Securities Litigation

So maybe it's not such a good idea for a volatile, impulsive chief executive to use his personal Twitter account to announce major policy shifts. No, no - not that one.

Everyone thought it would happen tout de suite, but the SEC finally filed its Tweet suit this week over Elon Musk's August 7 Tweet (to over 22 million followers): "Am considering taking Tesla private at $420. Funding secured."

Everyone cringed immediately about those last two words - a representation of fact. Especially because $420 a share was a substantial, if cannabis-tinged and arbitrary, premium. And because Tesla had been increasingly pressured by short selling, with short positions at that time of over $13 billion.

By the time the SEC got around to drafting it, though, the suit also encompassed three other tweets:

• "My hope is *all* current investors remain with Tesla even if we're private.
  Would create special purpose fund enabling anyone to stay with Tesla." [Neither he nor Tesla had seriously explored that, and their early information was that it likely wouldn't be possible]
• "Shareholders could either to [sic] sell at 420 or hold shares & go private." [He had no reasonable basis for that assertion]
• "Investor support is confirmed. The only reason why this is not certain is that it's contingent on a shareholder vote." [It wasn't and there were a great many other unresolved contingencies].

Maybe it was Musk's idea, but Tesla previously had filed a November 5, 2013 Form 8-K that Tesla intended to use Musk's Twitter account as means of disseminating material information to the public. CLO note to self: Re-examine Twitter's regulatory risks.

As we know, those Tweets moved the market for Tesla stock, which closed up almost 11% over the prior day - before NASDAQ suspended trading. And the Tweets also violated Exchange rules requiring notice before major material announcements, Twitter or not.

The Complaint details the glancing 35 to 45-minute discussion with Saudi sovereign fund officials in late July that resulted in no deal terms or details, but obviously dangled a tantalizing idea before Musk. He floated the naked idea to his Board on August 2, but it didn't go much further before the reckless Tweet. And the SEC expressly pleads reckless disregard of the truth as the scienter element of its Rule 10b-5 claim.

The SEC's suit seeks disgorgement, civil penalties, but most ominously, a D&O bar.

The Complaint in SEC v. Musk, No. 1:18-cv-8865 (USDC SDNY filed Sept. 27, 2018) is here: https://www.sec.gov/litigation/complaints/2018/comp-pr2018-219.pdf

Thomas K. Potter, III (tpotter@burr.com) is a partner in the Securities Litigation Practice Group at Burr & Forman, LLP. Tom is licensed in Tennessee, Texas and Louisiana. He has over 32 years' experience representing financial institutions in litigation, regulatory and compliance matters. See attorney profile.

© 2018 by Thomas K. Potter, III (all rights reserved).