Tesla CEO and tech entrepreneur Elon Musk is being sued by one of the connected carmaker's own shareholders, who alleges that Musk illegally inflated Tesla's share price with his August tweets about taking the company private.
Andrew Left, a prominent activist shareholder, believes Musk's online actions were ultimately damaging to all Tesla shareholders and tantamount to securities fraud. He has filed a lawsuit against Musk in San Francisco's federal court through investor law firm Labaton Sucharow, representatives of which sent a copy of the filing to Light Reading.
That lawsuit alleges that Musk artificially manipulated the price of Tesla securities to damage the company's short sellers, noting that Musk has had a "long-standing public feud" with short sellers and that he has often been critical of them in tweets. The repercussions have been felt by all purchasers of Tesla securities, according to the filing.
Short selling is a controversial trading strategy based on the expectation that a stock will lose value. A short seller would typically borrow shares it does not own for a small commission, sell these at the current market price and then buy them back when the price has fallen. After returning shares to the lender, the short seller pockets the difference between the sale and purchase fees as a profit.
As Left's suit points out, Tesla's share price surged nearly 11% on August 7, closing at $379.57 that day, after Musk tweeted that he was considering taking Tesla private at $420 per share.
"Many short sellers were forced to cover their positions at artificially high prices, losing approximately $1.3 billion in a single day, according to media reports," says the filing.
Andrew Left said: "Defendants have injured all purchasers of Tesla securities during the class period who also purchased shares at artificially high prices."
The allegations of fraud surfaced after Tesla issued a statement on August 8 indicating that its board was still evaluating whether to take the company private. Musk had previously tweeted that: "Investor support is confirmed. Only reason why this is not certain is that it's contingent on a shareholder vote."
A subsequent report from the Wall Street Journal said US regulators were investigating whether Musk had been truthful about securing funding for the proposed buyout. Tesla's share price closed down 2.43% on August 8, at $370.34, and suffered even bigger falls later in the month after further disclosures. It was trading at just $280.95 on the Nasdaq at close of business yesterday.
"This appears to be a textbook case of fraud," said Michael Canty, a partner a Labaton Sucharow, in comments emailed directly to Light Reading. "We believe Musk attempted to manipulate the price of Tesla securities with false and misleading tweets, in a directed effort to harm short sellers."
Light Reading approached Tesla outside normal business hours for its response to Left's allegations, but had not heard back at the time of publication.
Musk is developing a reputation as the Donald Trump of the business world with his outbursts on Twitter. He was earlier caught up in a different type of controversy after a Twitter spat with one of the divers involved in the rescue of children from a flooded cave in Thailand.
The Tesla CEO's behavior during earnings call has also been unorthodox: In May, he accused analysts of asking "bonehead" questions and decided to take queries from a YouTube blogger instead.
Besides running one of the world's most hi-tech automotive companies, Musk is also the founder of SpaceX, which aims to pioneer a mission to Mars in future, and is involved in various other high-profile technology ventures.
— Iain Morris, International Editor, Light Reading