(The opinions expressed here are those of the author, a columnist for Reuters.)
By Alison Frankel
NEW YORK, Oct 10 (Reuters) - A pair of offshore hedge funds that claim to have lost more than $15 million to cover short positions in Tesla have asked for court approval to lead consolidated private securities fraud litigation against the carmaker.
The Tempus International Fund and the Opportunity Unique Fund, which are both managed by Brazil’s Opportunity Gestão de Investimentos e Recursos Ltda, were among more than a dozen Tesla investors to file motions Tuesday night in federal court in San Francisco, where U.S. District Judge Edward Chen is overseeing lawsuits alleging that Tesla CEO Elon Musk deceived shareholders when he tweeted on Aug. 7 that he had secured funding to take the company private at $420 per share.
As Tesla shares spiked following Musk’s tweet, Tempus bought more than 150,000 shares and OUF bought more than 11,000 to cover short positions. The two funds, which are represented by the shareholders’ firm Kaplan Fox & Kilsheimer, claim to have lost more money in their Tesla purchases than any of the other hedge funds and individual investors bidding to lead the litigation against Tesla.
Tesla short-sellers Andrew Left and Vilas Capital also asked Judge Chen to appoint them as lead shareholders in the investor case, which will proceed as a class action on behalf of all Tesla shareholders.
Left and Vilas are part of an investor group claiming losses of more than $4.5 million. That group, which is represented by Labaton Sucharow and Keller Lenkner, also includes investors who held long positions in Tesla but lost money as the shares spiked on Musk’s tweet and declined as doubt set in about the going-private transaction.
Tesla is represented in the private securities litigation by Fenwick & West. Fenwick partner Dean Kristy did not respond to an email requesting comment on the lead shareholder candidates.
Tesla and Musk neither admitted nor denied liability in their settlement with the SEC. The company will almost certainly argue that investors cannot prove Musk intended to deceive them in his Aug. 7 tweets and that he had a reasonable basis to believe he was being truthful.
The law governing private shareholder litigation in the U.S. instructs federal judges to give heavy weight to the magnitude of investors’ losses when selecting a lead investor to run the class action. Congress reasoned that investors with a big stake in the outcome of the case are best positioned to make decisions on behalf of all shareholders.
Securities fraud class actions seek damages on behalf of all investors, but lead shareholders and their lawyers frame the case, decide when and whether to settle investors’ claims and shape the ultimate allocation of damages. For shareholders’ lawyers, appointment to serve as lead counsel means the chance to earn big fees if the case settles.
Lawyers say the lead investor in the Tesla case will have a particularly important role because many nontraditional investors such as short-sellers and options traders held positions in the company. The lead shareholder and its lawyers must represent the interests of those different constituencies if Tesla eventually agrees to a settlement.
Hedge funds have been reluctant, historically, to lead shareholder class actions. But plaintiffs’ lawyers told me earlier this month, after Tesla and Musk reached a $40 million settlement with the U.S. Securities and Exchange Commission, that the SEC deal might force funds off of the fence.
“It’s one thing to be an instigator,” Travis Lenkner of Keller Lenkner said at the time. “There’s a different public profile if you’re acting after a government regulator has already said there’s misconduct and reached a settlement.”
In addition to the offshore funds that lost more than $15 million and the funds in the Andrew Left group, FNY Investment Advisers and Hong Kong’s Bridgestone Investment Corporation also asked Judge Chen to appoint them to lead the case.
FNY did not specify its losses in Tesla shares. Bridgestone claimed losses of $3.9 million. Individual Tesla investors and investor groups with losses ranging from about $330,000 to $3.5 million also submitted motions to be appointed lead.
Tempus International and OUF are the presumptive favorites to lead the Tesla case because of their big alleged losses. But other candidates will now have an opportunity to oppose the funds’ motion. Such challenges could focus on the funds’ methodology for calculating their losses or their ability to represent the interests of all Tesla investors.
Judges overseeing securities class actions are sometimes reluctant to appoint groups of investors as lead shareholders because of concerns that the groups have been assembled by lawyers. The Left/Vilas group tried to dampen those concerns in a joint declaration from the members of the group. The investors said they and their lawyers came up with the idea of banding together.
“Based upon our own diligence and communications, we agreed that a small group of sophisticated investors, covering long, short, equity, and options positions, together, represented the best possible structure to achieve the maximum results in this litigation for ourselves and similarly situated investors,” the declaration said. (Reporting by Alison Frankel. Editing by Alessandra Rafferty.)