Tesla, Musk must face shareholder lawsuit over going-private tweet
reuters.com
reuters.com
It's not OK for directors of a company to make materially false statements to their shareholders and if they do they can (and deserve to) get sued. It's a bit silly to talk about people being "still angry about this" when between filing the lawsuit and today Tesla has been close to bankruptcy multiple times.
The market cap of Tesla is 137.2B in contrast to GM's 29.8B, Ford's 19.6B and Daimler's 32.3B.
Source: https://markets.on.nytimes.com/research/markets/usmarkets/in...
I'm mad about it and my only involvement with the market is through mutual funds and RSUs that are immediately sold up on grant from a FAANG.
He was lying with the intention of manipulating the shares of his company. That is unacceptable behavior for a CEO of a public company.
Tesla later issued a press release where they doubled down on the seriousness of taking tesla private: https://www.tesla.com/blog/update-taking-tesla-private
So you're just wrong on both counts.
Why does this matter?
Is the idea that if you're no longer a shareholder, this makes you bad?
As opposed to long term traders, who are not trying to make a profit?
Ideally, in a lawsuit, you want the plaintiff to have suffered some kind of harm at the hands of the defendant.
Yes, you can tactically become a shareholder and file suits as some people do all the time. You miss earning you get hit by a shareholder lawsuit every time. This is not a rare thing, but also does not necessarily imply they have any reasonable claim to any damages. Could be just leeching.
The distinction between this and the SEC matter that was settled is that SEC is supposed to care about the integrity of the market at large, not just Tesla, Inc. shareholders doing well at the cost of other players in the market that were misled. That's a much stronger basis to argue for damages.
Tesla's stock went down below 200 in May of 2019, well after the tweet and skyrocketed after that. The long term performance of Tesla stock is not the result of that tweet in August of 2018 and that tweet was not representative of creation of long term value. If Musk hadn't tweeted that day, I would bet long-term performance for Tesla shareholders would have been identical.
If Musk actually had funding secured and did take the company private, recent share prices might even indicate that would have been against the long term interests of Tesla shareholders as they were betting on the long-term results of Tesla's investments in manufacturing and would have been deprived of the gains from that bet that they are seeing now.
Holding a short position is similar to having a friend with a spare old car. Their lazy kid is going to get a job and their license eventually, and they definitely want to have the car for that, but who knows when that will be. You buy it for $3,000, promising they can have the car back whenever they want. But you sell it immediately to a third party. You're planning to buy them a replacement car on the used market when the car depreciates (they'll never know the difference), hopefully next year that old gas guzzler engine is even less popular and that model year's styling is considered even more dated. When your friend asks for the car back, you'll buy one for $2,000 and make a tidy profit! What happened to these folks was that the car didn't depreciate from $3,000 to $2,000 like they expected it to, that model had the lead role in a blockbuster movie and overnight, it became a coveted classic car. Turns out there are only a couple hundred still on the road, and now, if your friend asks for it back, you'll have to go to a big auction and pay $50,000 to replace it, suffering a loss 4700% greater than the profit you expected to make.
This is a lawsuit for car owNers, not car owe-ers. The owners are $47,000 richer, they don't want to sue the car manufacturer, regardless of any underhanded dealings that got it that movie role.
Again, I agree that your post above might serve as an avenue to claim some damages that a judge would agree to, but to say stock price today is immaterial is just plain wrong. If the stock price had dropped to $100 today, it would have been likely that all shareholders could make a valid argument to a claim, but now at the very least one has to demonstrate that they were a shareholder at the time of the tweet, and they have taken a certain action that hurt them based on that tweet.
Yeah, and time doesn't mean anything in markets, so that's somehow relevant.
> I point this out not to defend Musk (he is often an idiot, especially on social media), but to point out that the people still angry about this are likely Tesla shorts and day traders.
That...doesn't even remotely follow from the facts you cited. For one thing, a CEO repeatedly flouting securities rules and thereby triggering sanctions against the firm probably means that the current market price is less thanot would be, ceteris paribus, without that occurring. Just because the stock price has gone up since that event doesn't mean that the event did not negatively impact long positions compared to everything else being the same except that event.
Just to clarify, the stock hit the $969 high very briefly and dropped closer to what it is now far before any of the Coronavirus related moves in the market.
A hostile takeover, perhaps?
Most people can't even handle the volatility of Tesla shares emotionally, when it's leveraged even more, of course Elon get very frustrated when the stock goes down.
He should have just waited a bit more with his billionaire lifestyle that he deserves.
What's baffling is how shorting is even legal. It's strictly gambling and benefiting off the misfortune of others.
https://www.aqr.com/Insights/Research/Journal-Article/Price-... https://academic.oup.com/rfs/article-abstract/26/2/287/15819...
Markets would be far worse without short sellers.
Shorting Tesla without hedging (or some good covering protocol) is a fool's game; no margin calls for me. There's a reason why the IV is ludicrous too.
And I don't think that Tesla is a "bad company", it's merely has substantially overpriced securities.
But what I find truly horrifying is how okay everyone seems to be with highly unethical and dangerous behavior when things are going up. Not just in Tesla, but in so many corporate offices.
Amazon grew so big in part because of the dotcom bust which took to the grave uneconomic players from their competition horizon.
Up until now (and possibly still now), the fate of Tesla has been in their ability to raise capital to develop technology and build factories. They raise capital by selling shares or borrowing money using their ability to issue shares as collateral, so a high share price is a prerequisite to their ability to raise enough capital and therefore exist as a company. Meanwhile the charismatic CEO has been a major contributor to increasing the share price.
Without the charismatic CEO they don't have a high share price, without a high share price they don't have capital, without capital they don't exist. At some point they'll be past that dynamic, but they weren't always, and maybe they're still not.
And it's an open question whether the existing auto industry would pick up the ball on electric vehicles if Tesla ceased to exist. It's not hard to argue that they're only doing it now because Tesla is forcing them to -- they could have started 30 years ago and they didn't -- and they don't seem particularly enthusiastic about it even now. They also have a lot of incentives to avoid it, because it requires investing a lot of money in new R&D and retooling factories, and then giving up very lucrative service charges since electric drivetrains are much simpler and require less maintenance. And if Tesla imploded it would be easy for anyone inclined to succumb to those incentives to point to it as an indication that electric cars weren't a good market to be in, as a justification for not entering it.
So right now the world kind of needs Tesla to succeed, at least until they've forced most of the incumbents to release competitive electric vehicles, which they haven't actually done yet.
To rephrase the question: what will change in the structure of reality that will make EVs a great business?
To guide the answer: me currently being able to type it comes from decades of silicon semiconductor manufacturing improvements (none of which were bubble-funded; silicon is often not a massively profitable business but profitable; though those were govt bootstrapped).
When Tesla started out, there was no model for this. Nobody had ever made an electric car that was reasonably competitive with gasoline powered cars. Nothing before Tesla was that fast with that much range. They might have spent billions of dollars trying to develop it and failed. It's hard to raise that much money when there is that amount of risk. But once you're actually doing it, the risk is proved out and there is a known viable model for success and all that's left is to mass produce the design. So now they've essentially done that for sedans and we're waiting on trucks.
> To rephrase the question: what will change in the structure of reality that will make EVs a great business?
Have a look at oil prices right now. They're a lot lower than they were end of last year. That's what a reduction in demand does. The reduction in demand came from the coronavirus, but you get a similar effect from replacing a relatively small percentage of vehicles with electric ones, because they use 0% as much oil as ICE vehicles.
In theory low oil prices are bad for electric cars, but they're also bad for oil producers, who are then making dramatically less money. And the amount of money they're making is the primary lobbying force against having a carbon tax. The other impediment is the pinch the consumer would feel at the pump, which low oil prices also address, as does a larger number of consumers driving electric cars. Take all those things together and it becomes a lot easier to get a carbon tax.
So you build enough electric cars to make the oil industry bleed enough that they're no longer strong enough to resist the need of everyone else in the world to kill them, they are then killed, and ~100% of new cars become electric. Which makes electric cars a good business to be in.
But first you have to get over the hump.
If Tesla continues to work towards a fossil fuel-minimized economy (and to my part, I hope they do), then their stock price will demonstrate this.
If you think investors will lose confidence and back out of Tesla because "the shorts", then they're demonstrating their faith (or lack of it) in the market, not the company.
Either way, a lot of this sounds like "we don't like the way _they_ play the game". Sucks to be a (regulated) free market, huh?
The idea is that, in your capacity as owner of the company, you sue the company for screwing you over, and it pays a fine to you. But that makes you worse off, because it makes the company worse off, and you own the company.
In the best case scenario, where the suit is costless and 100% of the fine goes to shareholders, the shareholders come out of the suit no worse off -- and no better off -- than they were before they sued.
In any other scenario, they come out worse off.
Imagine that I accidentally hammer my thumb and sue my hammer for the injury. I find it guilty and have it destroyed. How did my situation improve? All that happened is that I'm down a hammer.
Imagine that I accidentally hammer my thumb and sue my hammer for the injury. I find it guilty and have it destroyed. How did my situation improve? All that happened is that I'm down a hammer.
Your hammer is literally just an extension of you so you are just suing yourself. A company is not just an extension of its shareholders. In fact, the whole point of the corporate form is that the business is separate from its shareholders legally, financially, and for all purposes (except for some reason First Amendment rights).
Specifically, the harm they're seeking redress from is a drop in the value of their stock.
And the redress they are seeking is also a drop in the value of their stock.
This is the conceptual problem. Shareholders have not suffered any harm that can conceivably be redressed by a shareholder lawsuit. The only possible effect of the lawsuit is to hurt the shareholders even more than they were hurt before.
They can be filed by shareholders who were harmed by prior corporate account. Not sure for this concept is so hard for people to understand.
TLDR we're taking about different groups of shareholders.
I believe that class-action suits are supposed to benefit the class, both in the judgement/settlement and in changing long-term incentives. Shareholder lawsuits appear to do neither.
I also agree that courts are allowing these lawsuits to proceed despite hearing objections like mine.
There is an interesting case where they were lucrative for lawyers. The government wanted to discourage "short swing" trading by executives and other insiders. That's a series of trades that includes both buying and selling.
The way they did this was the brilliant rule 16(b). That rule says that officers, directors, and people who own more than 10% of the shares in a company must turn over to the company any profits from short swing trading of the company's stock that occurs within a 6 month period.
So if Bob the CEO buys company stock at $100/share and a month later sells it at $120/share, Bob owes the company $20/share.
What makes it brilliant is:
1. If the company doesn't act and ask Bob to cough up that $20/share, and shareholder can sue Bob to make him do so,
2. If Bob loses, Bob will have to pay the attorney fees of that shareholder,
3. The shareholder did not have to be a shareholder at the time of Bob's trades. They only need to be a shareholder when they file the suit.
The people that 16(b) applies to are the same set of people who are required to publicly report their trades. There were law firms that would get those public reports in machine readable form, have a program go through them looking for people who profited from short swing trades, buy one share in those companies, and then sue. They easily would win, and Bob would have to pay his profits to the company, and the lawyers got to collect their fees from Bob.
And that's not even the worst of it for poor Bob. Suppose Bob had bought at $100, then sold at $90. If that's all he did, no problem because he had a loss, not a profit. But suppose that Bob then bought at $80 and sold at $70. Bob has suffered a loss of $20. No profit, so at least no 16(b) problem, right?
Not so fast. Suppose all four of those transactions took place inside of 6 months. The short swing profit calculation doesn't really care about timing. It just looks for the highest sale price and lowest purchase purchase price in the window and matches as many shares up at those prices as it can. Then do the same thing for the remaining shares, and so on, until as many shares as possible have been matched up.
Bob's buy $100/sell $90, buy $80/sell $70, which is a $20 loss according to Bob's bank account, would be seen as a $10 profit--the buy $80 would be matched with the sell $70. Bob ends up coughing up $10 to the company, on top of the $20 he actually lost, and whatever he has to pay the lawyers who sue him if it comes to that.
This turned out to be so effective at stopping officers, directors, and 10% shareholders from making money off of these short swing trades (or even from breaking even) that they largely stopped even trying--and with no enforcement cost to the SEC. Those people, if they want to trade in their own company's stock, have to pick a direction (buy or sell) and stick with that. If they want to change direction, they need to wait more than 6 months.
Yes, lawyers make a lot of money compared to individual shareholders. But in a class-action lawsuit, they make less overall money then they would if each shareholder had their own lawyer, and it costs the company far less to defend one shareholder class action then several thousand (and this is the entire point of class actions).
Among the shareholder class, there are a few different categories, each wins or loses a different amount due to the class-action:
1) Those who owned the stock at the time of the misrepresentation and continued to own it until the judgement/settlement. These people lose their portion of the lawyers' fees
2) Those who owned the stock at the time of the misrepresentation and sold it before the lawsuit ended. These people benefit from the judgement/settlement amount, minus lawyers' fees.
3) Those who did not own the stock a the time of the misrepresentation, but bought it before the end of the lawsuit. These people lose however much group 2 gained, in addition to some legal costs.
Out of the three groups, 1 and 2 are part of the class, but only 2 benefits from a successful complaint.
Still, I'm a bit confused -- as much as I think he deserved to be fined/punished for it, the $20 million SEC fine did that.
It seems like he should be subject to an SEC fine or a shareholder lawsuit, but not both -- isn't it redundant? I would assume that the SEC fine was calculated as an "appropriate" punitive amount -- not a punitive amount minus what they expected a shareholder lawsuit would also result in?
It's comparable to criminal and civil law existing side-by-side: if you run a red light and someone gets hurt, you'll be fined for the traffic violation. But the victim is also going to sue you for medical expenses, work income missed, and compensation for any suffering.
Of course any compensation here is going to be paid by Tesla to shareholders of Tesla, who own the company anyway. It might make a difference for individuals based on when they are/were shareholders and when not. But absent such effects, it's a really strange system.
I wonder if Elon Musk will join the lawsuit. He's the single largest victim here, after all. That would be fun.
Here, the SEC is an administrative entity (part of the executive branch) with the power to levy fines. Now shareholders are filing a civil suit for damages. Sometimes, the SEC will participate in a multi-party settlement that can resolve administrative, civil, and even criminal charges at the same time - but that didn’t happen here.
How is making trades based on statements from the CEO speculation?
Elon's actions were irresponsible at best, but I think suing him sets a bad precedent. There doesn't seem to be any evidence of insider trading. It seems to me like some investors are just mad that they lost money because they put too much stock in Elon's twitter feed.
> because they put too much stock in Elon's twitter feed.
That would be a wonderful argument, if the company had not put into an actual 8K that Elon's twitter is a source of official information about the company. https://www.sec.gov/Archives/edgar/data/1318605/000119312513...
"Tesla investors and others should note that we announce material information to the public about our company, products and services and other issues through a variety of means, including Tesla’s website, press releases, SEC filings, blogs and social media, in order to achieve broad, non-exclusionary distribution of information to the public. We encourage our investors and others to review the information we make public in the locations below as such information could be deemed to be material information."
"For additional information, please follow Elon Musk’s and Tesla’s Twitter accounts: twitter.com/elonmusk and twitter.com/TeslaMotors"
Yeah, that's pretty irresponsible. I don't see how it changes things, though.
IANAL, but I suspect there's a difference between "follow Elon's twitter because he might release material information there" and "everything Elon tweets is material information".
I have no desire to defend Musk or Tesla. The practice of distributing official information via social media posts is pretty sketchy. But that such an arrangement is even possible only continues to highlight how dumb the stock market is. The more I learn about this, the more it sounds like investors playing with fire and whining when they get burned.
I'm not going to bat for Elon here. I just think it sets a pretty bad precedent for investors to be able to sue a person when they make bad investments based on that person's social media ramblings.
If Elon or someone connected to him profited off the ordeal, then there might be something here. I haven't seen anything to indicate that, though.
IANAL, so I can only offer amateur speculation regarding whether Elon's actions were illegal. His actions do not align with any of the "type of securities fraud" listed on that page, but they do fit within the broader definition given at the top of the page.
I'd appreciate if you would refrain from associating me with groups you do not like just because you disagree with me. It's not constructive and it discourages people from challenging the thoughts of the groups they prefer to associate with.
Little in this entire discussion has been productive because Elon's fanboys are all delusional.
You may have unmasked me, but we'll see who's laughing 10-20 years from now when I'll be rescuing children from caves on mars... and driving electric cars through hyper tubes... and... something about flame throwers!
Seriously, though. Here's my real thoughts on Elon Musk. Keep in mind that I don't pay much attention to him, so this is probably not a great assessment. It's just my real impression of the guy.
I think he is a billionaire stuck in his teens. He throws money at things just because they sound cool and that has played a huge part in making him famous. He's reckless, but his celebrity status ensures he will always stay a billionaire. It also ensures he will have plenty of clueless fans and plenty of angry anti-fans. Most people do not fall into one of those camps, but those who do are often quick to let you know it.
I think he's irresponsible, he has a big ego, and his celebrity/billionaire/CEO status means there is serious potential for him to cause a lot of damage. He has done a lot of stupid things, but so far the collateral has been pretty small. I don't think it's fair to say everything he's done is bad, but you could spend an eternity debating how much good he's directly responsible for.
He doesn't strike me as an idiot, but he also doesn't seem especially smart. I imagine he thinks of himself as pretty smart, but that seems to be a common trait among billionaires. I'd guess very little of his companies' success can be directly attributed to him. He comes across more as a rich investor and figurehead than a manager.
Speaking of his companies, they also get a lot of media attention. Electric vehicles, autonomous cars, and space exploration are interesting subjects, but Tesla and SpaceX aren't the only names in those markets. Their brand popularity is just so huge that many people struggle to disassociate those companies from the technologies they work on.
From what I've heard, the work conditions at Tesla and SpaceX are bad (long hours, high stress, poor job security) so I have no desire to work for either. From a customer perspective, I hear Tesla vehicles are very costly to maintain so I'll be cautious about Tesla if I every find myself looking to buy an EV. I don't currently trust self-driving car technology, so that's not even a consideration for me right now.
Like I said, I don't pay much attention to Elon or his companies. I only commented on this one because I thought it was a good example of how dumb the stock market is. It encourages short-sighted behavior from publicly traded companies, it's painfully easy to manipulate, and I think it's dangerous how far some are willing to go to try and make it safe for investors.
Placing my bet that he did not >intend< to defraud them. Going to cost them a pretty penny to try to prove something that didn't happen.
Given that Musk's salary is based on the value of the stock, and that Tesla needed the stock to increase in value to avoid financial triggers, there is already sufficient pro forma evidence to satisfy the intent prong.
Unlike in criminal court, the true burden will be on Tesla/Musk to show that they did not intended to defraud investors. Given Musk's history of making misrepresentations, this will be a difficult task and it is very likely they will settle out of court instead of take this to trial.
He was making a joke and some money-havers were to dumb to spot it. Suing Musk over a tweet is like me suing Forbes about their forecasts, and I'm a nobody.
Long before the more recent controversies I remember probably the first thing that turned me off a bit was when someone wrote a critical piece about a launch event and Tesla cancelled his car purchase.. (Incidentally I looked up that incident and saw PG kinda didn’t like it either https://twitter.com/paulg/status/694892884508553216?s=21 )
But sometimes, you also disagree with Musk. Which should be impossible, logically, if the above were true. Which is causing some sort of cognitive dissonance.
And your current thinking on this breakdown in everything you hold to be true is that Elon Musk is the rare subject that's not quite as easy to judge within your simple good/evil framework that usually works so well.
Have you considered that maybe it's your thinking in tired clichés that's giving you all the trouble here? Maybe Elon Musk is right on some things, wrong on others? Maybe "Brooklyn Socialists" aren't always wrong on everything?
I believe I know some people you might file under that term, and some of them like cats, others don't, and there's one who doesn't care either way. Unless you categorically deny the existence of cats, it would seem impossible for you to disagree with all of them.
This may be one of the oddest sentence to read on HN. What are you talking about?
Also, regarding canceling someone's car purchase for writing a critical piece, why do you see that as a bad thing? or a good one?
The last time I bought a new car, though, I filled in the manufacturer's survey in painstaking detail, calling out points I liked, aspects I didn't like, and a few things I considered ridiculous or unacceptable. Apparently my responses not only made it back to the local dealer, but earned me a reputation on the sales floor as a dissatisfied customer -- or worse, an unsatisfiable one.
It never occurred to them that if I were really annoyed or disappointed in the car, or had any kind of personal beef with its manufacturer, I wouldn't have wasted time filling out the survey in the first place. I answered the survey honestly and comprehensively because I plan to buy more cars from them in the future and would like my input to be considered.
Companies need to understand that the opposite of love isn't hate, but indifference. When someone takes the time to criticize you in detail, you don't have to take it as a declaration of war. You can always ignore them if you don't feel their input has merit. From hearing all these anecdotes over the years, I'm under the impression that Tesla takes things a little too personally.
Then again, maybe that was the original problem. :)
And if you sold shares based on his statement, OR as a result of the enforcement activities that came after, then you lost potential earnings, as a result of (reacting to) his statement.
Martin Shkreli's investors made a profit. But he was still guilty of running a fraudulent pyramid scheme to get them that profit.
We don't know. He might have chosen to not disclose his discussions with other people.
> If he had not secured funding, how was his statement not deceptive?
He might have meant it in earnest. For fraud, surely he must have had the intention to profit from it personally at the expense of shareholders?
> And if you sold shares based on his statement,
Who would have done that and with what reasoning? Why would you sell for a lower price if you believed you'd get $420 very soon? That's a silly notion.
> a fraudulent pyramid scheme
A pyramid scheme is by definition a system where most (i.e. the last) investors get screwed, i.e. they don't make a profit.
Including the SEC?
> He might have meant it in earnest.
You can be as earnest as you like and still be capable of making statements that are factually incorrect. As to your previous point, one would presume that an absolute defense against the SEC's charges about making materially false statements would be to show that said statements were not, in fact, materially false. That didn't happen though.
> For fraud, surely he must have had the intention to profit from it personally at the expense of shareholders?
You mean the hope that the share price would go up, with him as a large shareholder. "At the expense of shareholders" would include "shareholders who may have bought, sold, or changed their strategies, or not, based on Mr Musk not making said statements as a matter of fact, that weren't".