COREY KRAFTSOW—A California jury recently acquitted Elon Musk and Tesla in a civil trial concerning tweets Musk posted in 2018. The billionaire Tesla founder and serial entrepreneur tweeted “funding secured,” implying that he had secured financing from Saudi Arabia’s sovereign wealth fund to take Tesla private at a price of $420 per share. In other words, Musk hinted to potential investors in Tesla that the automaker would be reformed into a private company, and no longer be listed as a publicly traded company. Subsequently, the price of Tesla’s stock increased significantly. The dramatic increase in Tesla’s stock price was likely a result of investors’ belief that the Saudi sovereign wealth fund would acquire all the publicly traded Tesla shares at a price of $420 per share when the stock was priced at just under $350 per share. However, the deal failed to materialize. Instead, Musk announced the company would remain publicly traded.
Subsequently, a group of investors filed suit alleging that Musk and Tesla had misled them into believing that Tesla would transition from public to privately owned. In support of their claim, the plaintiffs put forth expert witness testimony that Musk’s tweets resulted in $12,000,000,000 in losses to investors. In his defense, Musk and his lawyers argued that his tweet was only “technically inaccurate” because the deal with the Saudi sovereign wealth fund had been verbally negotiated and agreed to. In other words, Musk’s lawyers argued that Musk intended to take Tesla private. Furthermore, Musk’s attorney, Alex Spiro, argued that the “funding secured” tweet did not “materially” affect the company’s share price. Musk would need to have made material misrepresentations, or misrepresentations that actually caused investors to suffer financial losses, to be held liable.
To bolster his defense, Musk personally took the stand, testifying that a Twitter user would know that a reader could not reasonably rely upon his Tweet to make investment decisions. In addition, he testified that he wanted to alert all Tesla investors of his intention to take the company private before an article was released in the Financial Times claiming that Saudi Arabia’s sovereign wealth fund would purchase a small but significant share of Tesla.
Musk’s acquittal is also underscored by his legal team’s efforts to appeal his entrance into a settlement with the Securities Exchange Commission (“SEC”) over the 2018 tweet. In 2018, the SEC filed a complaint against Musk and Tesla over the “funding secured” tweet. In its initial complaint, the SEC alleged that Musk had defrauded Tesla investors because he knew Tesla was unlikely to go private successfully. The SEC’s complaint also alleged that Tesla failed to implement proper disclosure mechanisms to comply with the legal requirement that it ensured the information was truthful and did not need to be filed first with the SEC. Musk and Tesla eventually agreed to pay a $40,000,000 combined penalty fine over the tweet. Moreover, Musk agreed to resign from his position as company chairman for three years. Musk has subsequently sought an appeal to the settlement negotiation in the United States Second Circuit Court of Appeals, alleging that the SEC violated his free speech rights and pressured him into agreeing to the settlement.
Legal scholars and observers of the trial have observed that U.S. securities law tends to be quite strict on public misrepresentations made by corporate officers. However, some observers do not expect the case to make a lasting impact on a legal landscape in which trials over class-action securities lawsuits are extremely rare. It is likely that that Musk’s lawyers were confident in their ability to prevail at trial. Class-action plaintiffs typically avoid jury trials and usually go to trial only when lacking sufficient evidence. Meanwhile, in this case, the jury returned its “not guilty” verdict in short order, suggesting that the class-action plaintiff’s case had not been particularly compelling. It may be the case that Musk was only able to prevail at trial due to the uniqueness of the facts in his case. Musk’s chronic use of social media also marks a departure from the norm in which corporate officers are often hesitant to use social media to make public statements about their companies. Nevertheless, it still remains to be seen whether Musk’s “not guilty” verdict will embolden corporate officers to speak more freely on social media about their publicly traded employers.
