SEC Case Is `Early Christmas' for Suits Over Musk Tweet

(Bloomberg) -- The SEC’S lawsuit against Elon Musk is a gift for investors suing over his now-infamous Aug. 7 tweet because it provides all kinds of damning information they can use against him.

The monetary stakes in the private suits accusing Musk and Tesla Inc. of manipulating the market are high because the investors seek to recover hundred of millions of dollars in losses from stock price movements, whereas the U.S. Securities and Exchange Commission case is focused solely on penalizing Musk.

“The plaintiffs are dancing jigs over this,” said Stanford University Professor Joseph Grundfest, a securities law expert. He noted that settlements in private securities lawsuits tend to be higher when there’s a parallel SEC case. “For them it’s an early Christmas.”

The SEC case reveals facts based on emails, documents and interviews that private lawyers haven’t had access to yet, said Reed Kathrein, an attorney leading one of those investor cases. The agency’s complaint “strengthens our ability” to withstand Tesla and Musk’s attempts to get the private suits thrown out, he said.

Kathrein pointed in particular to a passage in Thursday’s complaint that’s meant to back up the regulator’s central claim that Musk falsely asserted he had secured funding to take the company private at $420 a share.

The SEC details a meeting with a sovereign investment fund that Musk has said offered him funding to take Tesla private and wanted to establish a Tesla production facility in the Middle East. It doesn’t offer specifics about who was present, but Musk himself disclosed in August that he met with representatives of Saudi Arabia’s sovereign wealth fund, and that’s who Kathrein thinks the SEC is referencing.

The revelation that there was no discussion during the meeting of a dollar amount or an acquisition is critical because “it shows that he had no reasonable basis for making his statements” about taking Tesla private, Kathrein said. Until the SEC complaint, investors didn’t know the details of that meeting, he said.

No Proposal

In another “powerful paragraph” in the complaint, the SEC alleges that Musk didn’t provide a proposal to Tesla’s board of directors and that he “didn’t contact existing shareholders” when he said he had funding, the lawyer said.

The process the private lawyers will use to piggyback on the SEC’s case is simple.

“They just amend their complaints to repeat verbatim the allegations in the SEC’s complaint,” Grundfest said.

But the professor also said the private investors don’t necessarily have an easy case because the primary plaintiffs are short sellers, and there are specific legal defenses that Musk and Tesla can rely on to fend off complaints centered around short selling.

“It will be much harder to defend the SEC’s action than the private party class action,” he said.

©2018 Bloomberg L.P.