On February 3, 2023, a federal California jury found Elon Musk not liable for losses experienced by Tesla investors following his August 2018 tweet stating he had “funding secured” to take the company private.

The shareholder class-action represented investors who purchased or sold Tesla stock from August 7 to August 17, 2018. The investors alleged violations of Exchange Act Section 10(b) and Rule 10b-5 against Tesla and Musk for knowingly making false statements of material facts that artificially inflated Tesla’s share price in order to defraud Tesla investors. The investors also alleged that current and former members of Tesla’s Board of Directors were controlling persons of Tesla and were therefore liable under Exchange Act Section 20(a) for any violations of Rule 10b-5 committed by Tesla. The shareholders sought billions of dollars in damages.

The suit followed a series of tweets made by Musk asserting he had “funding secured” to take Tesla private at $420 per share. Tesla shareholders alleged Musk lied when he tweeted later the same day that “investor support is confirmed.” Following Musk’s original “funding secured” tweet, Tesla shares rose 11% to $387.46, but never reached the promised $420 level. Soon thereafter, the share price declined.

In April 2022, the Honorable Edward Chen granted the shareholders summary judgment on the issue of whether Musk knowingly made false statements but declined to so rule on the question of whether Musk’s statements actually impacted Tesla’s share prices. Thus, the case proceeded to trial to determine whether the untrue tweets were material to the plaintiffs’ investment decisions and led to their financial losses.

During the three-week trial in the Northern District of California in January 2023, Musk testified he thought the tweets were truthful because he received a verbal commitment from Saudi Arabia’s Private Investment Fund to provide the necessary funding and that if the deal fell through, Musk believed he could fund the deal by selling his SpaceX stock. Musk also testified he thought he “was doing the right thing” by announcing the deal publicly, in an attempt to keep shareholders informed.

A general, ten-page jury form was used instead of a tailored one that only asked jurors whether Musk’s untrue statements were material to investors’ purchase or sale of securities. The general form included the following instructions:

• Regarding a prior SEC settlement: “During the course of the trial, you have heard testimony and seen evidence related to an investigation by the U.S. Securities and Exchange Commission. You have not heard or seen any evidence about how the SEC’s investigation concluded. You should not make any assumptions about the outcome of the SEC investigation.
• Regarding the Section 10(b)-5 claim, Judge Chen instructed the jury that Plaintiffs have the burden of proving (1) Elon Musk and/or Tesla made untrue statements of material fact in connection with the purchase or sale of securities; (2) Elon Musk and/or Tesla acted knowingly or with reckless disregard for the truth or falsity of the statements; (3) Elon Musk and/or Tesla used an instrument of interstate commerce in connection with the sale and/or purchase of Tesla securities; (4) Plaintiff justifiably relied on Elon Musk and/or Tesla’s untrue statements of material fact in buying or selling Tesla securities during the Class Period; and (5) Elon Musk and/or Tesla’s misrepresentations caused Plaintiff to suffer damages.
• Regarding the Section 20(a) claim, Judge Chen instructed the jury that Plaintiff has the burden of proving by a preponderance of the evidence that each Tesla director possessed, directly or indirectly, the actual power to direct or cause the direction of the management and policies of Tesla in the event that the jury found Tesla liable on Plaintiff’s Rule 10b-5 Claim. The judge further instructed that Plaintiff does not need to prove that any Tesla director actually exercised that power.
• The jury was also instructed on various defenses and apportionment of liability.

Ultimately, after less than two hours of deliberation, the nine-member jury unanimously decided that Musk’s statements were not significant enough to influence investors’ trading choices.

Musk’s infamous tweet had also prompted a civil suit by the Securities and Exchange Commission. It originally sought to oust Musk as Tesla’s CEO. The SEC eventually reached a settlement with Musk in which he and Tesla each agreed to pay $20 million in fines, and Musk surrendered his title as chairman of the company but retained his position as CEO. The settlement also required that any tweet he sent out with material information about Tesla be reviewed in advance by other company executives.

Key Takeaways:

• Musk’s strategy of taking this to trial was risky but ultimately paid off. Having lost on summary judgment on the issue whether he knowingly made false statements, he crafted a winning strategy arguing that the tweets were not material.
• Musk’s strategy would generally not be recommended for most officers and directors of public companies, particularly where there is evidence of some movement in the stock price.
• Ultimately, this verdict is a reminder that materiality matters and that plaintiffs have to show a connection between the untrue statements and the stock price to prevail on such claims.

If you have any questions regarding the matters covered in this e-mail, please contact any of the partners and counsel listed below or your primary attorney at Seward & Kissel.