August 22, 2018

Tesla Tweets: “Class Action Lawsuits Secured”

This recent “D&O Diary” blog says that the securities class action bar has latched on to Elon Musk’s ill-considered tweetstorm.  Here’s an excerpt on the winners of the race to the courthouse:

On Friday, two Tesla shareholders filed separate securities class action lawsuits in the Northern District of California against Tesla and Musk. The first of the lawsuits, filed by Tesla shareholder William Chamberlain, purports to be filed on behalf of a class of shareholders who purchased or sold Tesla shares between August 7, 2018 and August 10, 2018, inclusive.

The second of the two lawsuits, filed by Tesla investor Kalman Isaacs, purports to be filed on behalf of a class of shareholders who purchased Tesla securities after 12:48 pm EST on August 7, 2018 (the time of Musk’s first take-private tweets) and including August 8, 2018. According to news reports, Issacs is a short seller who sustained significant losses purchasing shares at the inflated price to cover his short position. Both complaints allege that Musk’s tweets contained material misrepresentations in violation of the federal securities laws and seek to recover damages on behalf of the plaintiff class.

Subsequently, the class action lawsuits have continued to roll-in – and the alleged class period for the more recent complaints extends from August 7th through August 14th.  That time frame includes the dates when media reports began to surface about the SEC’s decision to subpoena Tesla for information surrounding the tweets, when Elon penned a blog purporting to explain what he meant by “funding secured” (we’ll get to that in a minute), and when he apparently had a bizarre house guest.

Since 75% of those of you who took our recent poll are of the view that either Musk’s tweets violated the securities laws or that he is a supervillain, I don’t expect that you’re shedding a lot of crocodile tears over these developments.

Tesla Tweets: “Why, Elon, Why?”

Even if you’re enjoying his predicament (shame on you), you’ve got to be wondering – why on earth did Elon Musk end his tweet with the phrase “funding secured?”  Lots of other people had the same question – and so he posted this blog explaining his comment:

Why did I say “funding secured”?

Going back almost two years, the Saudi Arabian sovereign wealth fund has approached me multiple times about taking Tesla private. They first met with me at the beginning of 2017 to express this interest because of the important need to diversify away from oil. They then held several additional meetings with me over the next year to reiterate this interest and to try to move forward with a going private transaction. Obviously, the Saudi sovereign fund has more than enough capital needed to execute on such a transaction. . .

Yada, yada, yada . . . Anyway, this goes on for another 424 words, making a total of 518 carefully chosen and undoubtedly heavily-lawyered words to explain 2 very ill-considered ones. Still, the manure content in this statement seems pretty high. This “MarketWatch” article says that the SEC still has lots of questions for Elon, so my guess is that his word count will go much higher before this is over (and Broc is quoted in that article).

Crypto Exchanges: FinCEN Says Compliance Efforts Stink

I recently blogged about how CoinBase is laying the groundwork to possibly become the first “token securities exchange.” If so, it may want to take the recent comments from FinCEN’s Director Ken Blanco in this “ABA Journal” article to heart. He says that financial crimes enforcers are watching the crypto space—and they don’t like what they see.

The Treasury’s Financial Crimes Enforcement Network and the Internal Revenue Service “have examined over 30 percent of all registered virtual currency exchangers and administrators since 2014,” said Kenneth Blanco, FinCEN’s director, in an Aug. 9 speech to the Block (Legal) Tech conference at Chicago-Kent College of Law. “And there is no question we have noticed some compliance shortcomings.” Specifically, Blanco maintains that adequate money laundering controls are not put in place until a trading platform or peer-to-peer exchanger gets an investigation notice.

“Let this message go out clearly today: This does not constitute compliance,” he said. “Compliance does not begin because you may get caught, or because you are about to be discovered. That is not a culture that protects our national security, our country, and our families. It is not a culture we will tolerate.”

Blanco’s comments were echoed by Amy Hartman, Assistant Director of the SEC’s Enforcement Cyber Unit, who expressed concerns about the potential for fraud associated with stateless virtual currencies & advised any company thinking about a coin offering to “engage competent securities counsel.”

John Jenkins