Northern District Of California Denies Motion To Dismiss Putative Class Action Against Automaker Alleging Misstatements Based On CEO’s Social Media Posts
On April 15, 2020, Judge Edward M. Chen of the United States District Court for the Northern District of California denied a motion to dismiss a putative securities fraud class action asserting violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 against a designer and manufacturer of electric cars (the “Company”), its co-founder and CEO and its directors. In re Tesla Inc. Securities Litigation, No. 3:18-cv-04865 (N.D. Cal. Apr. 15, 2020). Plaintiff alleged that the statements made by the Company’s CEO on Twitter regarding securing funding for a going-private transaction were materially misleading. The Court denied defendants’ motion to dismiss for failure to state a claim, finding that plaintiff adequately pleaded falsity, scienter, and loss causation.
On August 7, 2018, the Company’s CEO posted the following message on his Twitter account: “am considering taking [Company] private at $420. Funding secured.” This tweet resulted in a number of subsequent exchanges on Twitter, in which the CEO confirmed the price (“420”), stated that the Company “[w]ould create special purpose fund enabling anyone to stay with the [Company],” and that “[s]hareholders could either to [sic] at 420 or hold shares & go private.” On August 13, 2018, the CEO posted another tweet stating that he was “excited to work with” financial and legal advisors on the going-private transaction, identifying them by name. On the same day, different media outlets reported that the named financial advisors were not working with the Company in an official capacity and that nothing had been finalized. Between August 15 and 17, 2018, major news outlets reported that there was an SEC investigation regarding the tweets and that the CEO stated in an interview that the going-private transaction was “far from secure” and that there was no financing commitment. Plaintiff alleges that the Company’s stock price increased after the tweets regarding the transaction and that it subsequently declined after the reports of the investigation and the interview.
Defendants moved to dismiss for on several grounds, including that the tweets were merely aspirational and not factual, that they were made by the CEO in his individual capacity and not on behalf of the Company, and that the complaint failed to adequately allege scienter. The Court disagreed. First, the Court opined that even statements of opinion could be misleading if they conveyed facts, which the tweets allegedly did by referencing a specific price of $420 and by identifying specific financial and legal advisors. The Court also found that the complaint had adequately alleged that a reasonable investor would read the tweets as statements of facts based on the affirmative nature of the statements and subsequent exchanges on Twitter confirming those statements. Second, the Court found that the CEO’s statements from his personal Twitter account were made within the scope of his authority, relying on the fact the CEO co-founded the Company, was on its Board, and that the Company had notified its investors in 2013 that additional information regarding the Company could be found on the CEO’s and Company’s Twitter accounts. Finally, contemporaneous correspondence that allegedly showed that the CEO was aware of significant hurdles to the transaction and that he harbored animosity against short-sellers, as well as the swift settlement reached with the SEC within a few days of the SEC’s complaint, in the eyes if the court, all supported an inference of scienter sufficient to survive the motion.