Giuseppe Pampena v. Elon R.Musk

Background

Lead Plaintiffs Steve Garrett, Nancy Price, John Garrett, and Brian Belgrave brought a securities class action against Elon Musk. They alleged that Musk violated Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5 by making multiple misleading statements that artificially depressed Twitter stock prices.

Twitter had agreed in April 2022 to be acquired by an entity wholly owned by Musk for $54.20 per share. The alleged misstatements included Musk’s May 13, 2022 tweet saying the deal was temporarily on hold while he investigated Twitter’s calculation that spam or fake accounts represented less than 5% of users; his May 16 statement that such accounts made up at least 20% of users; and his May 17 tweet questioning whether the deal could proceed. Twitter’s stock declined from $45.08 per share on May 12 to $35.76 on May 24. After Musk announced on October 4 that he intended to complete the deal at the original offer price, Twitter’s stock rose to $51.30 by the close of the next day.

The proposed class consisted of all persons and entities that sold publicly traded Twitter stock or call options, or purchased Twitter put options, from May 13 through October 4, 2022, inclusive, and suffered damages from Musk’s alleged violations.

Class-certification standard

Federal Rule of Civil Procedure 23 requires a court to find, by a preponderance of the evidence, that the proposed class satisfies four requirements: sufficient size to make individual lawsuits impractical, common legal or factual questions, claims typical of the class, and representatives who will fairly and adequately protect the class. For a damages class under Rule 23(b)(3), common questions must predominate over individual questions, and a class action must be superior to other methods of resolving the dispute. The court considered the merits only as necessary to decide whether these class-certification requirements were met.

Predominance and reliance

Musk argued that individual questions about whether investors relied on his statements would predominate. The plaintiffs instead relied on the fraud-on-the-market doctrine, under which investors may receive a rebuttable presumption that they relied on public, material misrepresentations when trading in an efficient market.

The court held that the plaintiffs adequately alleged an efficient market for Twitter shares. It rejected Musk’s argument that the plaintiffs’ theory was incompatible with an efficient market because some sophisticated investors might have recognized that his statements were false. The court also held that Musk’s evidence was insufficient at the class-certification stage to rebut the presumption. His arguments that the market already knew the truth and that his statements did not affect the stock price presented issues for later proceedings, and the court noted evidence that the stock price fell after the first alleged misstatement and rose after Musk’s October 4 correction.

Because the fraud-on-the-market presumption applied, the court held that the plaintiffs satisfied Rule 23(b)(3)’s predominance requirement.

Typicality and adequacy of representatives

The court rejected Musk’s argument that the lead plaintiffs’ claims were atypical because they were too sophisticated to rely on his statements. Sophisticated investors are still entitled to use the fraud-on-the-market theory.

The court found that the evidence showed three lead plaintiffs connected their sales to Musk’s statements or their effect on the market. It reached a different conclusion about Steve Garrett. Garrett testified that he sold his shares in July 2022 because Musk said he was terminating the deal and identified no other statement by Musk as causing him to sell. The court held that this reason for selling severed the causal connection between Garrett’s decision and the alleged misleading statements, rebutting the reliance presumption as to him. The court therefore found him unsuitable as a class representative.

The court found Nancy Price adequate despite her limited familiarity with the specific statements because she understood the class, the legal basis of the action, and her duty to represent class members. It likewise found Belgrave and John Garrett adequate because each showed a basic understanding of why Musk’s statements were allegedly misleading.

Class definition and damages model

Musk argued that the class was overbroad because some investors might have made money during the class period and therefore might not have been injured. The court held that possible non-injury among some class members did not necessarily defeat certification and that those members could be identified during the damages phase. Musk did not provide evidence that enough members were unharmed to make the class definition fatally overbroad.

The court also rejected Musk’s challenge to the damages model. It held that the model need only allow damages to be calculated feasibly and efficiently after the common liability questions are decided, and that damages must stem from the conduct creating the alleged liability.

Disposition

The court certified the proposed class. It appointed Cotchett Pitre & McCarthy LLP and Bottini & Bottini, Inc. as class counsel and appointed Nancy Price, John Garrett, and Brian Belgrave as class representatives. The court did not appoint Steve Garrett as a class representative. The order did not decide whether Musk ultimately violated Section 10(b) or Rule 10b-5.