The increase and decrease in value, when stock shares are in question, affect the conditions of the related market and the decisions of the investors. Recently, the suit filed by Andrew Left, a short seller, to the detriment of Elon Musk, the CEO of “Tesla Motors, Inc.”, displayed the alteration in investor behaviors. Aforementioned change takes place depending on a potential shift in market conditions. The facts of the case in question reveal the elasticity of the market and certain indicators that lead to alteration. Throughout this article the facts will be transferred while the main aspects, which should be discussed in order to grasp the lawsuit process, and the terms required are being explained.
The economic aspect constitutes the core and essence of the case. Therefore it would be precise to primarily enlighten the economic matters. Musk has recently made a public announcement via his Twitter account stating that, “Tesla Motors, Inc.” will be going private. Mentioned announcement was the trigger action in this case that led to the alteration in the market. The transition of a public company to private has certain consequences. In such transaction, investors have the intention of buying the shares of the company. To conclude this affair, the shareholders bring forward an offer to the investors. This offer is usually a premium which is less than the market value of the share. Usually, the transaction of going private is perceived as a situation in which the company’s value is despised in the market. When this specific case is considered, the offer made by Musk was $420 per share. As an economic aspect and consequence, the announcement concluded in the upsurge of share prices by 12%. After a short period, following the initial announcement, Musk has declared that Tesla will remain as a public company.
On the other hand, besides the market and share prices, the investors are also being affected. Andrew Left is a prominent short-seller, who accused Musk of fraudulently and intentionally deceiving the investors and manipulating the market over his statements. “Short-selling” as a term, has an undeniable importance considering that, this is the fundamental notion of the case. This concept expresses a risky form of investment maintained in order to make a profit. Briefly it is the circumstance where the investor (seller) sells certain shares by borrowing them. The shares which are in question do not belong to the investor. Investor is satisfied by borrowing the shares rather than buying them because, it is believed that the share prices will decline. In other words, the share prices are considered overpriced at the time of sale. Hence, the investor plans on buying the share again when the expected decline takes place. When the short-selling process is carried out seamlessly, the difference between the sale and purchase price will constitute the profit made by the investor. Since the stock prices rose, after Musk’s initial statement on going public, a productive investment environment shaped for short-sellers. Therefore short-sellers like Left, had the motive to direct their investment towards shorting the stocks of Tesla. However Musk’s second statement precluded this investment thrust. After Left’s lawsuit another complainant has brought a suit against Musk asserting that the investors had experienced heavy conditions due to the misleading appearances created by the conscious stimulation of Musk. Following the lawsuits, the Securities and Exchange Commission (SEC) has started to conduct an investigation on Musk and Tesla. The investigation and the lawsuits regarding Musk and Tesla are continuing.
The legal aspect should be considered depending on the Securities Exchange Act of 1934 where the regulation regarding the market manipulation is outlined. According to the section 9(a) of the Act, manipulation of the market for any reason whatsoever is prohibited in United States and worded as follows; “It shall be unlawful for any person, directly or indirectly, by the use of the mails or any means (…) for the purpose of creating a false or misleading appearance of active trading in any security other than a government security, or a false or misleading appearance with respect to the market for any such security (…)”.
Such incident has demonstrated a hybrid example in which legal matters and economic matters collide. Moreover, market’s elasticity, dynamism and the shift in investors’ inclination in such circumstances has been displayed. The accusations brought on Musk are undeniably intense and serious. Therefore, in my opinion, the decision of the court and the conclusion of the investigation will have a drastic impact on the company and the market. It is self-evident that the market has been affected by the statements of Musk, the question that should be enlighten is whether Musk had the intention to manipulate the market and mislead the investors or not.
Kroft, Edwin Grant. “THE ‘GOING PRIVATE’ TRANSACTION – SOME INCOME TAX AND CORPORATE ASPECTS OF A PUBLIC COMPANY BECOMING PRIVATE.” Ottowa Law Review, vol. 12, no. 49, pp. 49–118. commonlaw.uottawa.ca/ottawa-law-review/sites/commonlaw.uottawa.ca.ottawa-lawreview/files/08_12ottawalrev491980.pdf.
Matousek, Cadie Thompson Mark. “Every Bizarre Thing That Has Happened since Elon Musk Sent His ‘Funding Secured’ Tweet about Taking Tesla Private.” Business Insider, Business Insider, 6 Sept. 2018, www.businessinsider.com/tesla-going-private-timeline-2018-8.
United States, Congress, SECURITIES EXCHANGE ACT OF 1934 . 1934.
Stempel, Jonathan. “Tesla, Musk Sought to ‘Burn’ Citron, Other Short-Sellers – Lawsuit.” Reuters, Thomson Reuters, 6 Sept. 2018, www.reuters.com/article/uk-tesla-lawsuit/tesla-musk-sought-to-burn-citron-other-short-sellers-lawsuit-idUSKCN1LM2N6.
Author: Aybike Hotomaroğlu