(Fortune) - Elon Musk faces allegations that he illegally sold $7.5 billion worth of equity in Tesla in the fourth quarter of 2022, knowing that the business would disappoint after promising investors an "epic end of year."
In a lawsuit filed with a Delaware court late last week, shareholder Michael Perry accused both the CEO of deliberately unloading nearly 45 million shares in advance of poor vehicle sales data to prevent an estimated 55% hit in value, and almost the entire board of collectively violating their responsibility of directors toward shareholders.
“By disposing of $7,530,113,926 worth of Tesla stock in November and December 2022 while he was in possession of adverse, material non-public information, E. Musk exploited his position at Tesla, and he breached his fiduciary duties to Tesla,” the lawsuit claims, adding other directors were both “knowing and culpable” as well.
Unlike previous stock sales by Tesla insiders, however, these were not the result of a Rule 10b5-1 trading plan, which removes discretion over timing from an insider and hands them to a third-party broker.
Tesla shares slumped to a two-year low on Jan. 3, 2023, following the release of the car sales data.
He is asking for Musk’s illegal gains—which the plaintiff estimates at $3 billion—to be returned to the company via disgorgement, and is seeking damages from all eight directors at the time for their “reckless disregard.”
The insider trading claims are Musk's latest legal headache following the January ruling that voided his 2018 shareholder vote for a record compensation deal. Tesla is re-running the vote at the June 13 annual meeting.
'Ruthless measurers' at Tesla knew Q4 would disappoint
Core to Perry’s argument is establishing motive through the assertions that Musk knew, first, that he still needed to liquidate stock at as high a price as possible to cover a loan for purchasing Twitter; and second, that fourth-quarter sales trended well behind his bullish October 2022 expectations (Fortune even predicted as much at the time).
Just days after boasting about “excellent demand for Q4,” he slashed prices in China—the first of many cuts yet to come.
Musk may have been aware of softening sales because of what his former powertrain head Drew Baglino described last March as a corporate culture composed of “ruthless measurers,” all harnessing up-to-the-minute data to boost sales and optimize every aspect of Tesla’s business.
“I’m not sure there’s any company on Earth that has better real-time data than Tesla,” Musk said during the Q1 investor call last year. “Our finger on the pulse is real-time and does not have latency.”
Musk went so far as to say he personally examines the results of each price change to ensure production can continuously balance demand, rising when Tesla has too many orders and falling when it has too few.
“We see what happens immediately, and adjust course. We’re thinking about it literally every day,” he continued. “Seven days a week I look at that email and so does the rest of the team.”
Using his logic, the CEO would have known that Q4 would not meet market expectations and sold his shares anyway.
Perry’s lawsuit argued that it was reasonable to infer he did so to avoid losing money, having promised nothing short of an “epic end of year” only weeks earlier.
“Musk sold this stock before the non-public information in his possession could be publicly disclosed and affect the company’s stock price,” the suit claims.
By Christiaan Hetzner
