New Investor Suit Targets Board Over Musk Tweet on Financing to Take Tesla Private
A new shareholder lawsuit has accused the Tesla board of engaging in a conspiracy to cover up its failure to monitor CEO Elon Musk's "increasingly erratic" public statements, in a case that could set up the question of whether Musk's tweets qualify as company statements.
October 26, 2018 at 05:04 PM
5 minute read
A new shareholder lawsuit has accused the Tesla board of engaging in a conspiracy to cover up its failure to monitor CEO Elon Musk's “increasingly erratic” public statements, in a case that could set up the question of whether Musk's tweets qualify as company statements.
The derivative complaint, filed Thursday in Delaware federal court, is the latest to target Musk and the Tesla directors over a series of missteps from the outspoken executive, including a tweet in which Musk said that he had “funding secured” to take the Palo Alto, California-based carmaker private at $420 per share.
In a 64-page complaint, plaintiff Ross Weintraub said the board had “completely abdicated” its duty to oversee Musk's public social-media posts in an attempt to protect their own positions with the company.
“In taking such actions to substantially assist the commission of the wrongdoing complained of herein, each of the individual defendants acted with knowledge of the primary wrongdoing, substantially assisted the accomplishment of that wrongdoing, and was aware of his or her overall contribution to and furtherance of the wrongdoing,” Weintraub said in the filing.
According to the complaint, Tesla's chief financial officer has described Musk's tweets as a “strong channel of marketing,” and the company, as early as 2013, had directed its investors to follow Musk's account for announcement about new products and services. Weintraub said that the directors had given Musk “carte blanche” to make public statements about Tesla to his 22 million followers on the popular social-media platform, and no one at the company ever reviewed Musk's tweets before they were published.
“The individual defendants failed to implement any disclosure controls, procedures or protocols to assess whether the information published by Musk via his Twitter account was required to be disclosed in Tesla's Exchange Act reports within the time periods specified by the [U.S. Securities and Exchange Commission's] rules and forms. Nor did Tesla have sufficient processes in place to ensure the information E. Musk published via Twitter was accurate or complete,” the complaint said.
The issue came to a head Aug. 7, when Musk posted that he had funding in place to take Tesla private. The only contingency, he said in a later tweet, was a shareholder vote to ratify the deal. The surprise announcement sent Tesla's stock soaring before it was revealed in the following days that Musk never had the financial backing to support a go-private bid.
The incident sparked an SEC lawsuit and a criminal investigation by the Federal Bureau of Investigation into the company's public statements. Musk and Tesla settled the SEC action in late September, agreeing to pay a combined $40 million in penalties and committing to reforms in the company's corporate governance structure. Musk, who did not admit guilt, was barred from serving as Tesla's chairman for a period of three years.
The FBI probe remains ongoing, and The Wall Street Journal reported Friday that investigators are examining whether Tesla mislead investors about the company's business and production of Model 3 sedans dating back to early 2017.
Musk's go-private tweet sent shock waves through the market, causing Tesla's stock price to surge before plummeting on the news that a deal was not actually in the works. Weintraub's complaint detailed some of the behind-the-scenes reaction to the “market chaos” of Aug. 7, as Tesla officials scrambled to respond to questions from analysts and investors.
According to the filing, Tesla's head of investor relations texted Musk's chief of staff just 12 minutes after the tweet was published, asking, “was this text legit?” Later in the day, a research analyst asked if there was a commitment letter in place or whether Musk was referring to a verbal agreement, to which the official responded: “I actually don't know, but I would assume that given we went full-on public with this, the offer is as firm as it gets.”
Despite the confusion, the board never made any attempts to clarify Musk's statements, and the executive kept tweeting, Weintraub said.
The complain also cites other problematic tweets from Musk, in which he accused a British diver working to rescue a trapped youth soccer team of pedophilia and joked that Tesla was bankrupt.
Tesla is currently facing nine securities class actions in California federal court over the tweet and its effect on the company's stock. Last week, another investor filed a separate derivative suit in Delaware Chancery Court to recover “significant sums of money” for the director's alleged “gross mismanagement” for failing to monitor Musk's Twitter account.
Weintraub, who is represented by Wilmington's Rigrodsky & Long and Hynes Keller & Hernandez in New York, is seeking money damages and changes to Tesla's governance, including an amendment to the company's bylaws, which would allow investors to nominate at least three candidates for election to the board.
The case, filed in the U.S. District Court for the District of Delaware, is captioned Weintraub v. Musk. It has not yet been assigned to a judge.
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