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Lawsuit against Elon Musk for his 'funding secured' Tesla tweet goes to the jury

A San Francisco jury is now deciding if Elon Musk, Tesla (TSLA), and certain company board members are liable for a group of shareholders' trading losses, allegedly caused by Musk’s 2018 "funding secured" Twitter posts about taking the electric-vehicle company private.

The shareholders allege that Musk and some of Tesla's current and former board members violated certain Securities and Exchange Act laws that prohibit making or abetting fraudulent or misleading statements in connection with the sale or purchase of securities. They are seeking billions of dollars in alleged damages.

On Friday, before jury deliberations, the shareholders' lawyer, Nicholas Porritt, and an attorney representing Musk, Tesla, and Tesla board members, Alex Spiro, gave closing arguments to the jury.

"Those tweets caused investors harm…lots of harm," Porritt told the nine-member jury. “What moved the market…was [Musk's] representations made on Aug. 7, which were not true.”

August 7, 2018 Tweet from Elon Musk
August 7, 2018 Tweet from Elon Musk

Spiro countered the shareholders' claims, telling the jurors that "funding doesn't move the market" but "a possible take-private does."

Spiro said Musk's tweet clearly stated that a take-private deal was merely a consideration and that the shareholders knew that from the start. Nonetheless, Spiro said, Musk had obtained a verbal funding commitment from Saudi Arabia's Public Investment Fund (PIF) a week before the tweet on July 31, 2018, and alternatively had the ability to fund a take-private transaction using his own assets.

"Everyone knew funding wasn’t an issue," Spiro said, pointing to testimony from Musk and Tesla's then-CFO Deep Ahuja stating that in a July 31 meeting they both attended, the Saudi fund representative said it was ready to act on the take-private funding. Musk also knew, Spiro said, that his holdings in his private company, Space X, were more than enough to fund a take-private transaction.

Tweet posted to Elon Musk's twitter account August 7, 2018
Tweet posted to Elon Musk's twitter account August 7, 2018

Spiro went on to highlight an Aug. 2 email that Musk sent to Tesla's board informing them of funding to take the company private at $420 per share.

"This was a real proposal he had made to his board," Spiro said. He added that Goldman Sachs' chief investment banker, who also testified, explained that Musk signed a retainer letter with his firm — which also serves as banker for the PIF — to explore taking Tesla private.

Billions of dollars in potential damages

At stake in the dispute are billions of dollars in stock transaction losses that the plaintiffs say wouldn’t have happened absent Musk’s tweets. They say Musk and the board should compensate them for losing trades that followed the posts from Aug. 7, 2018 to Aug 17, 2018.

Tesla's market cap fluctuated approximately $12.6 billion over the 10-day period. An economist who testified on behalf of the shareholders said, excluding options contracts for the period, he calculated damages for the class of buyers and sellers of Tesla's stock between $4 billion and $11 billion.

Tesla share closing price (adjusted for subsequent stock split) from August 6, 2018 to August 17, 2018.
Tesla share closing price (adjusted for subsequent stock split) from August 6, 2018 to August 17, 2018.

Porritt said the actual state of affairs at the time of Musk's tweets was that the PIF had expressed interest in a potential transaction, but that funding had not been secured. He told jurors they should be skeptical that take-private deal amounting to around $60 billion was not memorialized in meeting notes and financial documentation.

"Securities laws prohibit behavior like Elon Musk’s," Porritt told the jury, characterizing Musk's explanations for his tweets as "excuses" and deflection for accountability to the public market.

"Without trust, the market stops working," Porritt said.

The shareholders' lawyer also said Tesla and Tesla's board members named in the suit should be held liable, especially given what he described as numerous prior warnings of Musk's inaccurate tweets.

“Tesla consciously chose to make Elon its public image,” he said. "When Elon tweets about Tesla, people listen.”

Tesla CEO Elon Musk and his security detail depart the company’s local office in Washington, U.S. January 27, 2023.  REUTERS/Jonathan Ernst     TPX IMAGES OF THE DAY
Tesla CEO Elon Musk and his security detail depart the company’s local office in Washington, U.S. January 27, 2023. REUTERS/Jonathan Ernst TPX IMAGES OF THE DAY

During the three-week trial, Tesla shareholders, Tesla board members, economists, and stock analysts also took the witness stand.

Musk himself spent two and a half days testifying, maintaining that his tweets were "truthful" and meant to ensure all investors had access to equal information to the take-private talks before a news leak made it public.

The jurors are tasked with evaluating whether at the time of the tweets, Musk knew the information within them was false, as well as material — which a reasonable investor would rely on in making investment decisions. The jurors must also determine if the tweeted information caused the shareholders to buy or sell Tesla shares to their detriment.

Before trial, Senior District Court Judge Edward Chen, who presided over the case, made the shareholders' case easier to prove, ruling that Musk’s funding statement was untrue.

Members of Tesla’s board named in the lawsuit include former members Brad Buss, Antonio Gracias, and Linda Johnson, and current members, Robyn Denholm, Ira Ehrenpreis, James Murdoch, and Musk’s brother Kimbal Musk.

In a separate case brought by the U.S. Securities and Exchange Commission in response to the funding tweet, Musk and Tesla settled the matter, each paying a fine of $20 million. Musk also agreed in the accord to step down as Tesla's board chairman and to have Tesla's general counsel review potentially "material" tweets before they are posted. Musk is currently seeking to have that part of the settlement dissolved.

Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis on Twitter @alexiskweed.

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