More witnesses, including Tesla (TSLA) CEO Elon Musk, are expected to be called to testify this week in a federal trial in California to settle Tesla shareholder claims of billions of dollars in damages against Musk and the company’s board.
Tesla shareholders on Wednesday began their case in chief, following opening statements from Musk’s attorney that laid out Musk’s defense of a 2018 tweet saying he had “funding secured” to take the electric vehicle company private.
“These tweets are informal, sporadic thoughts,” Musk’s attorney Alex Spiro told jurors about the take-private deal that never materialized. Musk’s word choice may have been reckless, Spiro said, though the tweet reflected a “split-second decision” to benefit — rather than harm — investors.
The class of Tesla shareholders that brought the lawsuit alleges that Musk’s Aug. 7, 2018, tweet about funding was false and therefore violated U.S. securities laws. They relied on the information to be true, they argue, leading to trading losses over a 10-day period that began on the day of the tweet.
The shareholders say the new information in the tweet caused Tesla’s stock price to shoot up because the $420 per-share offer that Musk tweeted represented a 20% premium to its trading price. The stock then dropped below where it had been before the tweet. (Tesla’s stock has since had two stock splits and currently trades around $129 per share.)
According to Spiro, at the time of the tweet, Musk had already held a series of private meetings with executives from Saudi Arabia’s Public Investment Fund. The fund’s executives, he said, agreed in a handshake deal to take Tesla private at $420 per share.
That commitment, Sprio said, led Musk on Aug. 2 to email to Tesla’s board a private, “informal” bid to acquire the company at that price. The bid, he added, positioned Musk as a counterparty to his own directors.
“He was more than merely considering” taking Tesla private, Spiro told the jurors about Musk’s thought process in crafting the tweet. “He was the bidder.”
However, on Aug. 7, Musk’s responsibility to Tesla shareholders changed, Spiro said, when a report published in the Financial Times cited an anonymous source who revealed what Musk already knew — that the Kingdom of Saudi Arabia had bought up shares on the open market, making its sovereign wealth fund one of Tesla’s major shareholders.
Knowing that he had previously engaged in non-public talks with the fund and that shareholder information must not be selectively disclosed to shareholders, Musk abruptly tweeted the take-private possibility, Spiro told the jurors.
Spiro went on to say that everyone who was in the room at the time the Saudi fund committed to take Tesla private would back up the accord, and that the fund’s executive in charge agreed to “do what needed to be done” to privatize the then-struggling EV company.
Spiro addressed subsequent August 7, 2018 tweet from Musk that reaffirmed his “funding secured” post and said only shareholder consent was needed to close the deal, as well as a same-day blog entry that offered additional detail about contingencies on Tesla’s website.
The blog clarified that Tesla had not yet made a final decision about the take-private deal. And Spiro downplayed the word “only” in Musk’s secondary tweet, saying that the lack of market response to Tesla’s blog post shows that Musk’s tweets did not move the often volatile stock.
“These tweets…they matter to plaintiffs’ lawyers. They didn’t matter to the market,” Spiro said.
The shareholders’ first witness, class representative Glen Littleton, took the stand Wednesday after both parties gave opening statements.
Littleton testified that he liquidated his call-and-put options on Tesla once he learned of Musk’s initial tweet.
When he saw the words “funding secured,” he said, he began dumping his positions because he was out of the money at Musk’s stated $420 go-public price. Both sets of his options, Littleton said, would quickly fall to $0 had the deal materialized.
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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