At least one hurting Tesla shareholder has filed a lawsuit against the electric-car maker and Elon Musk in the wake of the CEO’s stock-roiling remarks on going private earlier this week, court filings out late Friday showed.
The suit is seeking class-action status and is believed to be the first to stem from the Musk statement that he wants to return the car maker to private ownership at a $420-per-share takeout yet retain some original shareholders in a complex relationship.
The legal action, which claims Musk schemed “to artificially manipulate the price of Tesla TSLA, +0.86% stock to completely decimate the company’s short sellers,” was filed in the U.S. District Court for the Northern District of California in San Francisco by shareholder Kalman Isaacs. Tesla had not yet responded.
Musk last Tuesday said he wants the company — which has struggled to meet production demands but is fresh off a mostly upbeat profit projection in its latest earnings report — free of the short-term accountability that shareholders demand and the “distracting” stock-price swings. He also hinted that some private funding was already lined up.
Musk has waged a heated feud on Twitter and elsewhere with equally vocal short sellers. These investors faced a paper loss of more than $1 billion collectively on the initial market reaction to the going-private tease last Tuesday, which sent shares up about 11% shortly after the statement hit. That move took the stock, at above $397, to its highest point since a Sept. 18 record high of $385. The stock couldn’t hold that pop; it closed Friday at $355.49.
August losses for Tesla shorts, if marked to market, would stand at $3 billion, with year-to-date losses to $3.2 billion and losses since 2016 to $6.6 billion, according to analytics firm S3 Partners LLC.
Tesla shares had climbed roughly 30% after its early-August earnings report, already bringing pain for shorts, who bank on a stock falling in price. Short sellers “borrow” the shares to sell them, hoping they can later pick them up at a lower price, return them to the original lender and pocket the difference.
Musk took a another swipe at short sellers in the going-private post: “As the most shorted stock in the history of the stock market, being public means that there are large numbers of people who have the incentive to attack the company.”
The highly unusual proposal that Musk has under consideration has drawn criticism over feasibility and has raised questions about sources of funding, even as Musk declared “funding secured” in the first post.
In the suit, Isaacs claims Tesla, its board, and Musk did not address the claim of from who, where and how the funding would be secured even as it met Wednesday to further discuss the going-private proposal.
“As an officer of a publicly held company, Defendant Musk had a duty to disseminate timely, accurate and truthful information with respect to Tesla’s businesses, operations, future financial condition, future prospects and the Proposed Acquisition Transaction,” the suit claims. Regulation Fair Disclosure, or FD, requires companies “to distribute material information in a manner reasonably designed to get that information out to the general public broadly and non-exclusively.”
The Securities and Exchange Commission is probing the public statement, the Wall Street Journal has reported. Investors initially weren’t sure if the proposal was legitimate as Musk has ”joke” tweeted false bankruptcy claims in the past.
Attention remains fixed on at least one investor as the funding question persists. Saudi Arabia’s sovereign wealth fund, which has more than $250 billion under management, has built an undisclosed stake in Tesla, the Financial Times reported Tuesday, citing people with direct knowledge of the issue. Its position fell below the 5% threshold that requires disclosure, but the fund is believed to be one of Tesla’s eight largest stakeholders.
Investors have also questioned an unusual, and potentially challenging, structure that Musk has proposed. In a follow-on tweet to the original posting, Musk explained that his “hope” is that all current investors would remain Tesla shareholders even if it goes private, which would be accomplished by creating a “special purpose fund.”
He compared it to what he and executives of his other private company do with “Fidelity’s investment in SpaceX.” Accounting experts have pointed out that special purpose funds are usually used for angel investors and small start-ups.