February 2023 | Volume 14, Issue 7

Read the full article on CNBC.

According to the article, Tesla CEO Elon Musk appeared in a San Francisco federal court recently to defend tweets he posted to his tens of millions of followers in August 2018.

The tweets said he had “funding secured” to take his electric vehicle company private for $420 per share, and that “investor support” for such a deal was “confirmed.”

Tesla’s stock trading initially halted after the tweets, then shares were highly volatile for weeks. Musk later said that he had been in discussions with Saudi Arabia’s sovereign wealth fund and felt sure that funding would come through at his proposed price. A deal never materialized.

The SEC charged Musk and Tesla with civil securities fraud after the tweets. Musk and Tesla each paid $20 million fines to the agency and struck a revised settlement agreement that required Musk to temporarily relinquish his role as chairman of the board at Tesla.

His 2018 tweets also triggered a shareholder class action lawsuit from Tesla investors. They alleged that Musk’s tweets misled them and said relying on his statements to make trades cost them significant amounts of money.

The shareholders’ trades in question took place during a 10-day period before Musk seemed to admit a take-private deal was not going to happen in 2018.

Musk said under oath in court that it’s difficult to link Tesla’s stock price to his tweets.

“There have been many cases where I thought that if I were to tweet something, the stock price would go down,” Musk said. “For example, at one point I tweeted that I thought that, in my opinion, the stock price was too high...and it went higher, which was, which is, you know, counterintuitive.”

It is rare for top executives at publicly traded companies to discuss their stock price because any commentary can influence price movements.

Daniel Taylor, director of the Wharton Forensics Analytics Lab and professor at the University of Pennsylvania, analyzed every trade in Tesla stock occurring on Aug. 7, 2018, the day that Musk tweeted. He calculated the total trading volume every minute from the time the market opened through the time of Musk’s tweets about a buyout. 

Taylor found that the trading volume the minute Musk tweeted, at 12:48 p.m. ET that day, was over $350 million, and the trading volume for Tesla shares the next minute was over $250 million. By comparison, the average volume five minutes before Musk tweeted was $32 million per minute. The minute before Musk tweeted, trading volume was $24 million.  

“It is generally true that correlation is not causation,” Taylor said to the media after Musk’s first day on the witness stand. “However, I am unaware of any alternative explanation for a 10-fold increase in trading volume the same minute that Elon Musk tweeted.”

Musk also testified about his low opinion of short sellers.

“I believe short selling should be made illegal,” Musk said, referring to short sellers as “bad people on Wall Street” who “steal” from other investors. He said they also plant stories in the media to “get the stock to go down” and will “do anything in their power to make a company die.”

Tesla was among the most heavily shorted stocks in August 2018, when Musk made the statements about taking Tesla private. Tesla’s share price surged about 10 percent during trading that day. Short sellers face enormous losses when shares in a particular company climb higher.

Some of the plaintiffs in the trial that underway claims that Musk’s “funding secured” tweets were intended to put upward price pressure on Tesla’s stock driving a so-called “short squeeze.”

Musk’s testimony is not yet complete, and the court plans to hear from him again.

Discussion Questions

  1. Explain the role of the U.S. Securities and Exchange Commission.
    The U.S. Securities and Exchange Commission (SEC) is an independent agency of the United States federal government that was created in the aftermath of the Wall Street Crash of 1929. The primary purpose of the SEC is to enforce the law against market manipulation. In addition to the Securities Exchange Act of 1934, which created it, the SEC enforces the Securities Act of 1933, the Investment Company Act of 1940, the Sarbanes-Oxley Act of 2002, and other statutes. The SEC has a three-part mission: (1) to protect investors; (2) to maintain fair, orderly, and efficient markets; and (3) to facilitate capital formation.

    According to the SEC:
    At the SEC, we work together to make a positive impact on America’s economy, our capital markets, and people’s lives.

    For more than 85 years since our founding at the height of the Great Depression, we have stayed true to our mission of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation.

    Our mission requires timeless commitment and unique expertise from our staff of dedicated professionals who care deeply about protecting Main Street investors and others who rely on our markets to secure their financial futures.
  2. Define civil and criminal securities fraud.
    Securities fraud is the misrepresentation or omission of information to induce investors into trading securities.

    While always actionable under common law fraud, the U.S. Congress, the Securities and Exchange Commission (SEC), and states provide for criminal and civil liability for securities fraud.

    The broadest federal anti-securities fraud measure is Rule 10b-5, promulgated under Section 10(b) of the Exchange Act of 1934. Under Rule 10b-5, individuals may be civilly liable if the plaintiff establishes the following elements: (1) that the individual misrepresented a material fact; (2) that the individual did so knowingly (i.e., with scienter); (3) that the plaintiff relied on the individual’s material misrepresentation; and (4) that the plaintiff’s reliance on the material misrepresentation caused their loss. If the SEC establishes those elements, the individual may also be criminally liable.

    State governments may also impose civil and criminal liability on individuals engaged in securities fraud. For example, Title 4 of the California Corporations Code provides that securities fraud in California may result in a fine, imprisonment, or both.
  3. Based on the information presented in the article, and in your reasoned opinion, did Elon Musk commit securities fraud? Why or why not?

    This is an opinion question, so student responses may vary. As indicated in the article, Musk’s tweets said he had “funding secured” to take his electric vehicle company private for $420 per share, and that “investor support” for such a deal was “confirmed,” this despite the fact that a deal based on discussions with Saudi Arabia’s sovereign wealth fund never materialized.

    As indicated in response to Article 1, Discussion Question 2, under Rule 10b-5, individuals may be civilly liable if the plaintiff establishes: (1) that the individual misrepresented a material fact; (2) that the individual did so knowingly (i.e., with scienter); (3) that the plaintiff relied on the individual’s material misrepresentation; and (4) that the plaintiff’s reliance on the material misrepresentation caused their loss. Regarding element 1, Musk misrepresented a material fact (more specifically, he stated that he had “funding secured” to take Tesla private when he in fact did not). Regarding element 3, it is your author’s opinion that the plaintiffs relied on the material misrepresentation (more specifically, they traded Tesla stock at a loss based on Musk’s misrepresentation—It seems a bit disingenuous for Musk to claim that there is no direct relationship between his public proclamations and the demand for Tesla stock). In your author’s opinion, the most significant issue in this case, and the greatest challenge for the plaintiffs, will be to prove that Musk made the “funding secured” tweet with the scienter (i.e., knowing that it would have a direct impact on Tesla’s stock value).