Lawsuit Alleges Elon Musk Used Inside Information for $7.5 Billion Tesla Stock Sale

Elon Musk had inside knowledge of a production and delivery miss that Tesla Inc. (NASDAQ: TSLA) was facing when he sold more than $7.5 billion in stock in 2022. Or, at least that is what is claimed by a shareholder in the latest class action lawsuit to be filed against the electric vehicle maker.

Tesla’s chief executive officer had nonpublic information that Tesla would miss the fourth-quarter targets in 2022 when he sold the shares, Tesla investor Michael Perry alleged in the suit, filed Thursday in Delaware Chancery Court.

By relying on that information when selling part of his Tesla stake for funds to bolster his buyout of the social media platform X (fka Twitter), Musk “exploited his position at Tesla, and he breached his fiduciary duties” to the company and its shareholders, Perry said in the complaint.

“Musk profited from his misconduct and his exploitation of material and adverse inside information,” the suit alleges. Perry asked Judge Kathaleen St. J. McCormick to order Musk, the world’s second-richest person, to return the profit from his allegedly improper trading to the company.

Alex Spiro, a lawyer for Musk, didn’t immediately return an email Friday seeking comment on the lawsuit.

It’s the latest dispute over Musk and his stock purchases, sales and talk. The suit comes in the same week the 52-year-old billionaire agreed to sit for a third round of questioning by the US Securities and Exchange Commission (SEC) in its probe of his Twitter acquisition and whether he properly disclosed his initial stake in the company.

Earlier, after clashing with the SEC over a Twitter post he made about taking Tesla private, he incurred a fine and was forced to accept a “Twitter sitter,” a Tesla lawyer to screen his communications about the company.

In his lawsuit, Perry also names as defendants Tesla directors for allegedly failing to make sure Musk complied with his legal obligations in making the stock sales and statements about the carmaker’s performance. Musk touted the quarterly performance earlier in 2022, saying the company enjoyed “excellent demand” and expected “to sell every car we make as far into the future as we can see,” according to the suit.

But he learned in November 2022 — about midway through the quarter — that Tesla wouldn’t meet its targets for the period, Perry claims. Before that development was announced publicly in January 2023, Musk made the $7.53 billion share sale, Perry says.

On Jan. 3, 2023, the first trading day after the Jan. 2 announcement of the numbers, Tesla shares fell 12% from their close of $123.18 on Dec. 30, 2022, to $108.10, according to the complaint.

McCormick has dealt with Musk before. She oversaw a case over his unsuccessful effort to back out of buying Twitter. And in January she voided his $56 billion pay package after finding that Tesla directors who approved it in 2018 had a conflict of interest and that Tesla failed to properly disclose the terms of the executive compensation plan.

Tesla is asking investors to vote on it a second time at the company’s annual meeting on June 13, to show they still back the plan, which could help in a legal appeal of McCormick’s decision. Proxy adviser Institutional Shareholder Services is urging them to reject the pay package.

Unreported share sale

Tesla’s stock performance and Musk’s trading activities have been closely scrutinized by both regulators and the public. Following Perry’s lawsuit, social media users speculated about the implications of the case. One user, @jaberwock2, pointed out, “There is no way he would not have known about the shortfall in deliveries just two weeks before the end of the quarter” and raised questions about other potential unreported share transactions by Musk.

“But there is another interesting anomaly. After the December sale, he held 423,622,432 shares. In March of 2023, he filed a Form 4 after exercising 10,500 options. Before that option exercise, he held 411,062,076 shares. He did not file any 4s between those two dates,” the X user said.

A Form 4 is a document that must be filed with the SEC by officers, directors, and beneficial owners of more than ten percent of a company’s stock. This form is used to report changes in their ownership of the company’s securities, typically when they buy or sell shares. The filing of a Form 4 is mandatory and is designed to provide transparency to investors about insider trading activities.

Information for this story was found via Bloomberg and the sources mentioned. The author has no securities or affiliations related to the organizations discussed. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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