Tesla ( TSLA ) CEO Elon Musk is expected to be called to testify as soon as Friday in a federal trial in California to settle Tesla shareholder claims for billions of dollars in damages against Musk and the company’s board.
Tesla shareholders launched their case against the boss on Wednesday, following opening statements from Musk’s lawyer outlining the Tesla boss’s defense of a 2018 tweetand said he had “secured funding”[ads1]; to take the electric car company private.
On Friday, New Jersey resident Timothy Fries became the second of two Tesla shareholders to testify called to the stand. Fries said that relying on Musk’s tweet caused him to lose about $5,000 in Tesla stock transactions.
“I assumed Elon was speaking for the board,” Fries said of Musk’s claim that he had secured financing to take Tesla private. Fries said he invested about $18,000 in Tesla on Twitter Day on August 7, 2018, and then sold at a loss when the deal didn’t go through.
On cross-examination, Fries admitted that despite the tweet, he understood that a deal to take Tesla private had not been finalized.
“I knew it was still being negotiated,” he said in response to questioning from Musk’s lawyer.
The class of Tesla shareholders who filed the lawsuit alleges that Musk’s tweet about financing on August 7, 2018 was false and therefore violated US securities laws. They trusted the information to be true, they claim, leading to trading losses over a 10-day period beginning on the day of the tweet.
Shareholders say the new information in the tweet sent Tesla’s stock price soaring because the $420 per share offer that Musk tweeted represented a 20% premium to its trading price. The stock then fell below where it had been before the tweet. (Tesla’s stock has since had two stock splits and currently trades around $129 per share.)
“These tweets are casual, sporadic thoughts,” Musk’s attorney Alex Spiro told jurors Wednesday of the deal that never materialized. Musk’s choice of words may have been reckless, Spiro said, although the tweet reflected a “split-second decision” to benefit — rather than harm — investors.
According to Spiro, at the time of the tweet, Musk had already held a series of private meetings with executives from Saudi Arabia’s public investment fund. The fund’s executives, he said, agreed to a handshake deal to take Tesla private at $420 a share.
That commitment, Spiro said, led Musk on Aug. 2 to email Tesla’s board with a private, “informal” offer to buy the company at that price. The bid, he added, positioned Musk as a counterpart to his own directors.
“He was more than just considering” taking Tesla private, Spiro told jurors about Musk’s thought process in making the tweet. “He was the bidder.”
However, Musk’s responsibility to Tesla shareholders changed on Aug. 7, Spiro said, when a report published in the Financial Times cited an anonymous source who revealed what Musk already knew — that the Kingdom of Saudi Arabia had been buying up shares on the open market, which making its sovereign wealth fund one of Tesla’s largest shareholders.
Knowing that he had previously engaged in non-public conversations with the fund and that shareholder information must not be selectively disclosed to shareholders, Musk abruptly tweeted the opportunity to go private, Spiro told jurors.
Spiro went on to say that everyone in the room at the time the Saudi fund committed to taking Tesla private would support the deal, and that the fund’s chief executive agreed to “do whatever it takes” to privatize the then-struggling EV company.
Spiro turned to one subsequent tweet from August 7, 2018 from Musk confirming his “funding-secured” post, saying only shareholder approval was needed to close the deal, as well as a blog post the same day that provided further details about the contingency on Tesla’s website.
The blog clarified that Tesla had not yet made a final decision on the take-private deal. And Spiro played down the word “only” in Musk’s secondary tweet, saying the lack of market response to Tesla’s blog post shows Musk’s tweets didn’t move the often-volatile stock.
“These tweets…they are important to the plaintiffs’ lawyers. They didn’t matter to the market,” Spiro said.
The shareholders’ first witness, class representative Glen Littleton, took the stand Wednesday after both parties gave opening statements.
Littleton testified that he liquidated his call-and-put options on Tesla when he learned of Musk’s initial tweet.
When he saw the words “funding secured,” he said, he started dumping his positions because he was out of the money at Musk’s stated $420 go-public price. Both sets of his options, Littleton said, would quickly drop to $0 if the deal materialized.
In a separate case filed by the US Securities and Exchange Commission in response to the funding tweet, Musk and Tesla settled the case, each paying a $20 million fine. Musk also agreed in the agreement to step down as Tesla’s chairman and allow Tesla’s general counsel to review potentially “material” tweets before they are posted. Musk is currently seeking to have that portion of the settlement dissolved.
Musk is expected to testify after testimony from the shareholder’s expert witness, Harvard Law School professor Guhan Subramanian.
Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis on Twitter @alexiskweed.
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