Short Trader Taking Tesla to Court for Alleged Price Manipulation

August 14, 2018
891 Views

Elon Musk, the CEO of Tesla (NASDAQ: TSLA), shocked the stock market last week when he announced over twitter that he had secured funding to take Tesla stock off the public market. In his original tweet, Musk presented an extremely generous buyout of $420 per share, which was a 16% premium over the share price as it was when the news broke.

Musk made his twitter announcement on Tuesday the 7th of August, and stock prices shot up to a peak of $381.74 before stabilizing at the end of the week. As of this Monday morning, stock is trading close to $357.00 per share.

Long term investors are excited by the prospect of a buyout, because it would result in significant gains for those who have held stock since its earliest days. However, short traders are not happy, and one is even taking the company to court, claiming that Musk’s unconventional twitter announcement was pure price manipulation.

Case Filed in San Francisco

Shareholder Kalman Issacs is the first investor to file legal action. His suit claims that Elon Musk has intended to “artificially manipulate the price of Tesla stock to completely decimate the company’s short sellers.” Filed with the District Court in San Francisco, Issacs’ suit requests that it be treated as a class-action case, with any ruling applied to all investors.

Exactly what Issacs is seeking in damages is currently unknown.

Short traders have lost an estimated $3.2B from Tesla stock this month. Short traders borrow stock and sell at the market price, before rebuying stock at lower prices. They bank the difference and return shares to the lender. This is highly profitable but comes with substantial risk. Short traders rely on share prices decreasing. In the case of Tesla, the prices have only gone up.

Unclear Where Funding Is Coming From

Elon Musk has not been forthcoming with the source of funding that would be used for the buyout of public Tesla stock. Bloomberg recently reported that the Saudi government’s Sovereign Wealth Fund was interested in funding the buyback. Reuters news presented a different story, claiming that the fund was not interested in Tesla due to investments in other areas.

Tesla’s board is yet to officially announce intentions of a buyout, so investors will still need to wait for confirmation. As it stands today, Tesla is up 11.48% for the month, 18.08% for the last three months, and 14.18% for the year to date. Most analysts give a HOLD rating on this investment, advising no sales or new stock purchases until the buyout situation has been fully clarified.

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