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Securities Lawyers: Potential Tesla Stock Lawsuits Tied to Musk Tweets?

On August 8, 2018, Elon Musk, high flying CEO of Tesla, Inc. tweeted to the world that he was considering taking Tesla private at $420 per share. He said he had the money. The price of the stock skyrocketed, trading was temporarily suspended and the SEC launched an investigation into potential price manipulation. The financing later appeared to have depended on inconclusive conversations with the Saudi government. Some securities lawyers began to consider the impact of Musk’s tweeting on Tesla stock investors, including those who might be invested through their 401k plans. Within a week of Musk’s surprise announcement, several investors had filed Tesla stock lawsuits, claiming that they had suffered financial losses as a result of market manipulation.


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Elon Musk Tweet Roils ERISA Investors

Arianna Huffington suggested that he get more sleep. Some thought it was a marijuana joke.

But millions of ordinary people who invest their retirement savings through employer-sponsored pension plans may be affected by the edgier edges of the market. However the strange tale of the Tesla tweets ultimately works out, the story shines a light on the complicated ways in which ERISA lawsuits, securities regulation and fiduciary duties intertwine.

What should someone whose retirement plan holds Tesla stock or whose 401(k) plan offers a high risk/big payoff stock fund choice do? What about Tesla employees who doubled down by buying Tesla stock through their ESOP?

A Feud with Short Sellers?

Lawsuits filed in the Northern District of California claim that investors purchased Tesla stock at prices that were artificially inflated in the immediate aftermath of the tweet and then suffered significant harm once the price dropped on news that there was no funding.

Some speculate that Musk’s move was just the latest salvo in his ongoing battle with short sellers who have consistently bet against the company’s success. But if his statements were deliberately untrue, they may have serious consequences for both the company and Musk, individually.

Pension Plan Investors and the Stock Market

Securities laws are the first line of defense for workers who save for retirement through workplace retirement plans. Not all pension savings are invested in the stock market, but a sizeable chunk are. In the second quarter of 2016, for example, the Michigan Department of Treasury bought about $48 million of Tesla Motors Inc. stock for state retirement funds. Certain Tesla employees may also buy Tesla stock through the Tesla Employee Stock Purchase Plan

Securities laws protect investors through the application of two broad rules. The first is the sunshine principle, as in “sunshine is the best disinfectant.” Publicly traded companies (but not private companies) are required to disclose a great deal of financial information on a quarterly basis. Individual investors can protect themselves with truthful and complete information. The investment committees of pension plans can avoid ERISA lawsuits in the same way.

The second principle prohibits certain issuers of stock, including many privately traded companies, from marketing the investment to individuals who may not be sophisticated enough to evaluate the risk. Their sophistication -- whether or not they are “qualified investors”-- is measured by their net worth. This rule is considerably more controversial because it precludes many small investors from getting in early with startups and exciting tech companies, invariably described as the “next Facebook,” or the “next Google”.

This is frustrating for investors, including retirement plan investors, who feel stuck with reliable but stodgy investment options. Periodic efforts at legal reform have relaxed the restrictions for individual investors somewhat. Pension plan fiduciaries are governed by other sets of rules, though.

ERISA Adds a Second Layer to the Regulatory Cake

Those in charge of running ERISA plans have a legal duty to discharge their plan responsibilities for the exclusive purpose of providing benefits to participants and beneficiaries. They must act with the care, skill and prudence of a reasonable pension plan expert by diversifying investments, monitoring costs and minimizing the risk of loss.

According to a report issued by the Center for Retirement Research, the three main grounds for ERISA lawsuits, especially those involving 401(k) plans, are inappropriate investment choices, excessive fees and self-dealing.

With the CEO in apparent meltdown, is Tesla stock an inappropriate investment choice? On the other hand, is it inappropriate for pension plan fiduciaries not to include a high risk, but potentially high reward option in a move to maximize the benefits available to participants and beneficiaries? This is the dilemma.

ERISA plan fiduciaries are sometimes advised to address the problem by making investment decisions on the basis of whether an ERISA lawsuit against them would fail on a motion for summary judgment. In normal language, that means that their decisions must be purer than pure, safer than safe. It is a standard that encourages trustees and plan investment committees to be very, very careful.

The Risk of Caution

But excessive caution can also produce legal liability because cautious investing generally depresses return. People who are saving for retirement expect some growth. The truth is that there is an ERISA lawsuit lurking on either side.

For example, careful plan fiduciaries have traditionally avoided private equity or leveraged buyout investing. This is the practice of buying companies, drastically cutting costs in variously unpopular ways, and then re-selling what is left at a profit. For those who remember the 2012 election, this is the kind of business practice associated with Bain Capital.

Nonetheless, confronted with stagnant interest rates and employees more attuned to active investing, public pension funds have been more willing to re-consider these private equity programsCanadian pension funds do it. When people look across the border, they tend to ask pointed and painful questions.

Might the time come when private equity investing is such an accepted practice that plan participants could bring an ERISA lawsuit against fiduciaries if they fail to do so? It seems farfetched, but the point is that reasonable, prudent practice is a shifting standard.

No one has suggested that Elon Musk is engaged in a Bain Capital-like corporate raid. But the increasing tolerance of retirement plan investors for risk and their expectation of return may be relevant to the Tesla decision immediately at hand.

Buy, Sell or Hold?

Maybe Tesla will go private; maybe it will stay public and spook us every quarter about production goals. Maybe it will crater. Who can guess about Elon Musk? The Saudis are opaque. What about the rest of us who hold some mixed funds in their retirement plan portfolio? What recourse do we have?

Plan fiduciaries are not expected to be omniscient, just reasonably good at their jobs. Plan participants are expected to enforce this by being watchful. Among the plans most frequently scrutinized are:
  • 401(k) plans that offer employer securities as an investment option;
  • Plans that offer options that do not perform well ; and
  • Employee stock ownership plans (ESOPs), in particular leveraged ESOPs.
The tale of the Tesla tweets reminds us again that nothing is predetermined about the relationship between good work and good rewards. Nothing is set in stone about the risk/reward ratio, especially in the world of pension and retirement plans. Workers must be proactive and resort to legal processes when required—and in the case of Tesla, Musk’s tweets have at least gotten the attention of attorneys who are looking at the situation through the lens of potential Tesla stock lawsuits.

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