Elon Musk faces charges that he illegally sold $7.5 billion worth of Tesla stake in the fourth quarter of 2022 because he knew the company’s business was in trouble after promising investors an “epic year-end.” It will be disappointing.
In a lawsuit filed in Delaware court late last week, shareholder Michael Perry accused the CEO of deliberately selling off nearly 45 million shares ahead of poor auto sales data to prevent a value estimated at $55 % of losses and alleging that virtually the entire board of directors collectively breached directors’ responsibilities to shareholders.
The lawsuit states: “E. Musk disposed of $7,530,113,926 worth of Tesla stock in November and December 2022, taking advantage of his position at Tesla while in possession of adverse material non-public information, and Breach of fiduciary duty to Tesla.
However, unlike previous stock sales by Tesla insiders, these were not the result of a Rule 10b5-1 trading plan, which removes insider discretion over timing and hands it over to third-party brokers.
After the release of auto sales data on January 3, 2023, Tesla stock price fell to a two-year low.
He seeks that Musk’s ill-gotten gains, estimated by the plaintiffs at $3 billion, be returned to the company through forfeiture and that all eight directors at the time suffer damages due to “reckless indifference.”
Insider trading charges are the latest legal headache for Musk, following a ruling in January that invalidated Musk’s record pay deal that shareholders voted for in 2018. Tesla will re-vote at its annual meeting on June 13.
Tesla’s ‘ruthless measurer’ knew Q4 would disappoint
The core of Perry’s argument is to identify motivations through assertions that Musk knows: 1) he still needs to liquidate stock at the highest possible price to pay for the loan to buy Twitter; 2) sales are trending far higher in the fourth quarter lagging behind his optimistic forecast for October 2022 (wealth Such predictions were even made at the time).
Just days after touting “strong demand in the fourth quarter,” he slashed prices in China — the first of many moves to come.
Musk may have been aware of the weak sales, as his former powertrain chief Drew Baglino last March described it as a corporate culture made up of “ruthless measurers.” All of this leverages the latest data to increase sales and optimize every aspect of Tesla’s business.
“I’m not sure there’s any company on the planet that has better real-time data than Tesla,” Musk said during last year’s first-quarter investor call. “The pulse we have is real-time, no delay.”
Musk even said that he personally checks the results of each price change to ensure that production can continue to balance demand, increasing production when Tesla orders too many and decreasing when there are too few orders.
“We immediately watched what happened and adjusted our course. We think about it every day,” he continued. “I check that email seven days a week, as do the rest of the team.”
By his logic, the CEO would know that the fourth quarter wouldn’t meet market expectations and sell his shares anyway.
Perry’s lawsuit says it’s reasonable to infer he did this to avoid losing money because just weeks earlier he had promised an “epic year-end.”
“Musk sold the stock before non-public information in his possession could be publicly disclosed and affect the company’s stock price,” the lawsuit states.
