On Thursday (9 August), on the back of a dramatic move by Bullshitter – in Chief Elon Musk, who out of the blue Tweeted that he was taking his electric car / solar panels / space exploration company private, Tesla stocks initially spiked thanks to Musk’s claim that “funding was secured” for the massive buyback needed to take the company off the stock market, then slumped when it emerged that there had been no prior discussion with investors or members of the Tesla board. It quickly became clear that Musk had no funds secured and has already maxed out his company’s credit. Then somewhat more sinister rumours emerged anbout Musk’s motives and gossip in financial markets suggested Musk and Tesla may soon be sued by both traders who had taken short and long positions on the company when the dust finally settles.
To be short on a stock, in very simple terms, means traders have made forward contracts to sell at an agreed proce stock they do not own, in the expectation the market price will fall and the stock needed to cover the contract can be bought more cheaply than the contract price. A long position is simply making a forward contract to buy a stock at a fixed price, anticipating that by the contract date the prive will have risen above that, and the stock can be resold for a quick profit.
In news that emerged yesterday first half of this prediction came true when we learned buth short and long sellers of Tesla stock had filed actions against Tesla and Elon Musk alleging the Tesla CEO and anointed Messia of Silicon Valley tech fanboys had fraudulently engineered a scheme to squeeze short-sellers – something Musk has previously indicated he intended to do – through his shock announcement to take the electric car company private.
The lawsuits were filed three days after Musk’s shocking tweet in which he proposed a record $72 billion transaction that valued the company at $420 per share, and that “funding” had been “secured.” One day later, Bloomberg reported that the SEC had inquired from investment banks about whether this funding was indeed “secured”. the alternative would indicate an attempt by the CEO to launch a short squeeze by materially misrepresenting wishful thinking as reality.
Subsequently on Friday, Bloomberg (again) reported that Tesla’s Board of Directors had only begun canvassing investors and banks about funding of an MBO-type transaction, implicitly confirming that Musk may have misrepresented facts, opening up the company to legal action.
In one of the lawsuits, plaintiff Kalman Isaacs said Musk’s tweets were false and misleading, and together with Tesla’s failure to correct or retract them amounted to an “attack” designed to “completely decimate” short-sellers. The lawsuit filed by Isaacs, and a second one filed by William Chamberlain said Musk’s and Tesla’s conduct artificially inflated Tesla’s stock price and violated federal securities laws.
In the confusion following Musk’s tweet a rumour circulated that Musk had secured an agreement with the government of Saudi Arabia to fund the delisting transaction, but the Saudi Royal House quickly denied any interest in such a deal.