Professional Documents
Culture Documents
Gharrity Musk Lawsuit
Gharrity Musk Lawsuit
Transaction ID 66415547
Case No. 2021-0199-JRS
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
Plaintiff,
PUBLIC VERSION DATED:
MARCH 11, 2021
vs.
Defendants,
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TESLA, INC.,
Nominal Defendant.
VERIFIED STOCKHOLDER
DERIVATIVE COMPLAINT
Defendant Tesla, Inc. (“Tesla” or the “Company”), and alleges upon: (1) personal
knowledge as to himself and his own acts; (2) a review of publicly available
information, including court filings; (3) filings with the United States Securities and
INTRODUCTION
Controls Committee, Musk has continued to violate the Judgment and the Board of
substantial penalties and fines, As Tesla admitted in its Form 10-K filed February 8,
fiduciary duty. For example, more than a year after the Amended Judgment in the
SEC action was entered on April 30, 2019, Musk issued a tweet at 11:11 a.m EST
on May 1, 2020 (the “11:11 tweet”) that stated “Tesla stock is too high IMO.” In
1
Unless otherwise noted, all emphasis is added and internal citations are omitted.
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4. Three days later, on May 4, 2020, Tesla
5. On May 8, 2020,
stated
that
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6.
of loyalty and good faith. The Board was aware of and had approved the judgment
and amended judgment with the SEC, and had actual knowledge of the steps that
Tesla was required to take in order to comply with the judgments. The Board has
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regarding oversight of Mr. Musk, the Board has also consistently failed to ensure
that Tesla has an independent General Counsel who can provide advice untainted by
Musk. On December 12, 2009, it was reported that Jonathan Chang was resigning
as Tesla’s General Counsel in an article entitled “Tesla Loses Its Third General
Counsel in a Year.”2 The article noted that “With Chang’s departure, Tesla has now
lost three general counsels in the past year. Tesla’s general counsel Todd Maron left
the company in December 2018. Maron’s successor, Dane Butswinkas, left the
company in February 2019 after just two months on the job because he was not a
good cultural fit, a source familiar with the situation told CNBC at the time.”
9. The fact that Tesla lost three general counsel’s in one year reflects the
fact that none of them were able to exercise any independent advice on matters that
differed from Musk’s desired outcome. The Board was acutely aware of the need
for Tesla to have a General Counsel who could provide advice as to what was in
Tesla’s best interests. It was also well aware that Musk was interfering with the
General Counsel and dictating Tesla’s positions on issues, including with respect to
compliance with the SEC’s Judgment. The Board has failed to take necessary action
to ensure that Tesla has an independent General Counsel and to ensure that Musk
does not improperly interfere with the General Counsel’s job of representing the best
2
See Annie Palmer, “Tesla Loses Its Third General Counsel in a Year,” CNBC, Dec.
12, 2019.
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interests of Tesla, thus breaching its duty of loyalty.
10.
11. The genesis of the SEC’s lawsuits against Musk and Tesla was the
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12. The Board did not pre-approve this material statement; it also did not
make any SEC filings regarding this potential $71 billion transaction.
withdrew the offer. Thereafter, multiple lawsuits were filed against Musk and Tesla,
including complaints filed by the SEC, SEC v. Elon Musk, No. 1:18-cv-8865
(S.D.N.Y.) (referred to herein as the “SEC Action”); SEC v. Tesla, Inc., No. 1:18-
cv-8947 (S.D.N.Y.) (the “Tesla SEC Action”), as well as claims against the
Company under the federal securities laws that were consolidated before the United
States District Court for the Northern District of California, In re Tesla, Inc.
Securities Litigation, No. 3:18-cv- 04865 (N.D. Cal.). (the “Securities Action”). The
Company’s motion to dismiss was recently denied in the Securities Action, and the
Company faces the prospect of substantial damages in that case. Id., 477 F.Supp. 3d
14. Just two days after the SEC Action and the Tesla SEC Action were
filed, Tesla was forced to settle the cases (the “SEC Settlements”). As part of the
financial settlements with the SEC, both Musk and Tesla each agreed to pay $20
million. In addition, Tesla agreed to implement — and Musk agreed to comply with
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stockholders. Pursuant to the SEC Settlements, Tesla also formed a Disclosures
James Murdoch, who have purportedly “engaged in continuous monitoring and audit
the type alleged by the SEC against Musk and were demanded by the SEC with a
16. A final judgment against Tesla was entered on October 16, 2018 by the
U.S. District Court for the Southern District of New York (the “District Court”).
17. A final judgment was also entered against Elon Musk that requires
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comply with all mandatory procedures implemented by Tesla, Inc. (the
“Company”) regarding (i) the oversight of communications relating to
the Company made in any format, including, but not limited to, posts
on social media (e.g., Twitter), the Company’s website (e.g., the
Company’s blog), press releases, and investor calls, and (ii) the pre-
approval of any such written communications that contain, or
reasonably could contain, information material to the Company or its
shareholders.
19. In violation of the SEC Judgments, on February 19, 2019 Musk issued
the following tweet, which he corrected just four hours later, concerning the
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20. The next day, Tesla’s General Counsel Dane Butswinkas
(“Butswinkas”), the former Chairman of Williams & Connolly who was hired by the
Company in the wake of the SEC Settlements and whose presence the market had
21. On February 25, 2019, the SEC filed a Motion to for an Order to Show
Cause in the SEC Action, alleging that Musk had violated the SEC Settlement. The
next day, the District Court ordered Musk to respond by March 11, 2019.
22. The SEC and Musk thereafter entered into a revised settlement
governing Musk’s use of Twitter, and on April 30, 2019, the Court overseeing the
SEC Action approved the revised settlement. This revised settlement agreement
required that Tesla revise the Senior Executives Communications Policy to explicitly
23. However, Musk has continued to issue Tweets without the required pre-
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29, 2019, Musk responded to a reporter’s inquiry on Twitter, disclosing previously
24. Tesla’s Revised Policy applied to the July 29th Guidance Tweet. In
vetted as required, Tesla refused to disclose whether the guidance given had received
pre-approval. Tesla did not manufacture 1,000 solar roofs per week in 2019.
26.
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27.
28.
am, Musk once again disregarded the Revised Policy, tweeting that Tesla’s stock
capitalization.
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31. In response to this Tweet,
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34. The failure of Tesla’s Board to ensure compliance with the Amended
Final Judgment with the SEC has caused substantial damage to Tesla, including
billions of dollars lost in market capitalization and requiring Tesla to spend nearly a
billion dollars of its cash to handle a convertible debt maturity. To date, the Company
has agreed to pay a $20 million fine to the SEC for the failure to monitor Musk’s
potential damages and the payment of legal fees related to the federal securities fraud
class action cases that were filed in response to Musk’s Go-Private tweets, which
cases survived a motion to dismiss on April 15, 2020. Tesla’s business, goodwill,
and reputation with its customers and stockholders also have been harmed.
35. Musk’s wrongful conduct has caused, and will continue to cause,
and stock price, as well as the costs of attorneys’ fees, lost productivity, and other
costs associated with the SEC Actions, class action securities litigation, and related
investigations. This action seeks to redress this and the other harms caused to the
36. Plaintiff has not made a pre-suit demand on the Board because such a
demand would be a futile, wasteful, and useless act. The Board has failed to curtail
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Musk’s unlawful conduct, even after entry of the Judgments, and has failed to ensure
proper oversight and to enact adequate internal controls, causing (and continuing to
THE PARTIES
A. Plaintiff
Palo Alto, California. Tesla common shares are traded on the NASDAQ under the
symbol “TSLA.” Tesla designs and manufactures high-end electric cars. Tesla is
Architect” of Tesla. Musk has served as CEO since October 2008. Musk previously
served as Chairman of the Tesla Board from April 2004 until September 2018, when
Musk was forced to step down as Chairman in connection with the SEC Settlement.
Tesla admits in its SEC filings that Musk is not an independent director of the
Company. At all relevant times, Musk has also been the Company’s largest
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stockholder. As of the filing of this Complaint, Musk owns approximately 20.8% of
since April 2004. Although not an employee of the Company, Tesla concedes in its
SEC filings that Kimbal Musk is not an independent director of the Company.
41. K. Musk is the brother of Elon Musk and cousin of Lyndon and Peter
partner in Valor Equity Partners II, L.P. (in which his brother Musk has also
invested) and Valor Equity Partners III-A, L.P., both of which are funds advised by
42. Elon Elon Musk, Gracias, Ehrenpreis and Jurvetson have each invested
2018.
iii. Gracias
44. Defendant Antonio J. Gracias (“Gracias”) has served as a director of
the Company since May 2007. Gracias is the founder, managing partner, CEO,
Chief Investment Officer, director and sole owner of private equity firm Valor
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45. Gracias has been described as one of Elon Musk’s closest friends, and
in a December 29, 2018 article, The New York Times described Gracias as having
“close personal and professional ties to” Musk. Musk even gave Gracias the second
46. Gracias himself testified in the SolarCity Case that he had been close
personal friends with Musk for over 20 years. Gracias also testified that he was also
good friends with Musk’s family, including K. Musk, having vacationed with both
around the country and the world, having attended K. Musk’s wedding, and having
47. Among other things, Gracias has long been an investor in Elon Musk’s
enterprises, dating back to his investment in PayPal. Gracias and Valor participated
in several pre-IPO venture funding rounds for SolarCity, Tesla and SpaceX, and
Gracias served on the boards of directors of all three companies at the time of the
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49. Notwithstanding his friendship and involvement with Musk, Gracias
has served as Tesla’s purported “Lead Independent Director” since September 2010.
Tesla has stated that this role gives Gracias “broad authority to direct the actions of
[Tesla’s] independent directors.” In this role, Gracias, among other things: (a)
reviews the agenda and materials for meetings of the independent directors; (b)
consults with the CEO and Chairman (i.e., Elon Musk) regarding Tesla Board
meeting agendas, schedules and materials; (c) communicates with the CEO and
Chairman; (d) acts as a liaison between the CEO and Chairman and the independent
directors when appropriate; (e) raises issues with management on behalf of the
independent directors; (f) annually reviews, together with the Nominating and
Corporate Governance Committee, the Tesla Board’s performance during the prior
year; and (g) serves as the Tesla Board’s liaison for consultation and communication
that shareholders vote against Gracias when he was last up for re-election to the
board in 2018.
51. As a director of Tesla, Gracias earned over $13 million in fiscal year
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2018.
iv. Denholm
52. Defendant Robyn M. Denholm (“Denholm”) has served on the Tesla
Board since August 2014. Since November 2018, Denholm has served as Chair of
the Tesla Board, after Musk was forced to step down in connection with the SEC
Settlements concerning the Go-Private Tweets. Denholm also assumed the position
of Chair of the Disclosure Controls Committee that Tesla was forced to create as
part of the SEC judgments. She is also a member of the Audit Committee and the
Compensation Committee.
Financial and Operations Officer at Juniper Networks, Inc. (“Juniper”) from July
2013 until her retirement in February 2016. Previously, she served as Juniper’s
Executive Vice President and CFO since August 2007. Tesla purchases networking
resellers.
54. Denholm was the CFO and Head of Strategy of Telstra Corporation
Ltd. (“Telstra”),
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55. Denholm is indebted to Elon Musk. Denholm left Juniper in July 2016,
and until 2017 did not have a full-time job. Yet, as a director of Tesla, she earned
nearly $5 million in fiscal years 2016 and 2017 and another nearly $7 million in
fiscal year 2018. In addition, as described further herein, Musk’s has admitted that
he “handpicked” Denholm to succeed him as Chair of the Board, and that it is “not
realistic” that Denholm has any ability to control or restrict his actions.
v. Ehrenpreis
56. Defendant Ira Ehrenpreis (“Ehrenpreis”) has served on the Tesla Board
since May 2007. He is the Chair of both the Compensation Committee and the
57. In a December 29, 2018 article, The New York Times described
Ehrenpreis as having “close personal and professional ties to” Musk. Ehrenpreis was
an early investor in all things Elon Musk and has stuck with the entrepreneur during
Tesla and Mapbox entered into an agreement pursuant to which Tesla expects to pay
Mapbox certain ongoing fees, including $5 million over the first 12 months of the
agreement.
59. Since 2015, Ehrenpreis has been a managing partner and co-owner of
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venture capital firm DBL Partners (“DBL Partners”), which he co-founded with
fellow managing partner and co-owner Nancy Pfund (“Pfund”). Pfund was an
observer on the Tesla Board from 2006 to 2010. Pfund was also a member of the
SolarCity board of directors and one of the two members of the Special Committee
of the SolarCity board that negotiated and approved Tesla’s acquisition of SolarCity.
Pfund is a close friend of Elon Musk’s and has said that “[h]e’s always been a master
$166 million in Musk company SpaceX, Ehrenpreis has personally owned hundreds
61. Ehrenpreis has stated that Musk has had a significant influence on his
vi. Ellison
62. Defendant Larry Ellison (“Ellison”) has served as a director of the
Company since December 27, 2018. Ellison became part of Tesla’s Board in
connection with the SEC Settlements, which required Tesla to add two independent
63.
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64. Ellison is the founder and Chief Technology Officer of Oracle
Musk as his “very close friend” and has been publicly critical of what he claims is
unfair media coverage of Musk. Further, Ellison has a $1 billion stake in Tesla,
vii. Mizuno
66. Defendant Hiromichi Mizuno (“Mizuno”) has served as a director of
the Company since April 2020. Mizuno is a member of the Audit Committee.
67. Prior to his appointment as a director of Tesla, Mizuno was the Chief
viii. Murdoch
68. Defendant Defendant James Murdoch (“Murdoch”) has served as a
director of the Company since 2017. Murdoch is a member of the Tesla Board’s
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2018.
ix. Wilson-Thompson
70. Defendant Kathleen Wilson-Thompson (“Wilson-Thompson”) has
became part of Tesla’s Board in connection with the SEC Settlements, which
Former Directors
a. Buss
from 2009 until June of 2019. Buss served on the Tesla Board’s Audit,
Upon information and belief, Buss did not have full time employment from early
2016 until his departure from the Tesla Board, but earned $3,357,002 as a director
of Tesla for fiscal year 2017 and $6,877,402.95 in fiscal year 2018.
72. In a December 29, 2018 article, The New York Times described Buss as
having “close personal and professional ties to” Musk. For example, Buss was
previously the Chief Financial Officer for, and a consultant to, SolarCity, and as a
result he is indebted to Elon Musk because of, among other things, the $32 million
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Buss received for 18 months of work as SolarCity’s CFO.
73. Further, prior to joining SolarCity, Buss was the CFO and EVP of
in the Model S” was touted by Cypress as a significant highlight of its third fiscal
quarter of 2012.
b. Rice
Company from 2017 until June of 2019. Rice was a member of the Tesla Board’s
Compensation Committee.
75. As a director of Tesla, Rice earned over $8 million in fiscal year 2018.
***
76. As used herein, the “Board” or the “Tesla Board” collectively refers to
Musk, and Rice; and, for periods after December 27, 2018, Ellison and Wilson-
Thompson; for periods after June 11, 2019, excluding Rice and Buss; and, for
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periods after April 23, 2020, Mizuno.
c. Jurvetson
78. In a December 29, 2018 article, The New York Times described
Jurvetson as having “close personal and professional ties to” Musk. Jurvetson was
a managing director of venture capital firm Draper Fisher Jurvetson (“DFJ”). DFJ
invested in Tesla before its 2010 initial public offering (“IPO”), participating in
Tesla’s Series C (closed May 1, 2006), Series D (closed May 11, 2007), and Series
the Tesla Board. In addition, DFJ and Jurvetson owned substantial shares of
in numerous venture funding rounds for that company. Jurvetson also served on the
Board of SpaceX.
79. Further, not only did DFJ invest in Musk, Musk invested in DFJ: the
Elon Musk Trust is a limited partner in the Draper Fisher Jurvetson Fund X, L.P.
80.
81. In November 2017, Jurvetson was ousted from his own firm, DFJ,
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following scandalous revelations about his personal conduct. Nonetheless, thanks to
his friendship with Musk — who himself was implicated in one Jurvetson’s
infamous parties — Jurvetson has not suffered the same fate with respect to his roles
with Tesla and SpaceX. While Tesla and SpaceX placed him on “leave,” he
continues to attend events for both companies as a VIP, and he still serves as a
The Boring Company — a company that manufactures hats and flamethrowers, and
FACTUAL BACKGROUND
83. On June 29, 2010, Tesla conducted its IPO. The Company was founded
84. After’s Tesla’s founding, Elon Musk acquired a controlling stake in the
Prior to the Company’s IPO, Elon Musk invested approximately $70 million in
Tesla.
85. Musk solidified his control of Tesla in November 2007, when he forced
the founder and then-CEO Eberhard out of the Company. In October 2008, Musk
largest stockholder, owning nearly at least 20% or more of the Company’s stock.
87. Few companies are so closely associated with the identity of a single
individual. Musk is the “face of Tesla” and the dominant force behind Tesla’s
corporate strategy.
88. As the Delaware Court of Chancery recently stated, “[t]hat Musk is the
Stockholder Litigation, C.A. No. 12711-VCS, at 46 (Del. Ch. Mar. 28, 2018) (Trans.
ID 61851776). In fact, Tesla freely admits — including in its most recent Form 10-
K, filed February 19, 2019 (at 27-28) — that the Company is “highly dependent on
the services of Elon Musk” and that Musk “spends significant time with Tesla and
the Company’s affairs and exerts a level of influence and day-to-day control over
Tesla far beyond what would be typical given his equity stake.
89. In addition to his “highly active” role with Tesla, Musk holds himself
out as a visionary in the areas of alternative energy, electric cars, and space travel.
Using a select group of favored investors, including Tesla Board members Jurvetson,
Gracias, and Ehrenpreis, Musk has sought to build enterprises serving each of those
sectors. An essential aspect of this investing relationship is the low cost of capital
provided to Musk in light of his “visionary” status. Musk and these favored investors
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understand the link between the failure of any of Musk’s ventures and an increase in
the cost of capital for Musk’s other enterprises, which could very well stymie his
against personal liability arising from their service on the Board of Tesla. In its Form
10-K for fiscal year 2019, Tesla disclosed that Tesla canceled its directors and
officers liability insurance policy for the 2019 to 2020 year due to
behavior and misconduct and the Board’s continuing failure to demonstrate any
ability to control him. Now, Musk controls whether the directors and officers of
Tesla are insured for, among other things, failing to oversee his misconduct, the
terms on which they settle any litigation, whether they settle any litigation, or
whether those directors and officers have to reach into their own pockets should they
91. Musk also has served as the CEO, Chief Technology Officer, and
since 2002. SpaceX is a private aerospace manufacturer and space transport services
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company founded by Musk to develop advanced rockets for satellite and human
SpaceX, which is believed to be one of the most valuable privately held companies
in the world and was valued at an estimated $36 billion as of February 2020.
92. Elon Musk also served as Chairman of the Board of Directors for the
founding in July 2006 until it was acquired by Tesla in November 2016. Musk is the
cousin of SolarCity’s co-founders, Lyndon Rive and Peter Rive, and at the time of
SolarCity’s common stock, making him its largest stockholder. Through the
billion dollars’ worth of Tesla shares. In August 2018 — in the midst of the flurry
caused by Musk’s tweets — Musk received $65 million in repayments from Tesla
against the Tesla Board concerning Tesla’s and Musk’s alleged bailout of Musk’s
failing solar energy company, SolarCity (the “SolarCity Action”). The plaintiffs in
that litigation allege that Musk controlled Tesla and the Board in a transaction that
made several of Tesla’s directors millions of dollars, but that those plaintiffs allege
harmed Tesla in the billions. According to Court filings in that case, the Board, other
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than Musk, entered into a settlement of the claims against them for $60 million. The
“pyramid” atop which he sits, and it is “important that there not be some sort of
house of cards that crumbles if one element of the pyramid of Tesla, SolarCity and
SpaceX falters.”
96. On November 5, 2013, Tesla filed a Form 8-K with the SEC stating that
Tesla and its products and services. In that Form 8-K, Tesla stated:
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For more information for Tesla investors, please visit:
ir.teslamotors.com
For the latest information from Tesla, including press releases and the
Tesla blog, please visit: teslamotors.com/press
97. At all times since November 2013, Musk has used his Twitter account
information about Tesla published by Musk via his Twitter account. For example,
on November 7, 2016, Tesla filed a Form 425 referring to, and containing a
for Tesla.”
99. At all relevant times, Musk’s Twitter account was public, meaning that
anyone with access to the internet could view his Twitter publications (or “tweets”).
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100. Through his Twitter account, Musk both publishes tweets himself and
Tesla ever announce or disclose any distinction between Musk’s personal tweets and
101. Prior to August 2018, Tesla purportedly had in place at least one policy
102.
103.
104.
3
The August 18, 2018 minutes of a Special Meeting of the Tesla Board, produced
pursuant to Section 220, states that at that time the Board discussed
However, it
is unclear whether have been produced in response to the 220
Demands. One “Social Media Policy” was produced, but it was undated.
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105.
B.
as Todd Maron (Tesla’s then-General Counsel) and Deepak Ahuja (Tesla’s then-
CFO), with the subject line “Offer to Take Tesla Private at $420.” The email did not
state who made the offer but stated “Unless another bidder comes forward with a
better offer, I would ask that this matter be put to a shareholder vote at the earliest
107.
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109. The following day, on August 3, 2018, the Board of Directors again
110. Elon Musk has publicly displayed his animosity to those who were
not cool, Next?" and "These questions are so dry. They're killing me."
analysts who were trying to justify their Tesla short thesis." On May 4, 2018, he
further tweeted the following: "Oh and uh short burn of the century comin [sic] soon.
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Flamethrowers should arrive just in time." And immediately after, he posted "Looks
like sooner than expected. The sheer magnitude of short carnage will be unreal. If
112. On May 7, 2018, Musk bought $9.85 million worth of Tesla shares to
force a burst of the short-covering, which caused Tesla's stock price to increase from
$297.50 to $302.77. Musk did this again on June 12, 2018 to maintain Tesla's stock
price while Tesla laid off 46,000 employees (roughly 9% of the workforce).
113. A few days later, Mr. Musk tweeted that "[the shorts] have about three
weeks before their short position explodes." By the end of July 2018, Tesla's short-
stock interest was 35 million shares (20% of outstanding stock). Many speculated
that the Go-Private Tweets were the fulfillment of Musk’s promised “short burn of
the century.”
that
and asked
Musk
115. Within a few days, Musk flaunted the Board’s limited authorization,
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with no reprimand from the Board.
116. On August 7, 2018, at 12:48 p.m. EDT, Musk posted on his Twitter
account: “Am considering taking Tesla private at $420. Funding secured.” Musk
117. Throughout the day, Musk continued to tweet about the going-private
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• At 2:13 p.m., Musk tweeted, “Shareholders could either to [sic]
at 420 or hold shares & go private.”
118. The texts in the two preceding paragraphs are referred to herein as the
“Go- Private Tweets.” The Go-Private Tweets caused a surge in Tesla’s stock price,
reaching an intraday high of $387.46 per share, before closing at $379.57 per share
August 7, 2018, a nearly 11 percent jump from the previous closing price. Trading
representing over $11 billion of purchases in the open market. All the while, the
requirements, and the truth — all while leading to a flurry of speculative trading,
119. Musk’s Go-Private tweets were highly material information from the
Company’s key insider and largest shareholder, and caused an immediate reaction
from analysts.
120. Musk’s tweets also caused severe market reaction since the Company’s
Mr. Musk's tweets. First, an analyst asked the following, "In the tweet, [Mr. Musk]
said financing is secured but in the letter he doesn't address this. Can you clarify?"
Mr. Viecha responded saying "I can only say that the first Tweet clearly stated that '
financing is secured .' Yes , there is a firm offer." Second, another analyst e-mailed
Mr. Viecha and another Tesla investor-relations member and asked "Had some
questions/clarifications on today's news and blog post. Can either of you speak?"
Mr. Viecha responded that "[A]part from what has been tweeted and what was
written in a blog post, we can't add anything else. I only want to stress that Elon's
121. At the close of trading on August 8, 2018, Tesla's stock price dropped
2.5%—from $379.59 to $370.34 because contrary to what Musk had said on August
7, 2018, a press release from Tesla's Board said it was investigating the tweet, but
did not state that funding for a going-private transaction had been “secured.” On
August 9, 2018, Tesla's stock closed with a further drop from $370.34 to $352.45,
which reflected a 5% decline, due to the Wall Street Journal's publication of an SEC
122. Mr. Musk then tweeted the following on August 13, 2018: " I'm excited
to work with Silver Lake and Goldman Sachs as financial advisors , plus Wachtell,
Lipton, Rosen & Katz and Munger, Tolles & Olson as legal advisors, on the proposal
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to take Tesla private."
123. On the same day, Bloomberg reported that neither Goldman Sachs nor
Silver Lake were yet working with Musk pursuant to a signed agreement or in an
official capacity. Similarly, the New York Times reported that Goldman Sachs and
Silver Lake were only in talks with Tesla, but there was nothing finalized.
124. Tesla's stock price rose following Mr. Musk's August 13, 2018
statement —from $356.41 to $361.13. But on August 14, 2018, Tesla's stock closed
at $347.64, which represented a 2.5% decline from $356.41 because of reports that
Defendants did not retain the financial advisors mentioned in Mr. Musk's Twitter
post.
125. On August 15, 2018, the Wall Street Journal reported that the SEC
formally subpoenaed Tesla regarding Mr. Musk's tweets. The same day, Tesla's
126. The New York Times published an article on August 17, 2018,
summarizing a recent interview with Mr. Musk. The article reported that, during the
interview, Mr. Musk revealed that no one reviewed his August 7, 2018 tweet before
he posted it, he chose the $420 price per share because of "better karma," and the
going-private transaction was far from secure because financing was not in fact
secured. At the close of trading on August 17, 2018, Tesla's stock price closed at
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127. The Go-Private Tweets plainly flaunted the Board’s
For example,
senior executives, including CFO Ahuja, who had been present at the August 3, 2018
After the
Go-Private Tweets began, Ahuja sent a text to Musk: “Elon, am sure you have
general counsel], and I draft a blog post or employee email for you?”4 Musk
4
SEC Action Complaint, ¶35 (filed Sept. 27, 2018) (bracketed text in original). At
the time, Tesla’s head of communications was Sarah O’Brien, who would leave the
Company just a month later; while Tesla’s general counsel was Todd Maron, who
would leave the Company by the end of the year.
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responded “Yeah, that would be great.” A few hours later, Musk blogged to
but that the “final decision has not yet been made.”5
For example, the Go-Private Tweets violated NASDAQ rules specifying that listed
companies must notify NASDAQ at least ten minutes prior to publicly releasing
material information. In fact, because Musk published the Go-Private Tweets in the
middle of the trading day, investors quickly inflated the price of Tesla shares to a
point where the NASDAQ halted trading for more than two hours.
stockholders also be alerted to material news in other ways.6 George S. Canellos, the
SEC’s former acting enforcement chief, explained that the SEC rule provides that
social media is not an appropriate vehicle “if the access is restricted or if investors
don’t know that’s where they need to turn to get the latest news.”7 Yet Musk
5
Elon Musk, Taking Tesla Private, Tesla Blog, Aug. 7, 2018,
https://www.tesla.com/blog/taking-tesla-private.
6
See, e.g., David Michaels & Michael Rapoport, SEC Probes Tesla CEO Musk’s
Tweets, WAL. ST. J., Aug. 8, 2018, https://www.wsj.com/articles/sec-has- made-
inquiries-to-tesla-over-elon-musks-taking-private-tweet-1533757570.
7
Andrew Ross Sorkin, Elon Muskʼs Tweets on Tesla Started a Tizzy. Someone
Should Hit the Brakes, Aug 13, 2018, N.Y. TIMES DEALBOOK,
https://www.nytimes.com/2018/08/13/business/dealbook/elon-musk-tesla-
twitter.html.
- 41 -
repeatedly has blocked individuals from his Twitter account and did not issue a
broader release of his intentions to take the Company private through the SEC, while
Tesla did not itself file a Form 8-K with the SEC regarding Musk’s tweets and the
132. Further, in the days after the Go-Private Tweets, media outlets reported
the views of various respected legal analysts that the Go-Private Tweets violated the
If there is evidence that the financing wasn’t fully locked down, Musk’s
claim would expose him to allegations of fraud, Coffee said.8
***
8
James B. Stewart, Did Elon Musk Violate Securities Laws With Tweet About Taking
Tesla Private?, N.Y. TIMES, Aug. 8, 2018, https://www.nytimes.com/2018/
08/08/business/elon-musk-tesla-sec.html.
- 42 -
If his motive for the tweet “was frustration with short sellers, then that
could be a case of market manipulation,” John Coffee Jr., a Columbia
University law professor and corporate-governance expert.9
***
***
9
Christopher Rugaber, Tesla CEO Musk Taunts Short Sellers Amid Legal Scrutiny,
AP NEWS, Aug. 11, 2018, https://www.apnews.com/
a8b14ee7114b499bbb288d19d6ca2090.
10
Jessica Silver-Greenberg et al., Tesla Board Surprised by Elon Musk’s Tweet on
Taking Carmaker Private, N.Y. TIMES DEALBOOK, Aug. 13, 2018,
https://www.nytimes.com/2018/08/13/business/dealbook/tesla-elon-musk-saudi-
arabia.html.
11
Dave Michaels & Michael Rapoport, Musk’s Tweets on Tesla Buyout Face
Scrutiny After Saudi Disclosure, WALL ST. J., Aug. 14, 2018,
https://www.wsj.com/articles/musks-tweets-on-tesla-buyout-face-scrutiny-after-
saudi-disclosure-1534244400.
12
Id.
- 43 -
133. Indeed, as the market later learned, SEC investigators unsurprisingly
began questioning Tesla and Musk the very next day after the Go-Private tweets,
134. Finally, the Go-Private Tweets were false and misleading. As later
admitted by Tesla, neither Musk nor Tesla had actually lined up the necessary
some investors, which did not address “even the most fundamental terms of a
percentage. 14
135. Further, Musk stated in an interview with the SEC that in fact the $420
per share offer was based on a 20% premium, which resulted in a price of $419 per
share. Musk told the SEC he rounded the price up to $420 because he had learned
about the number’s significance in marijuana culture and thought his girlfriend
“would find it funny, which admittedly is not a great reason to pick a price.”15
Musk’s statements that funding was “secured” and investor support was
“confirmed” were false and misleading because, in reality, Musk had
no “secured” or “confirmed” commitment from any source to provide
13
The Wall Street Journal, “SEC Sends Subpoena to Tesla in Probe Over Musk
Tweets,” Aug, 15, 2018.
14
SEC Action Compl. ¶21.
15
Id. at ¶24.
- 44 -
any amount of funding. In addition, he had never even discussed taking
Tesla private at a price of $420 per share with the Fund or any other
potential investor.
***
***
Unlike market participants reading his tweets, Musk knew that his
ostensibly “secured” funding was based on a 30 to 45 minute
conversation regarding a potential investment of an unspecified amount
in the context of an undefined transaction structure. Musk also knew
that there were many uncertainties beyond just a shareholder vote that
would have had to be resolved before any going-private transaction
could have been possible. As a result, Musk knew or was reckless in
not knowing that his August 7 statements were false and misleading.16
requirements, and the truth. Yet Tesla’s Board failed to place any controls on
did the Board take steps to correct or to clarify the public information Musk had
disseminated. In fact, in an interview published on August 16, 2018, Musk said that
Board members had not complained to him about his tweet — “I don’t recall getting
16
Id. ¶¶62, 69, 71.
- 45 -
any communications from the board at all. I definitely did not get calls from irate
directors.”
138. At 4:30 PM on August 7, 2018 — the day the Go-Private Tweets were
139.
Indeed,
140. Tesla’s Board held another Special Meeting nearly a week later, on
again took to Twitter to falsely announce that he was “excited to work with Silver
Lake and Goldman Sachs’ as financial advisers on his proposal to privatize Tesla.”
- 46 -
In fact, neither of these entities had signed on as financial advisors to Musk.
141. Still, at another Special Meeting held three days later, on August 16,
2018,
of what The New York Times interview revealed when it was published. The article,
stress that he had been under, his use of Ambien, and the manner in which the Go-
Private Tweets had been conceived. Musk confirmed that “no one saw or reviewed
his tweet about the plan to take the electric-car maker private before he posted it,”
and that he typed the initial Go-Private Tweet as he was driving himself to an
airport. The interview also revealed that, as The New York Times summarized
elsewhere, that Musk had “taken to Twitter impulsively” and “because he was not
- 47 -
the kind of person who could hold things in, and was angry at the company’s
critics.”
143. The New York Times also reported that some members of Tesla’s Board
were “blindsided” by the Go-Private tweets, and that “some board members have
expressed concern” about Musk, including “his use of ambien.” Nonetheless, despite
even Musk’s own troubling admissions about his headspace and behavior, the
minutes of another Special Meeting of the Board on the day after the interview was
144. Finally, at another Special Meeting the following day, on August 18,
simply
145. On August 24, 2018, Musk changed course and announced that Tesla
- 48 -
would stay public.17
Despite Musk’s erratic behavior and concerning interview with The New
147. Yet, even if Tesla was no longer considering going private, the SEC
was still investigating the Go-Private Tweets — which made it all the more
egregious that Musk continued his reckless social media communications. For
Joe Rogan, during which he smoked marijuana and drank whiskey (the “Rogan
Podcast”).
17
Elon Musk, Staying Public, Tesla Blog, Aug. 24, 2018,
https://www.tesla.com/blog/staying-public.
- 49 -
148. At a special meeting of Tesla’s Board on September 10, 2018, the
Board discussed
149.
150. However, Musk threatened to “resign on the spot” if the Board accepted
the settlement offer and also “demanded the board publicly extol his integrity.”18
The Board caved to Musk’s demands. Tesla’s stock price fell 14% following
18
James B. Stewart, Elon Musk’s Ultimatum to Tesla: Fight the S.E.C., or I Quit,
N.Y. TIMES, Oct. 2, 2018, https://www.nytimes.com/2018/10/02/business/tesla-
elon-musk-sec.html
- 50 -
disclosure of Tesla’s refusal to settle. Jeffrey Sonnenfeld, a professor at the Yale
Kool-Aid of the founder,” and noting the decision to pull out of the settlement “is
151. On September 27, 2018, the SEC initiated the SEC Action by filing a
complaint charging Musk with securities fraud. In addition to financial damages, the
SEC Action sought to bar Musk from serving as an executive or director of any
152. In its complaint, the SEC alleged that for at least five years, Tesla failed
153. On September 29, 2018, the SEC announced that it had entered into a
settlement agreement with Musk to resolve the lawsuit filed two days earlier. The
SEC also filed the Tesla SEC Action, charging Tesla with failing to have sufficient
• Musk and Tesla each pay a $20 million penalty. The combined
$40 million in penalties will be distributed to harmed investors
under a court-approved process.
155. Thus, because the Board gave in to Musk’s threats and did not settle
with the SEC just a few days earlier, Musk was forced to pay double the initial fine
offered and the Company was charged by the SEC and forced to pay a $20 million
penalty.
156. Tesla’s settlement with the SEC imposed a heightened duty on the
Board to ensure compliance with the terms of the settlement and to exercise
increased oversight of Musk, who the Board knew was engaging in unlawful conduct
that put the Company at a materially increased risk of harm. The Board failed to
- 52 -
157. On October 1, 2018, Musk tweeted a link to the video for the song
“O.P.P.” and captioned the video “Naughty by Nature” with a winking emoji.20
158. Tesla’s Board called a special meeting the next day, at which
159. On October 16, 2018, the District Court overseeing the SEC Action and
the Tesla SEC Action entered the terms of the SEC Settlements as part of final
160. Just ten days later, on October 26, 2018, Musk said on Twitter that the
20
The Wall Street Journal, “Elon Musk Stirs Controversy on Twitter in Wake of
SEC Settlement,” Oct. 1, 2018.
- 53 -
$20 million fine was “worth it.”
relinquished his position as Chairman of the Tesla Board. The position was filled
instead by Denholm.
Lesley Stahl: The impression was that she was put in to kind of
watch over you.
Elon Musk: Yeah, I mean that’s not realistic. I mean I’m the largest —
Elon Musk: Yeah. It — it’s not realistic in the sense that I am the
largest shareholder in the company. And I can just call for a
shareholder vote and get anything done that I want.
violation of the SEC Settlements — Tesla was not taking seriously its duty to
monitor his social media posting, and that Musk himself had no respect for the SEC:
Lesley Stahl: Have you had any of your tweets censored since the
settlement?
- 54 -
Lesley Stahl: None? Does someone have to read them before they
go out?
Elon Musk: The only tweets that would have to be say reviewed would
be if a tweet had a probability of causing a movement in the stock.
Lesley Stahl: But how do they know if it’s going to move the market
if they’re not reading all of them before you send them?
Elon Musk: Well, I guess we might make some mistakes. Who knows?
Elon Musk: I want to be clear. I do not respect the SEC. I do not respect
them.
164. Shortly after Musk revealed his and Tesla’s noncompliance with the
Policy states:
- 55 -
or other publication, be submitted to Tesla’s General Counsel and
Disclosure Counsel (or in the event of the General Counsel’s
unavailability, Tesla’s Chief Financial Officer and Disclosure Counsel)
for pre‐approval Authorized Executives are not authorized to post or
publish Written Communications that contain, or reasonably could
contain, information material to Tesla or its stockholders without
obtaining pre‐approval.21
from the General Counsel), and any Tesla Vice President or higher employee
166. On December 28, 2018, Tesla announced that — also pursuant to the
SEC Settlement — it had elected Ellison and Wilson-Thompson to its Board. In the
21
SEC Action, ECF No. 18-1.
- 56 -
same announcement, Tesla stated that it “intend[ed] to certify to the [SEC] that it
and Elon have timely completed each of their respective actions required pursuant
to the Settlement.”
167. Yet Tesla did not disclose what the Board knew
Butswinkas stated that he was personally motivated by Tesla’s mission to join the
Company: “I would have never imagined joining a company in-house. But Tesla
presents a unique and inspiring opportunity. Tesla’s mission is bigger than Tesla —
one that is critical to the future of our planet. It’s hard to identify a mission more
169. Yet, even with a new Board Chairperson, two new Directors, and a new
170. On February 19, 2019, at 7:15 p.m. Musk once again took to his Twitter
account to announce: “Tesla made 0 cars in 2011, but will make around 500k in
- 57 -
2019.” This information was incorrect. Four hours later Musk tweeted: “Meant to
say annualized production rate at end of 2019 probably around 500k, i.e 10k
regarding Tesla’s business” and thus triggers the pre-approval requirements imposed
172. On February 20, 2019, SEC staff asked Musk and Tesla to confirm
the SEC Settlement. That same day, the Company’s brand new General Counsel
Butswinkas announced he was leaving the Company — just months after declaring
that Tesla’s mission was “critical to the future of our planet. It’s hard to identify a
Journal that his firm, Williams & Connelly, would continue to represent Tesla. But
just three days after the Motion for an Order to Show Cause was filed, on February
28, 2019, Williams & Connelly moved to withdraw as counsel for Musk in the SEC
Action.
Tesla, counsel for Tesla confirmed that Musk’s 7:15 tweet had not been pre-
- 58 -
approved, as required by the Policy. Only after Tesla’s “Designated Securities
Counsel” saw the initial tweet did that counsel meet with Musk to draft the correction
together.22
175. On February 25, 2019 the SEC filed a Motion to for an Order to Show
Cause in the SEC Action, seeking to hold Musk in contempt for violating the SEC
Settlement (attached hereto with all exhibits as Exhibit C and incorporated herein by
On February 20, 2019, SEC staff asked Musk and Tesla to confirm
whether Musk had complied with Tesla’s pre-approval procedures as
required by the Court’s Final Judgment before he published the 7:15
and 11:41 tweets. On February 22, 2019, in correspondence on behalf
of both Musk and Tesla, counsel confirmed that Musk’s 7:15 tweet had
not been pre-approved, as required by Tesla’s Policy and the Court’s
Final Judgment. According to counsel, immediately upon seeing
Musk’s 7:15 tweet for the first time after Musk had published it, Tesla’s
“Designated Securities Counsel” arranged to meet with Musk, and they
drafted Musk’s corrective 11:41 tweet together. Id. The first sentence
of the 11:41 tweet acknowledged that Musk’s 7:15 tweet was not
accurate: “Meant to say annualized production rate at end of 2019
probably around 500k, i.e 10k cars/week.”
Ex. C at 5-6 (internal citations omitted). The Contempt Motion also alleged that
Musk and Tesla also “acknowledged that they ‘are cognizant of the applicable
22
SEC Action, ECF No. 18-4 at 3.
- 59 -
communication contains, or reasonably could contain, material information.’” Ex.
177. That same day, Musk responded by mocking the SEC, tweeting in
response to a story about the SEC’s motion: “SEC forgot to read Tesla earnings
178. The following day, February 26, 2019, the Court overseeing the SEC
179. Once again, and even after the SEC had filed for an Order to Show
180. Early the next on February 27, 2019, Musk issued a series of cryptic
- 60 -
tweets: “Thursday 2pm”; “California”; “Some Tesla news,” creating further
announcements fueled rabid speculation and drove Tesla’s stock price up about 6%.
181. Ultimately, Musk’s attempt to build hype may have backfired: the
“Tesla news,” it turned out, was an announcement of a cheaper Model 3 that Tesla
told its stockholders it would release in the next few weeks — alongside news that
Tesla would not be profitable in the first quarter. Investors were deflated, undoing
the speculative gains before and then some, driving the stock price down more than
3% by the close of the following day. One analyst noted that “Given its seeming
abruptness, it does not appear that [the] announcement was made from a position of
strength[.]” That announcement and Tesla’s web site indicated that if someone
wished to purchase a $35,000 Model 3, they would receive it “quickly” and Tesla’s
order page was updated to reflect that new $35,000 Model 3 orders would be
conference call that was not made public either prior to, or after, the call with
selected analysts and press, during which a Tesla investor relations person stated
“please do not publish the recording or transcripts of this call.” During the call,
Musk spoke on behalf of Tesla, refusing to discuss the $35,000 Model 3 profit
margins despite several questions from analysts and reporters on this point and
- 61 -
divulged details about Tesla’s plans for significant reductions in force and material
that new orders would not be delivered until “let’s say June,” directly contradicting
Tesla’s earlier guidance. Tesla itself has not issued a Form 8-K with a transcript of
that call, despite a Tesla spokesperson advising a reporter from the L.A. Times to
“refer to what Elon said on the call” for material information explaining the
difference between the Tesla web site delivery estimate and the conference call
guidance.
details concerning Tesla’s profit margins on the $35,000 Model 3. Deutsche Bank
analyst Emmanuel Rosner published a report for Deutsche Bank’s clients called “SR
entered by the Court on April 30, 2019, pursuant to which Tesla again revised its
- 62 -
185. Among other things, the Revised Policy required that Musk get written
information that contains “Specified Information,” which the Revised Policy defines
as:
• any event requiring the filing of a Form 8-K by Tesla with the
Securities and Exchange Commission, including:
o a change in control; or
- 63 -
• a change in the Company's directors; any principal executive
officer, president, principal financial officer, principal
accounting officer, principal operating officer, or any person
performing similar functions, or any named executive officer; or
186. The Policy further provides that once any communication under the
of NASDAQ trading hours which the Policy states is intended to allow all investors
187. Despite the fact that the Revised Policy explicitly prohibits Musk from
tweeting about production numbers and forecasted guidance without following the
procedures set forth therein, on July 29, 2019 Musk tweeted previously undisclosed
guidance about Tesla’s purported ramp up of solar roof production, stating that the
Tesla would produce 1,000 solar roofs per week by the end of 2019.
188. Expected production numbers for the solar roof previously had not been
disclosed by Tesla. Indeed, Tesla did not mention the solar roof product at all in its
regarding solar roof production during its earnings call a mere five days prior, though
the Company did disclose disappointing results for deployments in its retrofit solar
- 64 -
business during the second quarter. Musk’s Guidance Tweet unquestionably was
covered by the Policy. Tesla declined to respond to reporters’ inquiries into whether
the tweet was pre-approved in accordance with the Revised Policy. Because only 56
minutes passed between when Mr. McCaffrey sent his tweet to Musk and when
Musk responded to the tweet, and because Tesla did not issue this guidance during
its earnings call that took place a mere five days prior, there is ample basis to infer
that the Guidance Tweet was published in violation of Tesla’s policies and the SEC
Settlement.
Section 220 Demand confirmed that the tweet was not pre-approved
190.
- 65 -
191. On August 7, 2019 Tesla
192.
193.
194.
- 66 -
195. Moreover, the documents produced in response to Plaintiff Gharrity’s
196. Because the Board has done nothing to ensure compliance with the SEC
Judgments, E. Musk’s unlawful conduct has continued unabated, with Musk openly
flaunting any concern about violating the Judgment. As Musk admitted to Lesley
Stahl on the 60 Minutes interview, “Well, I guess we might make some mistakes.
Who knows?” and “I want to be clear. I do not respect the SEC. I do not respect
them.”
- 67 -
197. The Tesla Board, possessed with actual knowledge of the harm to the
Company from Musk’s past conduct, and his public defiance of the SEC even after
entry of the Judgment, had a heightened duty to prevent unlawful conduct by Musk
H.
198. More than a year after the Amended Judgment in the SEC action was
entered on April 30, 2019, Musk issued a tweet at 11:11 a.m EST on May 1, 2020
(the “11:11 tweet”) that stated “Tesla stock is too high IMO.” In response to this
Tweet,
Committee discussed .
- 68 -
200. Three days later, on May 4, 2020, Tesla
202.
- 69 -
The letter stated that
203. These facts demonstrate the Board’s repeated breaches of their duties
of loyalty and good faith. The Board was aware of and had approved the judgment
and amended judgment with the SEC, and had actual knowledge of the steps that
Tesla was required to take in order to comply with the judgments. The Board has
204. Musk’s May 1, 2020 Valuation Tweet destroyed almost $14 billion in
Tesla’s market capitalization, causing Tesla’s stock price to decrease from $761.31
205. The Valuation Tweet was only one in a series of erratic tweets on this
date from the same Twitter account. Musk’s other tweets included lyrics from the
Star Spangled Banner, a tweet that his girlfriend Grimes was mad at him, and several
tweets that he was going to sell all of his material possessions, interspersed with
- 70 -
tweets about his other company, SpaceX.
I. The Board Has Breached Its Duties of Good Faith and Loyalty by
Failing to Appoint an Independent General Counsel and Prevent
Musk From Interfering With the General Counsel’s Duties
206. Tesla’s general counsel directs the company’s legal and policy teams
around the world and reports directly to Musk. It is a key position at the company
that was once held by Todd Maron, who joined Tesla in 2013 after working as
Tesla in 2014.
207. Musk has always sought to appoint a General Counsel that would
protect his interests first and those of Tesla second. In 2019, Tesla lost three general
counsels in one year because the lawyers were either too close to Musk or felt they
Connolly, would become the next general counsel to Tesla Inc., arriving as the
quickly learned that Musk ran the show and experienced what he later referred to,
when he resigned after less than two months on the job, as “culture clash.”
210. But Butswinkas’ departure was the result of far more than just a
- 71 -
“culture clash.” Butswinkas resigned in an extraordinarily hasty fashion, especially
Butswinkas resigned one day after Musk published the February 19, 2019 tweet
(“Tesla made 0 cars in 2011, but will make around 500k in 2019”) that caused the
SEC to sue him and Tesla for contempt of the SEC Judgment within a week of
211. Since Musk admitted the very next day that his tweet was not accurate,
and Butswinkas resigned that very day, the implications are very clear that
Butswinkas had not been able to curtail Musk’s conduct in violation of the Judgment.
In fact, the gravity of the harm to Tesla on February 20, 2019 must have been
Butswinkas did not want to be implicated in any contempt proceeding. “I don’t think
it’s a coincidence that the general counsel is leaving after a tweet that appears to
RebeccaDrives.com, an auto-industry and car review website. “It calls into question
the oversight of the board and the adherence to the S.E.C. settlement.”
212. But more broadly, these facts shine a light on the Board’s failure to
ensure adequate consideration of the best interests of Tesla. But Musk has always
filled that role with someone whose first fealty was to him, not Tesla. Butswinkas’
- 72 -
appointment was perhaps a feeble attempt to break that pattern, but it didn’t work;
213. When Butswinkas resigned, Musk predictably filled the role with a
long-time insider with loyalty to him. Jonathan Chang, who had worked with Tesla
as an employee and outside counsel for more than a decade, was named to replace
Butswinkas. Chang had first begun working with Tesla in 2006 at Latham &
Watkins. He joined Tesla in 2011 following Tesla’s IPO, and had been named vice
214. Chang also had a very short tenure as general counsel. On December
12, 2009, it was reported that Chang was resigning as Tesla’s General Counsel in an
article entitled “Tesla Loses Its Third General Counsel in a Year.”23 The article
noted that “With Chang’s departure, Tesla has now lost three general counsels in the
past year. Tesla’s general counsel Todd Maron left the company in December 2018.
Maron’s successor, Dane Butswinkas, left the company in February 2019 after just
two months on the job because he was not a good cultural fit, a source familiar with
215. The fact that Tesla lost three general counsel’s in one year reflects the
fact that none of them were able to exercise any advice on matters that differed from
23
See Annie Palmer, “Tesla Loses Its Third General Counsel in a Year,” CNBC,
Dec. 12, 2019.
- 73 -
Musk’s desired outcome. The Board was well aware of the need for Tesla to have a
General Counsel who could provide advice as to what was in Tesla’s best interests.
It was also well aware that Musk was interfering with the General Counsel and
dictating Tesla’s positions on issues, including with respect to compliance with the
SEC’s Judgment. The Board has failed to take necessary action to ensure that Tesla
has an independent General Counsel and to ensure that Musk does not improperly
interfere with the General Counsel’s job of representing the best interests of Tesla,
- 74 -
TESLA HAS INCURRED SIGNIFICANT MONETARY DAMAGES
conduct alleged herein. Not only has Tesla been forced to pay a $20 million fine, it
has had to pay to defend against the SEC Actions, securities class actions, and
investigations related to the conduct described herein due to both Musk’s actions
and the inaction of the Board, causing substantial financial harm to Tesla.
218. On April 15, 2020, Judge Chen denied the motion to dismiss brought
by defendants in the related securities fraud class action complaint, exposing Tesla
to significant damages. See 477 F. Supp. 3d 903 (N.D. Cal. Apr. 15, 2020).
Gracias, James Murdoch, Kimbal Musk, and Linda Johnson Rice are defendants in
that case, and thus face a substantial likelihood of liability in such case, impairing
the misconduct and inaction alleged herein. Whereas Tesla stock traded intraday at
$342.52 just prior to the August 7 “funding secured” tweet by Musk, by the time
Musk ultimately admitted after the close of the market on August 24, 2018 that he
would not pursue a going-private transaction, the Company’s stock price closed the
next trading day, August 27, 2018, at $319.27 per share. The result of this price drop
- 75 -
was that Tesla’s total market capitalization fell by approximately $3.96 billion,
220. Further, whereas Tesla stock price closed at $305.64 per share prior to
February 19, 2019, after Musk admitted his false statement, the next trading day,
February 20, 2019, the Company’s stock price closed at $302.56 per share. The
result of this price drop was that Tesla’s total market capitalization fell
making of the Valuation Tweet stating that Tesla was overvalued, Tesla’s market
222. On top of the substantial costs to Tesla arising from the misconduct that
are summarized above, the misconduct and surrounding fallout imposed heavy
downward pressure on Tesla’s stock price at a time when the Company would soon
need to spend cash to redeem convertible bonds if the stock price dropped too low.
223. Specifically, Tesla had $920 million in convertible bonds that came due
in March 2019 with a conversion price of $359.87. If Tesla’s stock was trading at
less than $359.87 per share, it would have had to spend cash to redeem the bonds. In
the aftermath of the Go-Private Tweets and as a result of the misconduct alleged
herein, Tesla’s stock was trading well below the strike price for the convertible
- 76 -
bonds. Indeed, commentators observed that “Elon Musk’s latest twitter meltdown
almost assures Tesla’s $920M bond will be paid in all cash.” On March 1, 2019,
commentators’ predictions proved correct, and Tesla was forced to deplete its cash
224. Tesla has incurred, and will continue to incur, substantial costs in
increased financing costs and costs resulting from investigations, fines, attorneys’
fees and expenses, advancement, and reputational harm. The SEC Settlements did
not end the lawsuits and government investigations resulting from the misconduct,
which continue to expose the Company to harm, and which in turn Musk’s continued
225. On September 18, 2018, it was reported that the DOJ had opened a
preliminary instigation into Musk’s tweets.24 In addition, the FBI has launched a
criminal investigation into whether Tesla misstated information about the production
investor conference call, Musk claimed he was pushing suppliers to “to be ready for
24
Matthew Goldstein et al., Justice Department Is Examining Tesla After Musk
Comment, N.Y. TIMES, Sept. 18, 2018, https://www.nytimes.com/
2018/09/18/business/tesla-elon-musk-justice-department.html; Tom Schoenberg
& Matt Robinson, Tesla Is Facing U.S. Criminal Probe Over Elon Musk
Statement, BLOOMBERG, Sept. 18, 2018,
https://www.bloomberg.com/news/articles/2018-09- 18/tesla-is-said-to-face-u-s-
criminal-probe-over-musk-statements.
- 77 -
a weekly run rate of 1,000 vehicles in July to 2,000 in August and 4,000 in
September.” On July 2, 2017, Musk tweeted: “Looks like we can reach 20,000
Model 3 cars per month in Dec.” However, as of September 2017, Tesla’s body
shop was not even fully functional. Tesla did not come close to meeting the
production goals claimed by Tesla, producing only 2,700 Model 3’s for all of 2017.
226. On November 1, 2018, Tesla filed a Form 10-Q with the SEC, reporting
that “the SEC has issued subpoenas to Tesla in connection with (a) Mr. Musk’s prior
statement that he was considering taking Tesla private and (b) certain projections
that we made for Model 3 production rates during 2017 and other public statements
relating to Model 3 production. The DOJ has also asked us to voluntarily provide
227. Musk’s Guidance Tweet and Valuation Tweet show that the SEC
228. Professor Sonnenfeld has opined that “Tesla investors must realize that
they have a panicky, erratic, possibly self-destructive C.E.O. at the helm. No C.E.O.
25
Dana Cimilluca et al., Tesla Faces Deepening Criminal Probe Over Whether It
Misstated Production Figures, WALL ST. J., Oct. 26, 2018, https://www.wsj.com/
articles/tesla-faces-deepening-criminal-probe-over-whether-it-misstated-
production-figures-1540576636.
- 78 -
is ever this confused and confusing.”26
229. The announcement of the SEC investigation caused Tesla’s stock price
confirmed in a note to investors that “[w]e are concerned that decreased confidence
in Tesla on the part of investors may impact the company’s ability to raise capital on
amenable terms.”
230. Indeed, as demonstrated by the fact that the Company was compelled
to deplete its cash reserves that otherwise could have been redeemed with stock but
for the downward pressure on the Company’s stock price caused by Musk’s unlawful
tweets, further unchecked tweeting by Musk can have severe ramifications on the
231. Finally, Musk’s unchecked behavior drives out the very voices in the
Company meant to stand up to him and protect the Company and its investors. The
day after Musk violated the SEC Settlement, Tesla’s esteemed new General Counsel
— who declared Tesla’s mission was “critical to the future of the planet” — quit. “I
don’t think it’s a coincidence that the general counsel is leaving after a tweet that
26
David Gelles, Why Elon Musk Reversed Course on Taking Tesla Private, N.Y.
TIMES, Aug. 25, 2018, https://www.nytimes.com/2018/08/25/business/elon-musk-
tesla-private.html.
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RebeccaDrives.com, an auto-industry and car review website. “It calls into question
the oversight of the board and the adherence to the S.E.C. settlement.”
Judgment has caused substantial harm to Tesla. Musk’s Valuation Tweet destroyed
almost $14 billion of Tesla’s market capitalization in a single day — more than three
times the harm caused to Tesla by Musk’s go-private tweet. This happened despite
the SEC Settlements, despite the existence of the Revised Policy, and despite
changes to the composition of the Board. Musk and the Board have failed Tesla and
unchecked.
233. Plaintiff brings this action derivatively in the right and for the benefit
of the wrongdoing alleged herein, and has been stockholders of Tesla continuously
235. Plaintiff will adequately and fairly represent the interests of Tesla in
enforcing and prosecuting its rights, and has retained counsel competent and
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experienced in derivative litigation.
236. As a result of the facts set forth herein, Plaintiff has not made any
demand on the Board to institute this action against Musk. Such a demand would be
a futile and useless act because the Tesla Board is incapable of making an
action. The Board has consistently proven itself to be incapable of preventing Musk
from continuing his unlawful and damaging tweets. Any demand upon the Board to
take action against itself or Musk would be futile because the Board itself has failed
237. Because Musk controls indemnification for any liability found against
i.e., five (5), cannot exercise independent objective judgment about whether to bring
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239. The Board faces a substantial likelihood of liability because it caused
or otherwise permitted Tesla to issue false and misleading statements concerning the
directorial positions with Tesla, the Board had knowledge of material non-public
information regarding the Company and were directly involved in the operations of
240. The Board either knew or should have known of the false and
misleading statements that were issued on the Company’s behalf and took no steps
241. The Board (or at the very least a majority of Board members) cannot
whether to vigorously prosecute this action. For the reasons that follow, and for
reasons detailed elsewhere in this Complaint, Plaintiff has not made (and is excused
from making) a pre-filing demand on the Board to initiate this action because making
242. The Board approved and/or permitted the wrongs alleged herein to have
occurred and participated in efforts to conceal or disguise those wrongs from the
wrongs complained of herein and are therefore not disinterested parties. The Board
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THIS DOCUMENT IS A CONFIDENTIAL FILING. ACCESS IS PROHIBITED
EXCEPT AS AUTHORIZED BY COURT ORDER
is interested because they engaged in conduct which is not protected by the business
judgment rule in connection with their failure to protect the Company against
Tesla represents an egregious breach of the Board’s duty of loyalty, since the general
counsel’s role is to protect Tesla’s interests rather than any personal interests
departure of Tesla’s esteemed general counsel after Musk plainly violated the SEC
Settlements in February 2019 “calls into question the oversight of the board and
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245. The failure of the Board to appoint an independent General Counsel at
Tesla demonstrates the Board’s breach of its duties of loyalty and good faith.
246. Many highly respected legal scholars have commented on the failures
of the Board in addressing the SEC Action and Musk’s underlying misconduct as
27
James B. Stewart, Elon Musk’s Ultimatum to Tesla: Fight the S.E.C., or I Quit,
N.Y. TIMEs, Oct. 2, 2018,
https://www.nytimes.com/2018/10/02/business/tesla-elon-musk-sec.html.
28
John C. Coffee, Jr., Bonfire of the Vanities — 2018 Style: The Case of Elon Musk,
CLS BLUE SKY BLOG, Oct. 2, 2018,
http://clsbluesky.law.columbia.edu/2018/10/02/bonfire-of-the-vanities-the-case-of-
elon-musk/.
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More important, one large unanswered question remains: Where was
Tesla’s board in all this? The only answer is: missing in action!
Indeed, it publicly stood behind Musk, expressing its support on
Thursday, while he placed at risk a large percentage of Tesla’s value
for no good reason (other than to avoid personal embarrassment).
The current Tesla board is an old boys club, and none of Musk’s
buddies can hold him accountable. Without a strong monitor, our
reckless entrepreneur will predictably fall victim again to his
impulses.
The Wall Street Journal, entitled “Elon Musk Tweet Mocks the Securities and
regulators who only days earlier charged him with fraud and sought to ban him from
Tesla takes Mr. Musk’s defiance to a new level.” It also quoted former SEC
violation of the Senior Executive Communications Policy, the Board said nothing as
he publicly tweeted that “[s]omething is broken with SEC oversight.” That the Board
still has not imposed meaningful restrictions on Musk’s use of his Twitter account,
especially when dealing with Tesla’s business and its dealings with its securities
29
Tim Higgins & Gabriel T. Rubin, Elon Musk Tweet Mocks the Securities and
Exchange Commission, WALL ST. J., Oct. 4, 2018, https://www.wsj.com/articles/
elon-musk-tweet-appears-to-mock-the-securities-and-exchange-commission-
1538685320.
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regulator, the SEC, further shows the Board’s complete abdication of its fiduciary
250. In other words, at all relevant times the Board was on explicit notice
that they were failing in their duties, but nonetheless continued to authorize and/or
permit Musk and the Company to make false statements that disseminated directly
to the public and made available and distributed to shareholders, authorized and/or
permitted the issuance of various false and misleading statements. The Board is the
principal beneficiary of the wrongdoing alleged herein, and thus, could not fairly
and fully prosecute such a suit even if they instituted it. Thus, for this reason alone,
demand is excused.
consider a demand, because they knowingly abdicated their duties and caused Tesla
to violate the Final Judgments, as well as the SEC Settlements and the Senior
exposing the Board, and Tesla, to a substantial threat of liability. Therefore, demand
is excused.
252. On April 15, 2020, Judge Chen denied the motion to dismiss brought
by defendants in the related securities fraud class action complaint, exposing Tesla
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Ehrenpreis, Antonio J. Gracias, James Murdoch, Kimbal Musk, and Linda Johnson
Rice are defendants in that case, and thus face a substantial likelihood of liability in
action.
254. Most importantly, the Board is insured, and thus indemnified, by Musk
personally for a majority of the harm caused by Musk alleged herein. The Board
Musk could refuse to pay out the “insurance policy” if the Board elected to proceed
with an investigation of him, and the Board would have every incentive to abandon
that investigation.
255. Additionally, separate and apart from the fact that Musk is personally
insuring the directors of Tesla, at all relevant times, a majority of the Board was not
a. Elon Musk
as CEO of Tesla. According to the Company’s most recent Proxy Statement, filed
with the SEC on May 28, 2020, the Board acknowledges that Musk is not
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independent. Musk owns approximately 20% of Tesla’s stock. In the March 28, 2018
the Delaware Court of Chancery ruled that it was reasonably conceivable that Musk
was the Company’s controlling stockholder. Musk also admitted his control over
Tesla during his 60 Minutes interview in which he stated, “I can just call for a
for breaching his fiduciary duties of loyalty and good faith for his behavior,
including the Go-Private Tweets, which have caused the SEC Action and damaged
the Company through the SEC Settlement, as well as the Guidance Tweet and the
Valuation Tweet, all of which potentially violated the SEC Settlements and,
particularly in the case of the Valuation Tweet, caused Tesla massive damage.
258. Musk is also interested because he was Chairperson on the Board when
the Company approved the SEC Settlements and adopted the Senior Executives
Communications Policy and was a director when the Company approved the
Revised Policy. As Director, Musk faces a substantial likelihood of liability for the
Board’s failure to enforce the Senior Executives Communications Policy, which led
to his February 2019 tweets, the subsequent legal action of the SEC, the Guidance
259. For all of these reasons, Musk cannot disinterestedly and independently
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consider a demand to prosecute the claims alleged herein.
b. Larry Ellison
261.
likelihood of liability for the Board’s failure to enforce the Senior Executives
Communications Policy and Revised Policy, which led to Musk’s February 2019
tweets, the subsequent legal action of the SEC, the Guidance and Valuation Tweets,
263. Ellison also has received very large compensation as a director of Tesla.
$5,868,976.
a demand.
c. Gracias
when Gracias invested in PayPal. Musk subsequently provided Gracias and Valor
SolarCity, Tesla, and SpaceX, and appointed him to the board of directors of each
company. In fiscal year 2015, Gracias received almost $11 million in aggregate
as a director of SpaceX.
267. In addition, both Musk and K. Musk are invested in various Valor
Gracias’s value to Tesla: “I’d like to thank Valor for being a key investor. And not
just an investor, but a strategic partner. I don’t think we would’ve made it without
their help, so thank you.”30 Gracias uses these testimonials and his relationship with
Elon Musk to solicit fund investors and entrepreneurs seeking venture capital on
behalf of Valor.
Board. By way of example, in fiscal year 2018, Gracias earned compensation valued
30
Testimonials, http://www.valorep.com/about (follow Testimonials hyperlink)
(last visited Feb. 28, 2019).
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269. In May 2018 Institutional Shareholder Services (“ISS”), a proxy
advisory firm, recommended that shareholders vote against Gracias as director also
in Tesla’s 2018 elections because after its analysis ISS viewed Gracias as non-
independent. ISS wrote that Gracias, CEO of Valor Management Corp, is not
sufficiently independent for key Tesla board committees. It also cited concerns
270. A May 19, 2018 Bloomberg article entitled “Tesla Shareholders Urged
letter filed with the SEC on May 9, 2018 on Form PX14A6G, CtW wrote that
“Antonio Gracias, a venture capital investor with multiple ties to Elon Musk, lacks
the independence to serve as Lead Independent director, and has not initiated the
31
Dana Hull, Tesla Shareholders Urged to Separate Chairman’s Role from Musk,
BLOOMBERG, May 19, 2018, https://www.bloomberg.com/news/articles/ 2018-05-
19/tesla-shareholders-urged-to-separate-chairman-s-role-from-musk.
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much-needed process of board renewal.” In this letter CtW also stated:
Antonio Gracias has extensive personal and business ties to Elon Musk,
which we believe make him especially ill-suited for a leadership role
on the Tesla board. Mr. Gracias, along with his venture capital firm
Valor Management Corp., participated in four Tesla venture funding
rounds between 2005 and 2008, as well as a pre-IPO venture debt raise
in 2009, joined the Tesla board in 2007, and was named Lead
Independent Director in 2010. Notably, he does not appear to have
served on the board of any public companies that are not associated
either with Valor (i.e., its portfolio companies) or Elon Musk. Mr.
Gracias has been an investor in multiple companies started by Elon
Musk, including PayPal, Solar City (where he was a director), and
SpaceX (where he remains a director). Elon Musk in turn has invested
in at least one Valor fund, and is a personal friend of Mr. Gracias, to
who he gave the second Tesla Roadster ever built.
commence and vigorously prosecute this action because of his personal involvement
in the issues at hand. Specifically, the day that Musk made the Go-Private Tweets,
Musk’s reckless
Board when the Company approved the SEC Settlements and adopted the Senior
substantial likelihood of liability for the Board’s failure to enforce the Senior
Executives Communications Policy and the Revised Policy, which led to Musk’s
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February 2019 tweets, the subsequent legal action of the SEC, the Guidance and
274. For all these reasons, Gracias cannot disinterestedly and independently
d. K. Musk
against his brother, Elon Musk. K. Musk sits on the Boards of Directors of Tesla and
SpaceX by virtue of being Elon Musk’s brother, and collects significant director fees
Musk as director in Tesla’s 2018 elections. In a letter filed with the SEC on May 9,
2018 on Form PX14A6G, CtW wrote that “Kimbal Musk — Elon Musk’s brother
auto industry, and has proven ineffective as a public company director at Chipotle.”
Kimbal Musk is Elon Musk’s brother, and has served on the Tesla
Board since April 2004. He is also the cousin of Lyndon and Peter Rive,
Solar City’s co-founders. Kimbal Musk is also an investor in two Valor
venture capital funds, which are managed by Mr. Gracias. While Tesla
acknowledges that Kimbal Musk is not an independent director, the
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board has nevertheless re-nominated him: we view this decision,
following both Tesla’s poor first quarter and the court’s citation of
extensive board conflicts, all but inexplicable. Or, rather, we would find
it inexplicable if Tesla were anything like a well-run public company.
Unfortunately, we know exactly why Kimbal Musk was re-nominated
despite lacking any relevant industry experience or possessing a track
record of effective public company board service [], and his re-
nomination goes to the heart of the problems with Tesla’s board: too
many of these directors, including all three of this years’ nominees, are
incapable or unwilling to contradict Elon Musk’s whims and finally
insist on a board renewal process that provides shareholders with
competent and effective representation.
close friend with whom he sits on both the Tesla Board and the SpaceX Board),
because of Gracias’s control over private equity funds in which K. Musk has
Board when the Company approved the SEC Settlements and adopted the Senior
substantial likelihood of liability for the Board’s failure to enforce the Senior
Executives Communications Policy and the Revised Policy, which led to Musk’s
February 2019 tweets, the subsequent legal action of the SEC, the Guidance and
279. For all these reasons, K. Musk cannot disinterestedly and independently
against Musk. Ehrenpreis, his partner Pfund, and the various funds they manage have
Tesla Board. By way of example, for serving as a Tesla director, in 2018 Ehrenpreis
Musk, in September 2015, Musk gave Ehrenpreis one of the first Tesla Model X’s
ever produced. And two years later, Musk gave Ehrenpreis the rights to the first
Tesla Model 3. Ehrenpreis then paid for the Model 3 and gifted the car back to Musk
283. As stated in the April 26, 2018 Proxy Statement (“2018 Proxy
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Mr. Ehrenpreis is a co-owner of DBL Partners. Another co-owner of
DBL Partners is a manager of DBL Investors, which is also an investor
in Space.
284.
Board when the Company approved the SEC Settlements and adopted the Senior
substantial likelihood of liability for the Board’s failure to enforce the Senior
February 2019 tweets, the subsequent legal action of the SEC, the Guidance and
f. Denholm
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287. Denholm cannot disinterestedly and independently consider a demand
against Musk. Indeed, in an interview with 60 Minutes after Denholm was elected
her” and said it was “not realistic” to think Denholm could “watch over” him.
because of the out-sized compensation she receives as a member of the Tesla Board
Operating Officer (“COO”) and earned $890,006 in total compensation for that year.
289. Finally, Denholm is also interested because she was a director on the
Board when the Company approved the SEC Settlements and adopted the Senior
substantial likelihood of liability for the Board’s failure to enforce the Senior
February 2019 tweets, the subsequent legal action of the SEC, the Guidance and
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290. Denholm is the chair of the Disclosure Controls Committee. The
consent agreement with the SEC dated September 29, 2018, as amended April
26, 2019;
disclosures, if applicable.
291. Denholm has abdicated her duties as Chair of the Disclosure Controls
Committee and has failed to curtail Musk’s wrongful conduct. For all of these
g. Mizuno
liability for the Board’s failure to enforce the Senior Executives Communications
Policy and Revised Policy, which led to Musk’s Valuation Tweet, and potential
h. Murdoch
294. Murdoch is interested because he was a director on the Board when the
Company approved the SEC Settlements and adopted the Senior Executives
likelihood of liability for the Board’s failure to enforce the Senior Executives
Communications Policy and Revised Policy, which led to Musk’s February 2019
tweets, the subsequent legal action of the SEC, the Guidance and Valuation Tweets,
Tesla Board, noting that Murdoch is “overboarded” since he serves as the CEO of
Twenty-First Century Fox Inc (FOXA.O) and on other boards. Glass Lewis also
consent agreement with the SEC dated September 29, 2018, as amended April
26, 2019;
disclosures, if applicable.
Tesla Board. As disclosed in Tesla’s 2018 Proxy Statement, for serving as a Tesla
$9,031,082 in 2018.
i. Wilson-Thompson
substantial likelihood of liability for the Board’s failure to enforce the Senior
February 2019 tweets, the subsequent legal action of the SEC, the Guidance and
consent agreement with the SEC dated September 29, 2018, as amended April
26, 2019;
disclosures, if applicable.
Disclosure Controls Committee and has failed to curtail Musk’s wrongful conduct.
COUNT I
Derivative Claim Against Musk for Breaches of his Fiduciary Duties in his
Capacities as Director, Officer, and Controlling Stockholder
307. As alleged throughout the complaint, Elon Musk controls Tesla and the
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Board.
309. Musk, as a director and CEO, owes the Company and its stockholders
310. As alleged above, Musk failed to act in accordance with these fiduciary
duties. Specifically, based on the facts alleged above, the Go-Private Tweets,
fiduciary duties and a conscious disregard for his responsibilities not to make false
and materially misleading statements to the market and not to attempt to manipulate
Settlements, and the Final Judgments, breaching his fiduciary duties, subjecting
312. Any breach of the duty of due care by Musk is not exculpated in his
Tesla has sustained and will continue to sustain damages, for which Musk is liable
to the Company.
COUNT II
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Derivative Claim Against the Tesla Board
For Breaches of Fiduciary Duties
316. The Tesla Board owes the Company and its stockholders the fiduciary
317. The Tesla Board acted with a conscious disregard for their
responsibilities to ensure that the Company’s public statements, including those that
Musk made on behalf of the Company through his personal Twitter account, were
not false and materially misleading, including by failing to immediately correct the
Go-Private Tweets, by failing to comply with the SEC Settlement, and by allowing
318. The Tesla Board also acted with a conscious disregard for their
responsibilities to ensure that the Company’s public statements, including those that
Musk made through his personal Twitter account, were not false and materially
provide such controls despite knowing that Musk disseminated false, misleading,
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irresponsible and defamatory information via his Twitter account and despite filing
with the SEC a Form 8-K on November 5, 2013, in which the Company advised
shareholders and the market generally that Musk’s Twitter account would provide
his violations of Tesla’s policies, the SEC Settlements, and the Final Judgments,
breaching their fiduciary duties, and subjecting Tesla to further damages as a result
of those violations.
320. As a direct and proximate result of these breaches, Tesla, Plaintiff, and
all other Tesla stockholders have sustained and will continue to sustain damages, for
the Company;
reasonable attorneys’ fees, accounts’ and experts’ fees, costs and expenses; and
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E. Grant such other and further relief as the Court deems just and proper.
Respectfully submitted,
OF COUNSEL:
BOTTINI & BOTTINI, INC.
Francis A. Bottini, Jr.
Albert Y. Chang
Yury A. Kolesnikov
7817 Ivanhoe Avenue, Suite 102
La Jolla, California 92037
Telephone: (858) 914-2001
Facsimile: (858) 914-2002
Email: [email protected]
[email protected]
[email protected]
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