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article imageTesla's Elon Musk facing lawsuits from 'short-sellers'

By Karen Graham     Aug 11, 2018 in Business
Elon Musk's bombshell announcement that he is thinking of taking the electric car company Tesla private has landed him a lawsuit from some unhappy Wall Street investors.
Three days after Elon Musk tweeted that he had "funding secured" to take Tesla private, some angry investors are crying "foul." claiming they have lost money, reports the BBC.
After Musk made his initial announcement via Twitter, claiming he may have a deal worth $72 billion, valuing the company at $420 a share, Tesla shares rose 11 percent to nearly $380 (£298), But soon after, shares dropped back down.
On Friday, stock trader Kalman Isaacs filed a class-action lawsuit - arguing that Elon Musk's tweets on Tuesday constituted securities fraud., according to ArsTechnica.
The lawsuit, first reported by Reuters, appears to be the first one claiming that Musk's Tuesday tweets violated federal securities law.
Elon Musk faces pressure over ramping up production of Teslas to meet consumer demand
Elon Musk faces pressure over ramping up production of Teslas to meet consumer demand
Market volatility created by short-sellers
Musk, who owns one-fifth of the company, is really not a "Wall Street hanger-oner," but owing to Tesla's capital investment requirements, he has been forced to live with the need to have a Wall Street presence. The one thing he really doesn't like is the "negative propaganda" from short-sellers.
Short-sellers are one of the reasons he wants to take the company private - to protect Tesla from the distractions of share price volatility and pressure to meet quarterly financial targets.
According to data provider IHS Markit, $13 billion worth of Tesla shares have been loaned to investors for bets that their value will plummet. There is even the suggestion that Musk's tweets about taking Tesla private were in response to the bets.
“Being public means that there are large numbers of people who have the incentive to attack the company,” he said in a letter to employees.
Tesla shares were in a tailspin after CEO Elon Musk got into a Twitter spat with a British diver ove...
Tesla shares were in a tailspin after CEO Elon Musk got into a Twitter spat with a British diver over the Thai cave rescue
Alberto E. Rodriguez, GETTY/AFP/File
The lawsuit against Elon Musk
Mr. Isaacs is a short-seller, and this is apparently legal on Wall Street, even though another short-seller, Carson Block of Muddy Waters Capital says, “Short-sellers are not ever going to be loved by Wall Street in the US, but we’re pretty lucrative for banks, because of the borrow fees we pay. We’re largely tolerated."
Mr. Isaacs, at some point before Musk's Tuesday tweet, borrowed 3000 shares of Tesla with the intent to sell them, betting that the price would fall and he would eventually be able to buy them back at a discount, pocketing the difference. That is how short-sellers make money.
However, Isaacs lost money on his deal. After Musk's tweet, Tesla shares rose, and Isaacs was frantic. If Musk really did close a $420-a-share buyout deal, Isaacs would have needed to come up with around $420 for each of those 3,000 shares he had borrowed. The next day, Isaacs panicked and closed out his short position early by buying Tesla shares at the then-current price of $376.
In the class action lawsuit filed by Isaacs, he argues that Musk doesn't actually have funding secured. And if that's true, then Musk violated US securities laws, which prohibit a CEO from spreading false or misleading information about a company in order to manipulate its stock price.
Isaacs is seeking approval to become the lead plaintiff in a class-action lawsuit representing all Tesla shareholders who traded after Musk's tweet on Tuesday or at any time on Wednesday. William Sjostrom, an expert on securities law at the University of Arizona. says this is a common tactic in securities legislation.
"There's this huge culture of these securities plaintiffs' firms," Sjostrom told Ars on Wednesday—before Isaacs' lawsuit was filed. Sjostrom said that "firms are geared up to file suits immediately," often using "cookie-cutter complaints."
It is claimed that Tesla is the “most shorted stock in the history of the stock market.” Globally, that distinction goes to Alibaba, the Chinese e-commerce group with American Depositary receipts traded on the New York Stock Exchange.
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