Elon Musk, co-founder and chief executive officer of Tesla Inc. Photographer: Patrick T. Fallon/Bloomberg

A federal appeals court is reviewing a San Francisco judge's order approving the lead plaintiff in consolidated class actions brought by shareholders over Tesla Inc. CEO Elon Musk's posts on Twitter last year.

The U.S. Court of Appeals for the Ninth Circuit ordered the lead plaintiff to respond by April 5 to an interlocutory appeal made by a competing institutional investor who claimed $3.8 million in losses due to Musk's alleged fraud. That investor, Bridgestone Investment Corp., argued that U.S. District Judge Edward Chen failed to comply with the Private Securities Litigation Reform Act when he selected a shareholder that could represent a diverse class of both stock purchasers and short sellers, rather than the one with the largest losses.

“While Bridgestone is aware of cases that hold that exclusive short sellers are atypical, it is aware of none (ever) holding that long investors with the largest loss should not be appointed as lead plaintiff,” wrote Bridgestone attorney Ramzi Abadou, a San Francisco partner at Kahn Swick & Foti, in a Jan. 4 petition for writ of mandamus.

On March 22, the Ninth Circuit ordered the lead plaintiff, Glen Littleton, represented by Levi & Korsinsky, to respond in 14 days, after concluding that the petition raised issues “that warrant an answer.” The Ninth Circuit also told Chen he could respond in that time frame.

Littleton claims to have lost $3.5 million. His lawyer, Adam Apton, of Levi & Korsinsky's Washington, D.C., office, did not respond to a request for comment, and Abadou and Chen declined to comment.

Chen has since granted a request by Musk, Tesla and its board members, represented by Fenwick & West, to halt proceedings in the case temporarily in light of the Ninth Circuit's order.

Shareholders sued after Musk posted an Aug. 7 tweet that he was “considering taking Tesla private at $420. Funding secured.” The surprise announcement sent shares soaring—then, falling—amid questions about the accuracy of his claims. News reports later revealed that no such deal was in the works, and Tesla's stock plummeted for the next 10 days.

On Sept. 29, Musk agreed to pay $40 million and step down as Tesla's chairman as part of a deal with the U.S. Securities and Exchange Commission. Last month, the SEC called for a federal judge in New York to hold Musk in contempt of court after he tweeted Tesla production estimates without prior approval from the company's general counsel, as required under the settlement agreement. Tesla's general counsel at that time, Dane Butswinkas, immediately left, replaced by in-house attorney Jonathan Chang.

In his Nov. 27 order, Chen rejected five other submissions, including those by institutional investors and short seller Andrew Left, to be lead plaintiffs. Left, who publishes the online newsletter Citron Research, alleged in his lawsuit that Musk intended to target short sellers with his Twitter post.

Chen raised concerns that Bridgestone was overstating losses and noted that it held only long positions. He picked Littleton, whose losses were the largest of those remaining and, even though they were mostly in options, contained a mix of both long and short positions.

On Dec. 17, Chen refused to reconsider his order, prompting Bridgestone's petition to the Ninth Circuit.

In its petition, Bridgestone also relied on a 2002 decision by the Ninth Circuit, In re Cavanaugh, which outlined how federal judges should comply with the PSLRA in appointing lead counsel. Chen's order, Abadou wrote, is unprecedented.

“The district court dramatically deviated from the PSLRA's and Cavanaugh's unambiguous mandates when it identified and then selected as lead plaintiff an applicant the district court determined had the most diverse financial 'experiences,'” he wrote in the petition. “Bridgestone is not aware of a single court ever holding under the PSLRA that a long investor was inadequate or atypical in a securities class action for that reason alone.”

But the cases against Musk are unlike most shareholder class actions, Apton wrote in Littleton's Dec. 10 opposition to Bridgestone's motion for reconsideration.

“Short investors and Musk's attitude towards them will be an important part of this case and it was reasonable, if not imperative, for the court to determine that an investor like Bridgestone who did not hold a short position cannot adequately prosecute this aspect,” he wrote.