Written By: Corey Butts
Background on Musk’s Tweet Heard Round the World and his Settlement with the SEC
On August 7th, 2018, Elon Musk, co-founder and CEO of Tesla, crafted and released a tweet on the global social media platform Twitter stating, “Am considering taking Tesla private at $420. Funding secured.” Just a few hours after Musk broadcasted this tweet to his then nearly twenty-two million Twitter followers, investors worldwide took the stock market by storm, buying up Tesla shares, which ultimately resulted in the stock price surging eleven percent on the day to a high of $387.46.
However, the stock price failed to reach Musk’s predicted $420.00 level. Just a few days after the tweet, investors’ bullish stance on the electric vehicle company’s future trajectory quickly shifted as it became more evident that Musk did not have any of the requisite funding to take his company private. When this information began to gain traction within the media, a large-scale selloff commenced, causing Tesla’s stock price to nose-dive to $263.24 just one month after Musk posted the tweet. This event prompted a high-profile investigation by the Securities and Exchange Commission (SEC), followed by a class action lawsuit brought in federal court by Tesla investors.
Following the investigation spearheaded by the SEC, in October 2018, Musk settled with the federal agency for a total of twenty million dollars in civil fines stemming from his August 2018 tweet. The SEC ultimately imposed these fines against Musk because they determined that his tweet was a misrepresentation of his financial reach; as they say, he was far from obtaining enough funding to swing the seventy-two billion dollar buyout of the world’s leading EV company. The SEC settlement also required Musk to step down as Tesla’s chairman and to appoint independent directors to manage and represent the company moving forward.
Musk and his lawyer, Alex Spiro, alleged the SEC was out to get Musk and the investigation was aimed at harassing him. The pair also said that SEC cannot act on the legality of Musk’s tweet “without court authorization.” Additionally, Musk doubled down on the validity of his tweet in an interview where he said that he did, in fact, have the funding at that time to take the company private.
Investor-lead Class Action Lawsuit against Musk: Trial has begun
Subsequently, after Musk’s settlement with the SEC, Tesla investors filed a class action lawsuit against Elon Musk over his “allegedly false and misleading” 2018 tweet. The trial commenced on Tuesday, January 17th, 2023, in a federal court in San Francisco, California, where Musk appeared with his team of lawyers to defend his 2018 actions. Attorney Nicholas Porritt and the primary plaintiff representing the shareholders in the case, Glen Littleton, are accusing Musk of fraud and are pursuing billions of dollars in damages, which they believe Musk’s 2018 tweet cost Tesla investors.
On Wednesday, the attorneys on both sides sparred on the alleged fraud issue in their opening statements to the court. Attorney Porritt initiated the trials opening statements by arguing to the jurors that Musk blatantly misled investors through his false tweet and that his reckless lies “caused regular people to lose millions and millions of dollars.” Following Porritt’s opening statement, Musk’s attorney, Alex Spiro, argued that his client’s 2018 tweet was “not even close to fraud,” that the tweet was crafted by Musk “in a rush,” and that his client merely misspoke and used the “wrong words.” Musk himself is expected to testify later in the trial to explain further his actions specifically related to his tweet.
What is the law regarding fraudulent misrepresentation, and what will the court have to consider surrounding the tweet?
Pursuant to contract law, a person can be held liable for damages if a court deems that person engaged in fraudulent misrepresentation. When courts assess fraudulent misrepresentation cases, they generally use a six-factor test in which, if all factors are present in the facts of the case, the court can provide relief to the plaintiff.
These six factors include: (1) a representation was made, (2) the representation was false, (3) that when made, the defendant knew that the representation was false or that the defendant made the statement recklessly without knowledge of its truth, (4) that the fraudulent misrepresentation was made with the intention that the plaintiff relies on it, (5) that the plaintiff did rely on the fraudulent misrepresentation, (6) that the plaintiff suffered harm as a result of the fraudulent misrepresentation.
The court, in this case, must determine through the evidence presented if the tweet was a false statement. If the court determines that the tweet was not true, they will then have to consider whether Musk knew that his statement was false or recklessly made the statement before he found out that he didn’t have the requisite funding. Additionally, the plaintiffs need to prove that they relied on Musk’s tweet when buying and selling Tesla stock and that they suffered financial harm as a result of relying on the contents of the tweet.
The extensive litigation and SEC investigation surrounding Elon Musk’s 2018 tweet should serve as a lesson to other high-level company executives to use extreme caution when using social media and other media outlets to air out any future business dealings or company information that could impact the price of their company’s stock.
United States SEC v. Musk, 2022 U.S. Dist. Lexis 76654
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