Tesla wants redo on ruling that Musk’s ‘funding’ tweets were false
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Tesla CEO Elon Musk speaks in Los Angeles, California, U.S., June 13, 2019. REUTERS/Mike Blake
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April 25 – As Tesla Inc CEO Elon Musk finalized his $44 billion deal to acquire Twitter Inc, Tesla defense lawyers pushed to undo a trial court ruling that Musk’s 2018 tweets about taking Tesla private were false and issued with fraudulent intent
Tesla counsel from Quinn Emanuel Urquhart & Sullivan filed a pair of motions on Friday, casting doubt on the viability of a still-sealed summary judgment decision by U.S. District Judge Edward Chen of San Francisco. Chen ruled earlier this month that Musk recklessly tweeted false information when he said in August 2018 that he had secured funding to take Tesla private at $420 per share. (As I’ve previously reported, shareholder lawyers from Levi & Korsinsky disclosed the substance of Chen’s ruling in their failed bid for a gag order on Musk.) In the new Tesla filings, the company asked Chen for leave to seek reconsideration of the summary judgment decision and permission to seek interlocutory review from the 9th U.S. Circuit Court of Appeals if the trial leaves his decision intact.
The Tesla motions provide more details about the specifics of Chen’s summary judgment decision, which remains unavailable to the public. Crucially, according to Tesla, the trial judge refused to grant shareholders summary judgment on the question of whether the market relied on Musk’s tweets about funding and investor support for the deal to take Tesla private, citing inconclusive evidence about whether the allegedly false statements within the tweets actually impacted Twitter’s share price.
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Tesla said in its new motions that Chen was right to leave it up to jurors to decide whether the allegedly false statements were of material importance to investors – and wrong to ignore the question of materiality when he decided, as a matter of law, that Musk’s tweets contained false statements and that the Tesla CEO acted with scienter when he posted them.
“All three elements — falsity, scienter and reliance — require materiality, and the standard of materiality is identical for all three elements,” Tesla argued in the motion for reconsideration. “If the evidence fails to show as a matter of law that the statements were material to investors so as to move the market price and thus evince reliance, then the evidence cannot show as a matter of law that the statements were materially false or that Mr. Musk acted with the requisite scienter as to the truth of a material fact.”
In Tesla’s separate motion for leave to appeal, Quinn Emanuel argued that the 9th Circuit should decide whether, in the context of a securities class action, materiality is a prerequisite for a finding that statements were false and made with fraudulent intent. Tesla said the U.S. Supreme Court has already “strongly suggested,” in 2013’s Amgen Inc v. Connecticut Retirement Plans, that materiality must be defined the same way across all of the elements of a securities fraud claim. Any uncertainty about that interpretation, Tesla said, ought to be resolved by the 9th Circuit before the Tesla class action goes to trial next January.
Tesla also argued that the appeals court should weigh in on whether trial judges must use the same standards for evaluating falsity and scienter when statements are posted on social media – and, in particular, on Twitter, which restricts the number of characters in every post – that they apply to statements appearing in more formal contexts, such as regulatory filings.
Shareholder lawyer Nicholas Porritt of Levi & Korsinsky said Tesla has offered no substantive reasons to revisit Chen’s summary judgment ruling. That decision, he said by email, “was well-reasoned and supported by a thorough review of the evidence, including the evidence cited by defendants in their recent motion.” Tesla and Musk, Porritt said, “essentially repeat arguments that have already been heard and rejected by the court.”
Tesla counsel Alex Spiro and Kathleen Sullivan of Quinn Emanuel did not respond to my email query on the filings.
It’s extremely unusual, as Tesla pointed out in its motion for leave to seek reconsideration, for a judge overseeing a shareholder class action to decide falsity and scienter as a matter of law, rather than leaving it up to a jury to figure out whether defendants intentionally misled investors. Tesla said it has not found any other case in which a court has granted summary judgment in similar circumstances, “where the statements were at best ambiguous and were issued in the word-constrained and informal context of posts on Twitter.”
9th Circuit precedent, Tesla said, calls for materiality and intent “ordinarily” to be left to jurors. By taking those decisions away from a jury, the company argued, Chen overlooked important facts about Musk’s interactions with officials from Saudi Arabia’s Private Investment Fund, including evidence that Musk believed the Saudi fund was prepared to back his bid to take Tesla private.
At the very least, Tesla said, Chen should modify his summary judgment ruling to clarify that jurors may consider whether Musk’s statements were materially false and ill-intended in order to reconcile his holdings on reliance, falsity and scienter. That clarification, Tesla said, would give defendants leeway to argue that Musk’s statements weren’t fraudulent.
Interestingly, Tesla’s briefs cite Supreme Court precedent from cases addressing price impact and the certification of shareholder classes. (As you know, the justices’ latest attempt to disentangle the strands of materiality and class certification came last year in Goldman Sachs Group Inc v. Arkansas Teacher Retirement System.) The Supreme Court has held that defendants in shareholder class actions can defeat class certification by showing that alleged misstatements did not impact the company’s share price, acknowledging in last year’s Goldman ruling that the materiality of the alleged misstatements overlaps with the statements’ impact on the market.
Tesla’s previous defense lawyers from Cooley chose not to oppose class certification by contesting the price impact of Musk’s allegedly false tweets, instead stipulating to a class in November 2020. It’s not clear, since we still haven’t seen Chen’s actual summary judgment ruling, whether Tesla’s price impact arguments against summary judgment for shareholders on the issue of reliance might have allowed the company to contest class certification.
(NOTE: This column has been updated to reflect an agreement struck for Musk’s acquisition of Twitter.)
Read more:
Twitter set to accept Musk’s $43 billion offer
Musk gag order bid was doomed, but shareholders didn’t walk away empty-handed
Judge rules Musk’s tweets over taking Tesla private were false, investors say
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Alison Frankel