By James Langford | June 10, 2021 | News & Features
Photo by David Tran / Dreamstime.com.
You might call Elon Musk unabashed.
That’s the claim of at least one investor in Tesla, the electric-vehicle wunderkind Musk founded, three years after a settlement with the Securities and Exchange Commission that cost him the title of chairman and required him to seek corporate approval for his Twitter posts. It mirrors one the agency itself made just months after the deal.
Musk’s tweets appear as free-wheeling as ever, and the directors tasked with overseeing them lack the influence necessary to rein in the man who is both the face of the Palo Alto, Calif.-based company and its largest shareholder, according to a lawsuit filed by stockholder Chase Gharrity earlier this year in the influential Chancery Court in Delaware.
“Because the board has done nothing to ensure compliance with the SEC judgments, E. Musk’s unlawful conduct has continued unabated, with Musk openly flaunting any concern about violating the judgment,” Gharrity argued in his complaint, which seeks unspecified damages from Musk and 11 other current and former members of Tesla’s board.
A separate federal, class action case in San Francisco, meanwhile, focuses on damage from the tweets at the heart of the SEC’s complaints against both Musk and Tesla.
In August 2018, Musk announced on Twitter an offer to take the company private for $420 a share, a sizable premium to its share price at the time and one that occurred as short-sellers bet that the carmaker wouldn’t deliver on its targets for its lower-cost Model 3.
While Musk said financing had been secured for the offer, which would have been worth $88B, eventually citing conversations with Saudi Arabia’s Public Investment Fund, the SEC demurred.
Funding was far from guaranteed, the agency maintained, with obstacles including Saudi Arabia’s demand that the company build a production facility in the Middle East.
The regulator said Musk’s post had harmed stockbuyers who had hoped for a windfall based on his claims but instead saw Tesla’s value decline as questions swirled – some focused on the price itself, not least because 420 is an American idiom for marijuana usage.
In response, the agency originally attempted to bar Musk from serving either as an officer of the company or a board member, but relented after Wall Street warned such an action might severely undermine shareholder confidence in the company. Musk and Tesla each agreed to pay $20 million fines.
If regulators considered the case closed at that point, they would later accuse Musk of being as unrepentant as Gharrity’s suit claims.
Less than a year after the settlement, the agency returned to U.S. District Court in New York asking a federal judge to hold Musk in contempt for failing to comply with its terms.
A February 2019 tweet regarding the carmaker’s yearly production goals hadn’t been approved beforehand, the agency argued in court papers, and coupled with his comments in a December “60 Minutes” interview that Tesla might “make some mistakes” in the compliance process, it indicated he didn’t take the agreement seriously, the agency said.
Musk, who had derisively called the regulator the “Shortseller Enrichment Commission” – claiming that its actions benefited investors betting Tesla’s stock price would fall – also told Lesley Stahl of “60 Minutes” that he didn’t respect the agency.
An excerpt from that interview was included in the SEC’s filing, which alleged that Musk hadn’t “made a diligent or good faith effort to comply with the provision of the court’s final judgment.”
The follow-up action was resolved months later, with U.S. District Judge Alison Nathan making the settlement order considerably more specific.
Among the new provisions was a requirement that Musk obtain pre-approval from an experienced securities lawyer for statements on any topic in a detailed list of data and projections about Tesla’s business.
Gharrity’s lawsuit, however, claims that didn’t put a stop to the market-inflaming tweets. In May 2020, for instance, Musk said the company’s stock price – which had by then reached $761 a share – was too high.
Such a statement is virtually unheard of for the CEO of a publicly-traded company, and Tesla’s price plunged in response, wiping out about $14B in market value just as the Covid-19 pandemic was forcing much of the U.S. into a lockdown and taking a sledgehammer to a previously vibrant economy.
Directors should have prevented that, Gharrity argued in his suit.
“The board was aware of and had approved the judgment and amended judgment with the SEC, and had actual knowledge of the steps that Tesla was required to take in order to comply with the judgments,” Gharrity’s lawsuit argues. “The board has repeatedly failed to do so.”
The SEC has had concerns of its own since the Tesla settlement was amended, the Wall Street Journal reported in early June, citing previously undisclosed correspondence between the agency and the automaker.
The agency declined to expedite production of that correspondence sought by Lawdragon under the Freedom of Information Act and has as long as 30 days to process the request. Last month, Nathan approved the SEC’s request to appoint Rust Consulting to oversee distribution of the $40M in fines from the action to harmed investors.
Tesla didn’t respond to a message seeking comment.
Gharrity’s suit is a derivative action, alleging harm to the company, a maneuver that typically requires the plaintiff to first demand that Tesla itself take legal action, though he argues doing so in this case would be pointless because of the control exerted by Musk.
The investor is represented by Blake A. Bennett of Cooch & Taylor in Wilmington. Francis A. Bottini Jr., Albert Y. Chang and Yury A. Kolesnikov of Bottini & Bottini in La Jolla, Calif., are of counsel.
Separately, the federal class action case in San Francisco that consolidated claims from nine investors related to Musk’s 2018 tweets survived Tesla’s motion to dismiss last year and is moving forward with Glen Littleton, an investor who claims to have lost $3.5M, as the lead plaintiff.
Attorneys Nicholas Porritt and Adam Apton appeared on behalf of lead counsel Levi & Korsinsky, based in New York, in the most recent status conference on the case.
U.S. District Judge Edward M. Chen asked attorneys in late May for further data on usage of shareholder and brokerage lists to identify potential class members, a method attorneys told him usually nets about 70 percent of a proposed class, and later approved a plan agreed on by both sides to notify members of the legal action.
While Tesla hasn’t filed a response to the suit, the carmaker’s motion to dismiss argued that Musk “was ‘considering’ taking Tesla private and truthfully disclosed what he ‘hoped’ and ‘envisioned’ that might look like” in mid-2018.
The CEO’s statements were “consistent with what he told the board privately days earlier” and “every action he took before and after his tweet reflected his good faith pursuit of the opportunity,” according to the filing.
Further, attorneys argued in the motion, “the process undertaken by Tesla (which made no statement) and the directors (who are barely mentioned) demonstrate their good faith, not fraud.”