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Musk Tweet Draws Tesla Investor Lawsuits Over Share Price Jump

Joel Rosenblatt, Dana Hull, Jef Feeley
CHICAGO, IL - JUNE 14: Engineer and tech entrepreneur Elon Musk of The Boring Company listens as Chicago Mayor Rahm Emanuel talks about constructing a high speed transit tunnel at Block 37 during a news conference on June 14, 2018 in Chicago, Illinois. Musk said he could create a 16-passenger vehicle to operate on a high-speed rail system that could get travelers to and from downtown Chicago and O'hare International Airport under twenty minutes, at speeds of over 100 miles per hour. (Photo by Joshua Lott/Getty Images)

Elon Musk and Tesla Inc. were sued by investors for manipulating share prices after the chief executive officer’s bombshell tweet that he was thinking about taking the company private and that he’d secured funding for the deal.

Musk lied about funding so he could push shares higher and ambush short sellers betting against the company, according to one shareholder complaint, filed Friday as a securities-fraud class action in federal court in San Francisco. Another disgruntled Tesla investor who sued in the same court cited media reports noting more than a dozen banks and technology firms said they weren’t aware of funding being locked in before Musk’s tweet.

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Musk set off a firestorm with the 53-character post Aug. 7 on Twitter: “Am considering taking Tesla private at $420. Funding Secured.” 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.

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“Musk’s statement that he had secured funding was especially material and significantly moved the market,” shareholder Kalman Isaacs said in one of the complaints. “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 12:48 p.m. on August 7, 2018. Obviously, all purchasers of Tesla securities were injured as well.”

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Tesla declined to comment on the suit. Musk is Tesla’s largest shareholder, with a 20 percent stake in the company. Bloomberg News reported today Saudi Arabia’s sovereign wealth fund is in talks to invest in Tesla as part of Musk’s going-private gambit.

The U.S. 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.

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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 may be consolidated before a single judge for pre-trial information exchanges and test trials.

Musk concocted a “a plan, scheme and course of conduct which was intended to deceive” investors and force them to buy shares at an artificially high price, Tesla investor William Chamberlain said in his suit. Chamberlain also is asking a judge to grant class-action status to his suit.

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 option 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.

The cases are Isaacs v. Musk, 18-cv-04865, and Chamberlain v. Musk, 18-cv-4876, U.S. District Court, Northern District of California (San Francisco).

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