The Civil Case over Elon Musk's 420 Pledge

Crimes in the Business World

Elon Musk and Tesla are being sued in civil court for securities fraud as a result of Musk, acting as CEO of the company, Tweeting that he had funding secured to take Tesla private at $420 a share. The stock price immediately leapt, which hurt short sellers, and then the share price crashed when Musk confessed that he did not in fact have funding secured. The Board did not know of Musk’s intentions when he made his claims on Twitter; however, the Board does have a role to play in the self-regulation of the company. The Board must demonstrate corporate management, so as to show that the company “is not engaging in actions harmful to the interest of shareholders and is not engaged in unwarranted forms of self-dealing” (Friedrichs 305). Because Musk was acting on his own when he informed shareholders of the false news of taking Tesla private, the company sought to have the case dismissed. U.S. District Judge Edward M. Chen in San Francisco refused to toss the case and is allowing it to go forward. He stated clearly that “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” (Mitchell). Shareholders and short sellers are behind the civil suit and seek recompense for what they view as securities fraud on the part of Musk and Tesla.

Musk had been in a war of words with short sellers in the days leading up to his now notorious Tweet that shook the world of Tesla longs and shorts. Many big fund managers had been vocal about Musk’s management of Tesla and had called for the share price to be brought back to earth. Musk had vowed on Twitter to “burn the shorts”—and his later Tweet about taking the company private did exactly that (Levine). When he Tweeted that he would take the company private at $420 per share, it caught everyone by surprise, and instantly the stock price began to rise. However, news began to trickle out from various sources that Musk’s reference to “420” was a marijuana-related joke and that his Tweet was not serious. Musk himself insisted the Tweet was serious and that he was in talks with Saudis to take the company private. The SEC even filed suit against Musk and settled out of court for $20 million. As a result of the settlement, Musk had to give up part of his control of Tesla (his Board position). He was allowed to remain as CEO, however.

Shareholders and short sellers were not amused. The share price declined once it became apparent that funding was indeed not secured. Initially, those displeased by Musk’s antics on Twitter hoped Musk would face a stiffer penalty than the wrist-slapping that was the settlement fine. Unsatisfied by the SEC’s attitude towards Musk, shareholders and short sellers united to sue in civil court—and that trial is now going to proceed. Tesla had tried to block it by arguing that Musk was acting as a shareholder and not as a representative of the company when he made his infamous Tweets. The Judge rightly saw that this was not an accurate defense. The trial will thus go forward.

Securities fraud is an important issue in the realm of public companies, where investors stand to make or lose a great deal of money based on the performance of a company’s stock over time. Tesla’s Musk had made many promises about Tesla products and had attracted a lot of attention from short selling firms—firms that look for fraudulent or misleading claims made by companies and exploit those mistakes by shorting the stock (borrowing shares to sell them and buy them back at a lower price after the stock price has fallen). Short sellers had to cover their positions when Tesla’s stock rose following Musk’s Tweets. Thus, in their minds, this constituted securities fraud—and it appeared that the SEC viewed it in the same way. However, because the SEC settled its suit with Musk out of court, shareholders and short sellers saw that they needed to file a civil suit in order to obtain justice.