In re Tesla, Inc. Sec. Litig.

477 F.Supp.3d 903

IN RE TESLA, INC. SECURITIES LITIGATION.

Case No. 18-cv-04865-EMC

United States District Court, N.D. California.

Signed April 15, 2020

ORDER DENYING PLAINTIFF'S MOTION TO CONVERT OR, ALTERNATIVELY, TO STRIKE; GRANTING DEFENDANTS' REQUEST FOR JUDICIAL NOTICE; AND DENYING DEFENDANTS' MOTION TO DISMISS

EDWARD M. CHEN, United States District Judge

This consolidated class action lawsuit arises from Elon Musk's Twitter and blog post(s) in which he openly discussed funding for a transaction to take Tesla, Inc. ("Tesla") from a publicly-traded company to a private company. Lead Plaintiff Glen Littleton is a shareholder—and seeks to represent a class of shareholders—who purchased or sold Tesla securities during the relevant time period. Plaintiff alleges that Mr. Musk's social-media posts contained false statements, which led to a trading frenzy that artificially drove up the value of Tesla's shares. Mr. Musk, Tesla, and Tesla directors¹ (collectively, "Defendants") are the named defendants in this lawsuit. Pending before the Court is Defendants' motion to dismiss the Consolidated Complaint. Docket No. 227 ("Mot."). Plaintiff opposes the motion to dismiss, but he also moves to convert Defendants' motion to a motion for summary judgment or, in the alternative, to strike the motion or portions thereof. Docket No. 233 ("MTC").

I. PROCEDURAL BACKGROUND

This action is a consolidation of nine lawsuits.² The Court granted Glen Littleton's motion to serve as Lead Plaintiff under 15 U.S.C. § 78u-4(3)(B)(ii). Docket No. 152. Mr. Littleton subsequently filed the Consolidated Complaint on behalf of himself and those similarly situated. Docket No. 184 ("Compl."). The Consolidated Complaint alleges Mr. Musk and Tesla violated Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j, and SEC Rule 10b-5, 17 C.F.R. 240.10b-5. Id. ¶ 1. It further alleges that Tesla's Board of Directors violated Section 20(a) of the Securities Exchange Act, 15 U.S.C. § 78t. Id. This action seeks to represent a class of shareholders who purchased and/or sold Tesla stock from August 7, 2018 to August 17, 2018 (the "Class Period"). Id.

II. FACTUAL BACKGROUND

The Court must assume all factual allegations³ in the Consolidated Complaint as true, liberally construe them, and draw all reasonable inferences in Plaintiff's favor. In re Xytronyx Sec. Litig. , 1992 WL 427475, at *2 (S.D. Cal. Oct. 14, 1992) (citing Plaine v. McCabe , 797 F.2d 713, 723 (9th Cir.1986) ). As discussed below, however, the pleadings are subject to the requirements of PLSRA and Federal Rule of Civil Procedure 9(b). The Consolidated Complaint alleges the following:

A. Tesla's Vehicle Production

Mr. Musk is the co-founder, former Chairman of the Board, and current Chief Executive Officer of Tesla, which "designs, develops, manufactures, and sells electronic vehicles." Compl. ¶¶ 2, 38. Tesla produces the Model S, the Model X, and the Model 3. Id. In 2012 and 2015, the Model S and Model X experienced production issues, so investors closely followed Tesla's 2017 rollout of the Model 3, which was anticipated to be built in large quantities due to it being a mass-market sedan. Id. ¶¶ 38, 39. From October 2017 through January 2018, Tesla experienced production problems for its Model 3 because of issues related to manufacturing lithium-ion battery cells. Id. ¶¶ 40, 44.

These production difficulties led numerous short-selling investors to target Tesla. Id. ¶ 45. As one example pled in the Consolidated Complaint, Stanphyl Capital pursued a significant short-term investment in Tesla; a CNBC report subsequently quoted this investor making the following statement:

While I've no doubt that Tesla will eventually work out its Model 3 vehicle production problems, the base model will cost Tesla at least mid-$40,000s to build. The company will never deliver more than a token few for less than the current 400,000 a year. And even at those higher prices Tesla will never come anywhere close to its promised [profitability].

Id. (alteration in original). At the end of January 2018, Tesla's short interests were 30 million shares, which amounted to 18% of the company's outstanding shares. Id. ¶ 46.

On April 3, 2018, Tesla revealed in a press release that instead of producing 2,500 Model 3 vehicles per week as promised, it was producing slightly more than 2,000. Id. ¶ 47. Based on this shortcoming, the Wall Street Journal published an article describing Mr. Musk's reputation for setting "ambitious deadlines that he fail[ed] to meet on time." Id. The same day, Tesla's short interest grew to 32 million shares, representing 19% of its outstanding shares. Id. ¶ 48. A week later, on April 11, 2018, a CNBC article entitled "Tesla is the biggest short in the US stock market " reported that Tesla had $10.7 billion in short shares, which was more than 25% of Tesla's available stock. Id. ¶ 49.

B. Mr. Musk's Public Animosity Towards Short -Selling Investors

According to the Consolidated Complaint, Mr. Musk publicly displayed his animosity to those who were short-selling Tesla stock. Id. ¶ 50. On May 2, 2018, Mr. Musk responded to analysts' questions about Tesla's first-quarter earnings by responding "Boring, bonehead questions are not cool, Next?" and "These questions are so dry. They're killing me." Id. On Twitter, Mr. Musk defended his answers by posting "two sell-side analyst who were trying to justify their Tesla short thesis." Id. He further tweeted the following: "Oh and uh short burn of the century comin [sic] soon. Flamethrowers should arrive just in time." And immediately after, he posted "Looks like sooner than expected. The sheer magnitude of short carnage will be unreal. If you're short, I suggest tiptoeing quietly to the exit ...." Id. ¶ 52.

On May 7, 2018, Mr. Musk bought $9.85 million worth of Tesla shares to force a burst of the short-covering, which caused Tesla's stock price to increase from $297.50 to $302.77. Id. ¶ 53. Mr. Musk did this again on June 12, 2018 to maintain Tesla's stock price while Tesla laid off 46,000 employees (roughly 9% of the workforce). Id. ¶ 54. A few days later, Mr. Musk tweeted that "[the shorts] have about three weeks before their short position explodes." Id. ¶ 55 (alteration in original). By the end of July 2018, Tesla's short-stock interest was 35 million shares (20% of outstanding stock). Id. ¶ 62.

C. Mr. Musk's Meeting with Saudi Arabia's Public Investment Fund

On July 31, 2018, Mr. Musk met with representatives from the Public Investment Fund ("PIF"), which expressed interest in taking Tesla private, if Tesla agreed to build a production facility in the Middle East. Id. ¶ 63. No decision resulted from this meeting. Id. ¶ 64. On August 2, 2018, Mr. Musk sent an e-mail to Tesla's Board of Directors, CFO, and General Counsel with a subject line reading "Offer to Take Tesla Private at $420" in which he explained the move would avoid the "constant defamatory attacks by the short-selling community" and requested the "matter be put to a shareholder vote at the earliest opportunity" because the "offer expires in 30 days." Id. ¶ 69.

In response to Mr. Musk's e-mail, the Board held a conference call on August 3, 2018, during which Mr. Musk revealed that PIF was interested in funding a transaction for Tesla to go private, conditioned on Tesla building a production facility in the Middle East. Id. ¶ 72. According to Paragraph 72 of the Consolidated Complaint, "On August 3, 2018, in response to Musk's email, the Board held a telephonic meeting at which time Musk informed the board that the Public Investment Fund was interested in funding a going-private transaction and that the fund was interested in having Tesla build a production facility in the Middle East."⁴ Some Board members considered the condition of having a Middle East production facility to be a "non-starter," and others described it as "really difficult for small investors" to retain shareholders. Id. However, the Board authorized Mr. Musk to contact investors to gauge their interest in participating in such a transaction. Id. On August 6, 2018, Mr. Musk spoke with a private equity fund partner who described the structure of Tesla's contemplated move as "unprecedented" in his experience because Mr. Musk desired the number of shareholders in a private Tesla to be less than 300, but Tesla had over 800 institutional investors at the time. Id. ¶ 73.

D. Mr. Musk's August 7, 2018 Tweet And Subsequent Tweets/E-mails/Blog Posts

On August 7, 2018,⁵ Mr. Musk posted the following message on his Twitter account: "Am considering taking Tesla private at $420. Funding secured. " Id. ¶ 74 (emphasis added). According to the Consolidated Complaint, this tweet resulted in the following exchange of text messages:

• Martin Viecha, Tesla's Senior Director of Investor Relations, sent a text message to Mr. Musk asking, "Was this text legit?"

• A Tesla investor texted Sam Teller (Tesla's Director, Office of the CEO) asking, "What's Elon's tweet about? Can't make any sense of it. Would be incredibly disappointing for shareholders that have stuck it out for so long."

• A reporter also texted Mr. Teller saying, "Quite a tweet! (Is it a joke?)."

Id. ¶¶ 74–76. Further, Mr. Musk responded to comments related to his tweet and posted new tweets:

• A Twitter user asked, "At what price?" and Mr. Musk responded "420."

• Mr. Musk tweeted, "I don't have a controlling vote now & wouldn't expect any shareholder to have one if we go private. I won't be selling in either scenario."

• Mr. Musk then tweeted, "My hope is *all* current investors remain with Tesla even if we're private. Would create special purpose fund enabling anyone to stay with Tesla. Already do this with Fidelity's SpaceX."

• A Twitter user asked, "Could we still invest once private?" to which Mr. Musk responded, "Yes, but liquidity events would be limited to every 6 months or so (like SpaceX)."

• Another Twitter user posted, "Or if you do take Tesla private, please have a provision for

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