University of Connecticut corporate law professor, told Reuters. While Musk's chances of winning outright may be low, the plaintiff still has to prove his false statements directly caused investors' losses in order to obtain a significant payout. They're seeking billions of dollars in damages for investors who bought Tesla shares at inflated prices and sold at a loss.
A Musk filing said the plaintiff's request amounts to $66.67 in per-share damages, including the alleged effects of Musk's tweets and "consequential effects" such as shareholder lawsuits and negative news coverage. Musk disputes this calculation.
The $420 price suggested in Musk's tweet was almost a 20 percent premium over Tesla's closing share price of $349.54 on August 2, 2018. "Musk believed that 20 percent was a 'standard premium' in going-private transactions," the lawsuit said. "Although the precise calculation equaled $419.49, Musk rounded the price up to $420 per share because he thought his girlfriend at the time, Claire Elise Boucher (also known as 'Grimes'), would find it funny due to the significance of the number to marijuana users."
Judge ruled tweets false and reckless
Although a jury will decide the case, District Judge Edward Chen already issued a major ruling that makes it harder for Musk to win. In April 2022, Chen granted in part Littleton's motion for partial summary judgment, ruling that Musk recklessly made false statements.
"The Court holds that, based on the evidence presented, there is no genuine dispute that the first three representations at issue were false and that Mr. Musk recklessly made those representations," Chen's ruling said. Chen only sided against Littleton on a fourth statement from a Musk blog post on August 13, 2018, in which he described ongoing communications with the Saudi Arabian sovereign wealth fund.
The jury will be aware of that ruling. As Chen wrote, "[T]he jury will be told that the Court has already found that the August 2018 tweets were false and made with the requisite scienter." (Scienter is a legal term for intent or knowledge of wrongdoing.)
The first of the three statements Chen found to be false and reckless was the infamous tweet: "Am considering taking Tesla private at $420. Funding secured." Chen's ruling said that "a reasonable jury could reach only one conclusion—i.e., that Mr. Musk recklessly tweeted to the public that funding was secured."
The second and third statements that Chen ruled were false and reckless both come from Musk's follow-up tweet that said, "Investor support is confirmed. Only reason why this is not certain is that it's contingent on a shareholder vote."
Musk's statement that "Investor support is confirmed" was false and misleading because discussions with the Saudi government were only preliminary, Chen wrote:
Based on the evidence of record, the Court finds that no reasonable jury could find the statement "Funding secured" accurate and not misleading. The evidence of record shows that there was nothing concrete about funding coming from the PIF [the Saudi Arabia government's Public Investment Fund]; rather, discussions between Tesla and the PIF were clearly at the preliminary stage. There had been no discussion about what the purchase price would be for a share of stock. Nor had there been any discussion about what percentage of the company the PIF would own or the total amount of money the PIF would contribute.
The statement about a shareholder vote being the only remaining contingency was false because there were "a number of contingencies that had to be addressed before the matter could reach a shareholder vote," Chen wrote.
Ruling damages Musk’s case
Myers told Reuters that the ruling means shareholders are "starting with runners on base" in their trial against Musk.
Miller told Ars it is "incredibly unusual" for a plaintiff "to win on summary judgment on the falsity and recklessness of the statement." But this is an unusual case for several reasons.
When defendants in similar securities lawsuits can't get the case thrown out, the sides usually settle, Miller said. "If the complaint survives a motion to dismiss, then they almost always settle... so it's very unusual to have something go into trial. It's even more unusual to go to trial and have the defendants lose [in summary judgment] on what's usually their best defense."
It's also atypical for the head of a major company to announce a deal the way Musk did. "Disciplined people running public companies don't talk about strategic transactions until they actually have a signed deal, and then they have very high-end lawyers and PR people who craft the press release," Miller said. "You don't announce a deal until you have signed documents. No one would. The idea that you would do anything else is, you know, like crazy stuff people did back in the '60s or something," he also said.
But now, Musk has an incentive to go to trial. "The longer he drags it out, the better for him because it's just a fixed amount of money he has to pay... If you have more money than everybody else, you can afford to do stuff like this," Miller said.
Musk took a different approach when he decided to complete his purchase of Twitter instead of going to trial in Twitter's lawsuit against him. Miller—who predicted that Musk would lose that case shortly before Musk seemed to reach the same conclusion—said the incentives were different in the Twitter lawsuit. With Twitter, dragging the case out would have caused further damage to the company Musk was purchasing, making a court loss more costly for him.
Still, it's possible the sides could settle on the eve of the trial.
Musk’s defense
Musk hasn't given up on defending the "funding secured" statement. Musk's trial brief says his tweet came 30 minutes after the Financial Times reported that the Saudi Arabia government's Public Investment Fund had acquired a $2 billion stake in Tesla.
"Mr. Musk was worried that whoever had leaked the investment would also leak the PIF's interest in taking Tesla private and that such a leak might include inaccurate information that could cause confusion in the market," Musk's brief said.
Musk's brief goes on to suggest he was misled by Yasir Al-Rumayyan, the PIF's managing director:
On August 10, Mr. Al-Rumayyan told Mr. Musk for the first time that the transaction would have to be approved by certain committees within the PIF. Mr. Musk was surprised; Mr. Al-Rumayyan told Mr. Musk at the July 31 meeting that he was the PIF's decision-maker and had the support of the Crown Prince. Mr. Musk conveyed to Mr. Al-Rumayyan that this was not what he understood from the July 31 meeting.
Mr. Al-Rumayyan apologized for the misunderstanding and reiterated that he was "unequivocal" about his desire to invest in Tesla... In the days following the "funding secured" tweet, and after news outlets began to question the PIF's level of involvement in the potential transaction, Mr. Musk communicated with Mr. Al-Rumayyan to confirm that the PIF had committed to fund Tesla to go private. Mr. Musk's non-public statements to Mr. Al-Rumayyan demonstrate his belief that funding was secured as a practical matter after their meeting.
The Securities and Exchange Commission charged Musk with securities fraud over the false "funding secured" statement and reached a settlement with him on September 29, 2018. The settlement required Tesla to impose controls on Musk's tweets, and Musk and Tesla each agreed to pay $20 million in penalties.
Literally false but not materially false?
Despite the judge's ruling on the falsity and recklessness of his tweets, Musk's defense argued that it "remains up to Plaintiff to prove and the jury to resolve if the statements were 'materially false' and made with scienter as to their 'material falsity.' Additionally, the jury must make specific determinations regarding Mr. Musk and the Tesla directors' states of mind."
Musk's trial brief acknowledges the court found that his statements "were literally false and/or misleading and that Musk had knowledge of the underlying facts when he made them." But the brief says that at a June 16, 2022, hearing, the court made it clear "its holding was limited to finding that the challenged statements were 'false statement[s]... in a literal sense, not in a legal sense.'"
"To avoid any doubt, the Court stated '[t]o be clear, I did not find materiality with respect to the misrepresentation or a reckless disregard or knowingly scienter with regard to any such material representation,'" Musk's brief said.
Materiality, as Musk's brief noted, concerns "whether the alleged misrepresentations affected the market price in the first place." Despite his statements being false, Musk will argue at trial that they didn't affect the stock price—or at least not as much as the plaintiff claims.
Plaintiff: Tesla is liable, too
Littleton's trial brief acknowledged what Musk pointed out, that "the Court has concluded that the materiality of those statements is still an issue for the jury." But it says the "issue of materiality does not require the jury to re-examine the falsity of the misrepresentations subject to the Court's summary judgment order or Musk's scienter when he made them."
"Musk's tweets on August 7, 2018, prompted an immediate rise in the price of Tesla's stock and also affected the prices of other Tesla securities. The stock price declined during the course of the Class Period as further information was revealed about the going-private transaction and the circumstances of the August 7, 2018 tweets was disclosed by Musk, Tesla, and financial media and analysts," the plaintiff's brief said.
Tesla and Musk are both liable for damages, the brief argued. "Tesla had previously identified Musk's Twitter account as a duly authorized channel for corporate communications," the brief said.
Additionally, the "funding secured" tweet "was confirmed and essentially adopted by Tesla through the comments of [Martin] Viecha, its Director of Investor Relations," the plaintiff also argued. "The final tweet on August 7, 2018 stating that 'investor support is confirmed' linked to an email from Musk that had been written for him by Tesla management and the August 13, 2018 blog post was also drafted by Tesla management."
The brief quoted Viecha as telling a financial analyst that "the first Tweet clearly stated that 'financing is secured [sic].' Yes, there is a firm offer." Viecha told another analyst that Musk's tweet "is correct."
"Further, in general a corporation is responsible for the acts of its officers performed within the scope of their authority and Musk's statements on August 7, 2018 and in the August 13, 2018 were seen as being made in the scope of his authority. Thus, there is evidence supporting liability for Tesla for the misleading statements in this case," the brief said.
Arguing over damages
The plaintiff will offer testimony from four experts on subjects such as "the impact of Musk tweets on Tesla's stock price" and "the movements in Tesla stock options following the Musk tweets on August 7, 2018, and the appropriate method for measuring the impact of the Musk tweets on Tesla stock option prices."
"Based on Plaintiff's presentation at trial, the jury will be able to easily 'make reasonable estimates based on evidence they credited' and award damages in the amount being sought by Plaintiff," the brief said.
A report submitted by the plaintiff's expert Michael Hartzmark said, "Using the out-of-pocket method, damages suffered by Class Members are measured based on the investors' losses from transacting at artificial prices caused by the alleged fraud. The levels of artificiality in the securities' prices (i.e., artificial inflation or deflation) at purchase and sale are compared to determine the harm to each Class Member."
As noted earlier in this article, Musk argues that not all of the price movement can be attributed to his false statements. "Based on his assumption that information regarding the accuracy of the August 7 tweets caused all price movement during the class period, Dr. Hartzmark reaches the conclusion that Mr. Musk's tweets caused $66.67 in damages, nearly three times the amount of direct artificial inflation Dr. Hartzmark measured on August 7 as a result of Mr. Musk's tweets," the Musk court filing said.
Musk alleged that "Dr. Hartzmark's damages analysis is flawed from the start because he does not isolate the impact of the allegedly false statements from the other company-specific information" and "fails to address other potential causes of stock movement."
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