In re Tesla Inc. Securities Litigation

Background

This securities class action concerns the calculation of damages involving Tesla stock options. Plaintiff Glen Littleton retained Professor Steven Heston as a damages expert. Heston developed an original method using theoretical option prices and later submitted a method using actual market data for the actual-price calculation.

The parties had repeatedly litigated whether Heston’s methods should be admitted under Daubert, the rule requiring expert testimony to be sufficiently reliable to be considered by the fact finder. Defendants had challenged Heston’s use of theoretical rather than actual option-price data. During an earlier pretrial proceeding, the plaintiff agreed to use actual data for the actual-price curve, so the court did not then decide whether Heston’s use of theoretical data for that purpose satisfied Daubert.

After supplemental reports and briefing, defendants continued to challenge the revised method. Their expert, Professor Seru, argued that the revised method was unreliable because it could be affected by the execution price within the bid-ask spread and because it applied an implied-volatility assumption only to the hypothetical, or “but-for,” option value. The court stated that the supplemental materials clarified why Heston’s original theoretical-price method could provide an “apples-to-apples” comparison and address problems created by bid-ask spreads.

Plaintiff’s motion in limine

The plaintiff asked the court to bar defendants from offering argument, testimony, or evidence contradicting their earlier positions concerning the use of actual option prices. The plaintiff relied on judicial estoppel, an equitable doctrine that can prevent a party from taking a clearly inconsistent position after persuading a court to accept its earlier position.

The court denied the motion. It concluded that prior expert analyses are generally proper subjects for impeachment, meaning evidence used to question an expert’s credibility or the weight given to the expert’s testimony. The court also held that judicial estoppel did not apply because it had not made a decision accepting defendants’ initial Daubert challenge. The plaintiff had agreed to treat that earlier motion as moot, so there was no merits ruling that could support a claim that defendants had misled the court.

Daubert ruling

The court ruled that Professor Heston’s original methodology, as well as his subsequent methodology, passed Daubert. It denied defendants’ challenge to Heston’s use of artificial data to calculate the “revalued fitted option value,” which the order describes as the actual price. The court found nothing so fundamentally wrong with either methodology that it would make the methods unreliable and therefore inadmissible.

The court stated that both methodologies remain subject to cross-examination. It also stated that the plaintiff may choose to present evidence at trial derived from the original methodology, the subsequent methodology, or both.

Disposition

The court denied the plaintiff’s emergency motion in limine regarding stock-option damages. It also denied defendants’ Daubert challenge to Professor Heston’s initial methodology. The order disposed of Docket No. 611.