In today’s Finshots, we explain how Musk’s tweet from 2018 about taking Tesla private almost came back to haunt him
The Story
Tesla’s Technoking — yup, that’s Musk’s official title since 2021 — has a cult following. If he tweets that a particular cryptocurrency is the future of money, people buy it. If he says that everyone should buy a meme stock, they will. He has a massive sway over these people.
And when you’re someone who runs multiple companies — Tesla, SpaceX, Twitter — you have to be a tad bit careful about what you say. Especially when you’re tweeting stuff about the company’s future plans. You have to run it through compliance. You have to make sure you’re not revealing anything you’re not supposed to. Because there are certain rules in place to ensure how information can be made public. And importantly, you can’t piss off the regulators. They’ll come after you.
And on 7th August 2018, Musk really pissed off the Securities and Exchange Commission (SEC) in the US.
What happened, you ask?
He tweeted that he was “considering taking Tesla private at $420. Funding secured.” And within hours, the stock price jumped by over 6%.
See, when a public company announces that it’s going private, it needs to buy back shares from the public. But why will a public investor simply give up their shares? They’re in it to make money, right?
So, the company has to sweeten the deal. It says it’ll pay a premium to the investors. Give them some extra cash for their troubles. And Musk’s price of $420 was at a 20% premium to Tesla’s then share price. So investors rushed to buy shares. They thought the price would go up to $420.
But guess what?
The deal never happened. And the stock went down instead. People who believed Musk and bought shares were deceived. They lost money.
So, the SEC sued him. And investors in Tesla also sued him.
One allegation was that Musk’s tweets were ‘reckless’.
Now here’s the thing. Musk did not get out of bed on 7th August and simply think, “Hey, let me take Tesla private. I’ll tweet about it” He’d actually sent an email to Tesla’s board a week before that. His subject line was “Offer to Take Tesla Private at $420.”
Which means he’d probably spent at least a week with the idea floating in his head.
But CEOs don’t really tweet about a deal unless it’s 100% certain that it’s in the bag. Probably only after all parties sign on a dotted line. Otherwise, people might think that you’re intentionally trying to mislead investors. Or well, let’s say that CEOs don’t tweet till their company’s investor relations or communication team first puts out a press release.
But Musk said ‘funding secured’ based on a conversation he had with a Saudi Arabian fund. Just verbal. There was nothing in writing. There wasn’t any confirmation that they were really interested. Nothing. It was just wishful thinking that because he’s Musk, he can get the money.
And it’s not us saying that. Musk pretty much said that in court. “I’m Musk. People will give me money.”
Also, when the board asked Musk to clarify certain bits about taking Tesla private, he didn’t really do it. He just went along with his tweet.
So yeah, when a judge looked into the matter a few months ago, he was appalled. He said Musk was extremely reckless.
But there was still one matter left. See, some of Tesla’s investors were still calling the tweet a fraud. This basically translates to, “Did Musk tweet, run the price up, collapse it by saying ‘oops, no deal’, and then jump in to buy shares for himself at a lower price? ” Did he have any bad intentions?
So the matter went to trial. Not in front of a judge. But before of a jury. Now a jury in the US is just a hodgepodge of regular folks like you and me. They don’t have legal or financial expertise. But they listen to what the lawyers argue and then pass their own judgement.
The jury listened to what the lawyers said. Talked among themselves for 2 hours. Came back and said, “Nope, Musk wasn’t being malicious. Maybe it was a bad tweet. But he didn’t mean to hurt the investors.”
Essentially, they gave Musk a clean chit.
But here’s the thing. As we mentioned, the jury isn’t really made up of financial experts. What if they missed something? And we’re not disrespecting their intellect in any way. We say this because of what one jury member said after the trial and we quote, “[the case was] hard to sometimes understand in layman’s terms. I don’t understand stocks. I don’t invest in options.”
So, what if Musk wasn’t out to hurt your regular mom-and-pop retail investors? What if he had another target — the short-sellers?
For the uninitiated, these are the folks who make money when the price of a stock falls in value. They borrow a stock from someone and sell it at say $100. When the price falls, they buy it back at say $70. And return the stock to the original investor. The short-seller makes a neat profit.
Now Tesla has been attacked by short-sellers time and time again. Many of them, including some big names, believed, that Tesla is just hot air. So naturally, Musk hates short-sellers. And he wants short-sellers to be banned. He’d even tweeted saying that there would be a “short burn of the century.” This was in May 2018, mind you. Just a couple of months before his ‘Tesla is going private’’ tweet.
And maybe Musk really wanted to stick it to the short-sellers. Drive the price up and hurt them real bad.
So if the real target were the short-sellers, you could argue that the whole thing was a bit dubious. Especially when the deal wasn’t final. And apparently it cost short-sellers a whopping $1.3 billion when the price initially shot up! That was a temporary thing though. We don’t know how much they actually ended up losing. But still...
It seems like the investors’ lawyers couldn’t prove any of this. They couldn’t convince the jury. And that’s the end of the matter for now. Musk is free.
And maybe this is the vindication Musk needed to continue tweeting his mind. Will his tweets get crazier in the future? We don't know. But the SEC will surely be waiting for him to slip up.
Until then…
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