elon musk tesla funding secured lawsuit

The jury trial that will look into Elon Musk’s statements about his intention to take Tesla private has been going on for two days and the general public is wondering how much money the controversial CEO of the automaker is poised to lose if the proceeding ends up with an unfavorable ruling.

The class-action lawsuit led by Glen Littleton, a former Tesla investor who allegedly lost $3.5 million as a result of Musk’s misleading comments about the operation, has already won a pad on the back from the judge as a summary ruling from May last year asserted that the billionaire’s claims were false.

Why is Elon Musk Being Sued?

The lawsuit takes aim at one of Elon Musk’s most controversial – and probably illegal – tweets of all time, where he told the public that he was “considering taking Tesla private at $420” and that he had secured the required funding to pull that off.

On August 7 2018 when the tweet was published, the price of Tesla (TSLA) stock went up by 11% as investors took Musk’s word for granted. Typically, the acquisition of a public company results in premium payments of 20% or more above the market value of the firm at the time.

Notwithstanding the boldness of this claim, Musk confirmed that he had secured the required “investor support” and said that it was now up to shareholders to approve the transaction.

On that same day, Tesla – the company – published an internal memo sent by Musk to the company’s employees in which he explained the nature and scope of the tweet. He justified the decision by stating that Tesla would “operate best” as a private entity.

“This proposal to go private would ultimately be finalized through a vote of our shareholders. If the process ends the way I expect it will, a private Tesla would ultimately be an enormous opportunity for all of us”, the head of the electric vehicle manufacturer told his workers back then.

Six days after making these statements, another blog post was published in which Musk justified why he made public his intentions to take Tesla private. He reasoned that it would not be fair to reach out to just the firm’s largest shareholders and decided to tell everyone what he was thinking on the grounds that all shareholders should be equally informed.

Musk clarified why he claimed that he had secured the required funding for the transaction, telling the public that, after a conversation with officials from Saudi Arabia’s Public Investment Fund (PIF) that took place on 31 July 2018, he had “no question” that it was a done deal.

However, things took an apparently unexpected turn for Musk as the PIF backed down from their initial offering and opted to invest $1 billion into Lucid Motors (LCID) shortly afterward.

The SEC Fined Musk for His Misleading Claims

Just a month after Musk’s false claim, the United States Securities and Exchange Commission (SEC) slapped Tesla with a $40 million fine and forced the billionaire to step down as Chairman of the Board of the automaker.

According to the SEC, Musk knew that, at the time he tweeted, the completion of the transaction was still uncertain as it was subject to “numerous contingencies”.

“Musk’s misleading tweets caused Tesla’s stock price to jump by over six percent on August 7, and led to significant market disruption”, the SEC’s complaint asserted.

Even though the settlement did not include an admission of guilt by either Tesla or Musk, it remains a strong precedent that the jury may consider when they are ready to provide a ruling for Littleton’s class-action lawsuit.

How Much May the Plaintiffs Get If They Get a Favorable Ruling?

Littleton is claiming that he lost approximately $3.5 million from his investment in Tesla. He states that he was misled by Musk’s claims, which he for granted at the time, and the same goes for other investors, stock options traders, and even short-sellers whose positions and financial well-being were dramatically affected.

The lawsuit is seeking damages compensation for around $66.67 per share. At the time, there were approximately 170 million shares of Tesla in circulation and probably hundreds of thousands of stock options if not millions.

It is hard to estimate how much money Elon could lose if the jury delivers a ruling against him. However, the tab could easily stack up to a couple of billion. That said, these cases tend to be settled by the parties involved as it can take years before the legal proceeding is finished and Musk has the resources to drag things for as long as needed.

There is, however, reputational damage that may cost Musk much more than the few billions he may have to pay to these affected shareholders and that could weigh on the definitive outcome of this saga.

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