Last Friday, billionaire Elon Musk won a securities fraud class action brought by some Tesla investors who complained that his bad tweets caused them to lose millions. Musk managed to pull this victory off with both hands tied behind his back.
Back in 2018, Tesla CEO Musk tweeted that he was planning to take Tesla private at $420 per share. He wrote, “funding secured.” He followed this with another tweet: “Investor support is confirmed. Only reason why this is not certain is that it’s contingent on a shareholder vote.” Tesla’s stock price skyrocketed. But the deal, if there ever was one, fell through shortly thereafter. That caused the share price to tank.
The Securities and Exchange Commission was paying attention. It sued Musk and Tesla for securities fraud. The parties settled before trial, with Musk giving up his CEO seat for at least three years and splitting a $40 million fine with Tesla.
That wasn’t the end of the matter, however. Some Tesla shareholders who sold Tesla stock at a loss filed a securities fraud class action against Musk and Tesla in San Francisco federal court. Given the settlement with the SEC, the plaintiffs’ lawyers probably thought they’d scored a litigation trifecta: SEC-endorsed fraud claims, a controversial defendant, and a potential damages award in the billions. Musk had a battle on his hands, and many were surprised that he chose not to settle before trial.
‘Would I Lie to You?’
Senior District Court Judge Edward M. Chen tied Musk’s first hand behind his back by ruling for the plaintiffs on two elements of their securities fraud claims. To win a securities fraud case, you have to prove several elements, including:
Misrepresentation: The defendant misrepresented a fact
Materiality: The fact was material in that it made a difference to an ordinary investor
Scienter: The defendant knew the statement was false or made the statement recklessly
Causation: The misrepresentation was the direct cost of investors’ losses
In most cases, the jury, not the judge, is supposed to hear the evidence and decide if these elements have been established. Not here, however. As Reuters noted, Chen ruled that the tweets were false (misrepresentation) and that Musk made them recklessly (scienter). So the plaintiffs went into the trial really only having to prove their losses, that those losses were directly caused by Musk’s tweets, and that the tweets made a difference to ordinary investors. They must have been jumping for joy.
“San Francisco Blues”
Chen tied Musk’s second hand behind his back by denying his request to send the case to Texas for trial. Federal judges can send a case to a different location — lawyers call this a “transfer of venue” — under certain circumstances. Musk’s lawyers wanted to flee San Francisco for a couple of reasons.
First, some courts are perceived by many lawyers to be more friendly to one side than the other. California is considered by many to be a plaintiff-friendly jurisdiction.
Not Texas. Many lawyers perceive Texas (except for the big cities) to be more defense-oriented than California. Musk’s lawyers, rightly or wrongly, thought his chances would be better in front of a Texas judge than before the Obama-appointed Judge Chen.
Hostile Jury Pool
Second, since his Twitter buyout, folks in San Francisco generally aren’t fans of Elon anymore. Forgive us for getting political, but it’s fair to say that most people in the Bay Area consider themselves left-of-center. When he took over Twitter, Musk laid off thousands of employees, including a large number from the San Francisco area. This didn’t sit well with the pro-labor populace.
Nor did Musk’s new content-moderation policies (or lack thereof) endear him to the locals. According to progressives, Twitter has become the wild west of social media, replete with rampant misinformation and disinformation. They certainly weren’t happy when Musk reinstated the accounts of many controversial right-wing celebrities, pundits, and politicians, including rapper Ye and former President Donald Trump.
Prospective jurors made their disfavor crystal clear in their responses to the jury questionnaire. When asked about their impressions of Musk, some of the kinder, gentler prospective jurors called him a “narcissist,” a “mercenary,” and said he was “not a very likable person.”
Musk and Tesla For the Win
The trial took three weeks. Musk testified for about eight hours. Closing arguments by plaintiffs’ lawyer Nicholas Porritt and Musk’s lawyer Alex Spiro took about three hours.
We waited less than two hours for the jury’s unanimous finding for Musk and the Tesla Board. This is a decisive victory (sometimes it takes two hours for a jury in a big case just to pick a foreperson and go through the jury instructions).
Kudos, Elon. And kudos, Elon’s lawyers.
Can Twitter Force Elon Musk to Buy It? (FindLaw’s Courtside)
So What Happens with Twitter Now? (FindLaw’s Law and Daily Life)
Twitter v. Musk: The Battle Begins (FindLaw’s Courtside)
Securities Fraud (FindLaw’s Learn About the Law)
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