It has been more than four years since Elon Musk said he had secured funding to take Tesla out of the stock market, a claim he will defend in a trial that begins Tuesday in federal court in San Francisco.
The case was brought by investors who allege the electric carmaker’s chief executive, Mr Musk, didn’t actually have the money ready to take Tesla private and acted recklessly in discussing budding plans to do so. If the plaintiffs let the jury find in their favor, Tesla and Mr. Musk could be forced to pay billions of dollars in damages.
The trial focused on what Mr. Musk said on Twitter, which he acquired in October. “I’m considering taking Tesla private at $420. Funding secured” he wrote in an article August 7, 2018.
Shares of Tesla soared after the tweet, but fell after the proposal failed. The plaintiff, Glen Littleton, and other investors have asserted that Mr. Musk’s actions were responsible for their losses from Tesla’s stock movements.
The company, Mr. Musk and their lawyers defended the post and said it was not an act of recklessness.
Mr. Musk and Tesla settled a separate lawsuit brought by the SEC over his plans to take the company private. They paid the SEC a fine, and Mr. Musk agreed to step down as Tesla’s chairman and have lawyers review certain statements he made about the company on social media before releasing them.
The investor’s lawsuit will be heard in U.S. district court at a difficult time for Mr. Musk and Tesla. The company sold fewer cars than executives promised and analysts expected, forcing Tesla to cut prices. Twitter’s revenue has plummeted as many companies stopped advertising on the platform after Musk’s erratic behavior and decision to fire most of the company’s employees.
Legal experts say the case could prove difficult for Mr. Musk and Tesla. The senior district judge in the case, Edward M. Chen, ruled last year that he agreed with the plaintiffs that Mr. Musk’s 2018 Twitter post about taking Tesla private was false, in the words of investors. In other words, Mr. Musk was “willfully reckless in making his statement”.
“You’ve made summary judgments about reckless conduct and misrepresentations,” said Adam C. Pritchard, a law professor at the University of Michigan. “These are the two most common defenses that defendants win.”
Judge Chen did not side with investors in other parts of the case, though — which could give Musk a path to victory. Legal experts said plaintiffs would have to show that their losses in Tesla stock were related to a statement by Mr. Musk that the court found to be false, such as a claim that he owned the funds.
Mr. Musk could win the case if the jury finds that other of Musk’s statements are true and that they could have caused volatility in Tesla’s stock.
In court documents, his attorneys pointed to statements they believe fit that description. For example, one of Musk’s lawyers, Alex Spiro, argued that the volatility in Tesla’s stock could be driven by his “indisputably true” statement that “he is considering selling Tesla to privatization”.
“Any normal defendant would have settled the case, but he did have something worth trying,” Mr Pritchard said.
Tesla, Musk and Spiro did not respond to requests for comment.
While Mr. Musk has struggled to prove he has enough money to take Tesla private, he may seek new evidence and testimony to back him up in court. He insisted that Saudi Arabia’s Public Investment Fund agreed to provide financing.
Text messages between Mr Musk and Saudi fund regulator Yasir Al-Rumayyan emerged in court documents early last year. Mr. Musk asked the fund about its commitment to the deal, the sources said. Mr Al-Rumayyan responded that Tesla had not provided enough information.
“This is an extremely weak statement and does not reflect our conversations at Tesla,” Mr. Musk wrote in an August 2018 post. “You said you were absolutely interested in taking Tesla private and have wanted to do so since 2016.”
“It’s up to you Elon,” Mr Al-Rumayyan replied. “We cannot approve something for which we do not have sufficient information,” he added in a later text.
Musk’s legal team subpoenaed Mr. Al-Rumayyan and other employees of the Saudi fund in an attempt to force them to testify at the trial. But lawyers for the fund told the court on Thursday that the subpoena was “legally flawed” and “frankly, pointless.” The next day, Mr. Musk’s lawyers told the court they were no longer processing the subpoena.
A spokesman for Saudi Arabia’s Public Investment Fund did not respond to a request for comment.
Later in August 2018, Mr. Musk said in a blog post that Tesla would remain a public company.
The lawsuit takes Tesla back to a very different era. In 2018, the automaker struggled to ramp up production. Before long, the problems eased and sales climbed rapidly. The company started out doing so well that many investors thought it would dominate the auto industry. Tesla’s market cap exceeds $1 trillion.
But last year, investors reassessed the company’s prospects after the company reported disappointing sales figures and Mr. Musk sold a large number of shares to finance his acquisition of Twitter. Shares of Tesla have fallen about 65% in the last year.
Mr. Musk and his lawyers have tried to delay the trial, including last week asking Judge Chen to move the case to the Western District of Texas, which includes where Tesla will move its headquarters to Austin in 2021. The lawyers argued that the local media has been “filled” with “biased and negative stories about Mr. Musk” in the Bay Area, Tesla’s former home, to the detriment of jurors. Judge Chen rejected the request on Friday.
This is not Mr Musk’s only lawsuit.
In the U.S. Court of Appeals for the Second Circuit, he is seeking to end part of his agreement with the SEC. On that appeal, Mr. Musk argued that the terms of the settlement prohibiting him from making public statements about certain Tesla matters violated His First Amendment rights.
In Delaware Chancery Court, a Tesla shareholder is trying to cancel a huge compensation award awarded to Musk in 2018. A Delaware judge is likely to deliver his verdict in the next few weeks.