In re Tesla Inc. Securities Litigation, No. 3:2018cv04865 - Document 172 (N.D. Cal. 2018)
Court Description: ORDER Denying 156 158 Motions to Reconsider. Signed by Judge Edward M. Chen on 12/17/2018. (emcsec, COURT STAFF) (Filed on 12/17/2018)
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1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 7 8 IN RE TESLA, INC. SECURITIES LITIGATION. Case No. 18-cv-04865-EMC ORDER DENYING MOTIONS TO RECONSIDER 9 10 Docket Nos. 156, 158 United States District Court Northern District of California 11 12 13 On November 27, 2018, the Court granted Mr. Littleton’s motion for appointment as Lead 14 Plaintiff and approved his selection of Lead Counsel, the Levi & Korsinsky, LLP law firm. See 15 Docket No. 152 (order). Within a week, two motions were filed asking for reconsideration of the 16 appointment decision. The motions were filed by Mr. David (who had the greatest asserted loss 17 immediately after Mr. Littleton) and Bridgestone (who had the greatest asserted loss immediately 18 before Mr. Littleton). The Court ordered full briefing on the motions but indicated that there 19 would be no hearing absent further order of the Court. See Docket Nos. 157, 160 (clerk’s notices). 20 21 Having received and reviewed the full briefing, the Court hereby DENIES the motions to reconsider. I. 22 23 FACTUAL & PROCEDURAL BACKGROUND In the original briefing, the relevant parties claimed that their total loss was as follows: 24 • Bridgestone: $3,869,744.20. 25 • Mr. Littleton: $3,518,478.68. 26 • Mr. David: $439,399. 27 The Court declined to appoint Bridgestone as Lead Plaintiff for two reasons. First, it had 28 “concerns regarding [Bridgestone’s] adequacy or typicality”: “Bridgestone held long positions – 1 both in common stock and options – but does not appear to have held any short positions.” 2 Docket No. 152 (Order at 6). Second, the Court had 3 4 5 6 7 8 9 10 United States District Court Northern District of California 11 12 13 14 15 16 17 18 19 20 21 22 23 some concern as to whether Bridgestone may have overstated its loss – or at least questions about its loss could well become a unique defense that would preoccupy it. As explained by [Mr.] Littleton, ... a substantial part of Bridgestone’s total losses of $3,869,744.20 stem primarily from the $1,641,391 in losses it incurred from buying Tesla January 2019 $450 call options [on August 7, 2018]. [Dkt.] No. 52-5. These transactions, however, subject Bridgestone to a unique defense based on this class definition. Specifically, this loss chart (Dkt. 52-5) is proof that Bridgestone purchased the January 2019 $450 call options by not relying upon the first materially false and/or misleading statement issued by Musk on August 7, 2018 at 12:48 p.m. EDT stating that “Am considering taking Tesla private at $420. Funding secured.” See Dkt. No. 46, at 3. If Bridgestone was relying upon the content of Musk’s 12:48 p.m. tweet, it would not have purchased Tesla January 2019 $450 call option contracts because Musk’s tweet was clear that he was only considering to take Tesla private at $420 per share. It simply makes no sense that Bridgestone would have invested $2,156,496 to buy January 2019 $450 call option contracts relying on Musk’s 12:48 p.m. tweet when they would expire worthless when Musk took Tesla private at $420. In fact, Bridgestone must have expected that Tesla’s stock price would surpass $467.85 per share (the exercise price of $450 plus the highest premium paid of $17.85 for these call option contracts). Docket No. 118 (Reply at 6) (emphasis in original). This is not to say that a causally related loss based on Bridgestone’s purchase of the January 2019 call options cannot be proven; but it does make a substantial portion of its loss assertion uncertain for purposes of the pending motions. Docket No. 152 (Order at 6-7). 24 The Court subsequently appointed Mr. Littleton – the next in line after Bridgestone – for 25 the following reasons. First, he had “the largest clear financial interest of the remaining moving 26 parties.” Docket No. 152 (Order at 7). In this regard, the Court found that Mr. Littleton had 27 adequately responded to Mr. David’s argument that Mr. Littleton was a net seller/net gainer (i.e., 28 that Mr. Littleton had not suffered any loss at all). “Second, Mr. Littleton held interests that cover 2 1 most of the persons/entities likely to be in the class – i.e., long positions in common stock, long 2 positions in options, and short positions in options – and thus can most adequately represent the 3 class (in light of the differing damages analysis that might apply to each class of investors).” 4 Docket No. 152 (Order at 7). II. 5 Civil Local Rule 7-9 governs motions for reconsideration. In the instant case, both Mr. 6 7 David and Bridgestone essentially argue for reconsideration on the basis of “[a] manifest failure 8 by the Court to consider material facts or dispositive legal arguments which were presented to the 9 Court before such interlocutory order.” Civ. L.R. 7-9(b)(3). 10 A. Mr. David’s Motion to Reconsider In his motion, Mr. David argues that the Court erred in concluding that Mr. Littleton was 11 United States District Court Northern District of California DISCUSSION 12 not a net seller/net gainer. Mr. David maintains that Mr. Littleton was a net seller/net gainer if the 13 Court looks at the transactions that took place during the class period (August 7 to 17, 2018). 14 The critical transactions – no party disputes such – are the options transactions. (Mr. 15 Littleton had limited common stock transactions and suffered little loss therefrom.) Mr. David 16 notes that, during the class period, Mr. Littleton purchased 2,325 options for more than $9.4 17 million but also sold 3,630 options for more than $11.9 million. See generally Docket No. 42-2 18 (McCall Decl., Ex. B) (chart of Mr. Littleton’s transactions). Thus, according to Mr. David, Mr. 19 Littleton had a gain during the class period of more than $2.4 million. See Mot. at 1. Mr. David’s position is predicated on the notion that a party who sells securities during the 20 21 class period profits because, during the class period, the value of the securities is artificially 22 inflated. That notion makes sense where the securities at issue are common stock. If the value of 23 the stock is artificially inflated, and a party sells the stock, then he is actually gaining from the 24 fraud. 25 But, as noted above, Mr. Littleton’s critical transactions involved options, not common 26 stock, and Mr. Littleton has provided a sufficient explanation as to why the sale of at least some 27 kinds of options resulted in loss. For example, in his original briefing, Mr. Littleton indicated that 28 investors who, during the class period, sold call options with exercise prices above $420 were 3 United States District Court Northern District of California 1 injured. See Docket No. 118 (Reply at 9) (asserting that “investors with long call positions with 2 exercise prices above $420 were injured as a result of the alleged fraud when they sold their call 3 positions during the class period at times when the option market was affected by Musk’s 4 statement that he was thinking to take Tesla private at $420 per share”). Although Mr. Littleton 5 did not precisely explain in his briefing how these investors were injured, his position seems to be 6 that, once Mr. Musk made his statement about taking Tesla private for $420, the investors were 7 essentially forced to sell at a discount their call options with a higher exercise price (the options 8 had less, possibly little value, after the statement was made) and the forced sales resulted in a loss 9 given what the investors had paid to open their position in the call options. The chart submitted by 10 Mr. Littleton detailing his transactions indicate that, during the class period, he was an investor 11 who sold call options with an exercise price over $420 during the class period. Mr. Littleton has also provided an explanation, as part of his current briefing, as to how 12 13 investors who sold put options during the class period were injured.1 An investor who purchases a 14 put option expects that the underlying stock will decrease in value. In contrast, an investor who 15 sells a put option expects that the value of the underlying stock will rise. (In this respect, a seller 16 of a put option is like a buyer of common stock – i.e., both transact with the expectation that the 17 price of the stock will increase. See also Opp’n at 4 (asserting that “selling put options is 18 economically similar to purchasing a share of common stock).) When a fraud is disclosed, the 19 stock will lose the artificial inflation, and the seller of the put option is injured “either by paying 20 an increased cost to repurchase the put option or paying the now above market strike price [that 21 the buyer of the put option can command].” Opp’n at 4. Thus a seller of a put, like the buyer of 22 common stock, pays an artificially high price if he/she sells the put during the class period. The 23 chart submitted by Mr. Littleton detailing his transactions indicate that, during the class period, he 24 was an investor who sold put options during the class period. Mr. David’s main contention in response is that a net seller/net gainer analysis requires a 25 26 court to “look[] exclusively at what an investor expended and received during the period of 27 28 1 This was also discussed at the hearing on the appointment motions. 4 1 artificial inflation caused by defendants’ false statements [i.e., during the class period]. That is 2 not, as Judge Koh recognized [in Perlmutter v. Intuitive Surgical, Inc., No. 10-CV-03451-LHK, 3 2011 U.S. Dist. LEXIS 16813 (N.D. Cal. Feb. 15, 2011)], ‘the same as determining whether a 4 party lost or earned money trading in a particular stock,’” which would involve analysis of pre- or 5 even post-class period transactions. Reply at 5. 6 7 case. First, the class in Perlmutter was defined as those “who purchased or acquired Intuitive 8 stock during the Class Period.” Perlmutter, 2011 U.S. Dist. LEXIS 16813, at *4. There was no 9 claim that investors trading in options – in particular, sellers of options – were part of the class. 10 United States District Court Northern District of California But, as Mr. Littleton argues in his papers, Perlmutter is distinguishable from the instant Second, the net seller/net gainer analysis that Judge Koh conducted in Perlmutter was, at 11 the end of the day, simply one means of trying to figure out whether a party had, as a “net” matter, 12 benefitted from the alleged fraud. See id. at *29 (“The purpose of isolating the calculation of net 13 sales and net gains to the Class Period is to determine whether a party potentially benefitted from 14 the fraud.”). Nothing in Perlmutter says that the net seller/net gainer analysis is dispositive, 15 particularly where an explanation is given as to how a seller has been hurt from the fraud. 16 Third, Judge Koh’s comment in Perlmutter that the net seller/net gainer analysis “is not the 17 same as determining whether a party lost or earned money trading in a particular stock” must be 18 taken in context. Id. Judge Koh’s statement regarding the latter was with respect to the following 19 situation: 20 21 22 23 As alleged in the complaint, Defendants’ fraud artificially inflated Intuitive’s stock price during the Class Period. Thus, when Marcus purchased Intuitive stock prior to the Class Period, he purchased it at fair market value. When he sold it during the Class Period, however, he sold it at fraudulently inflated prices. As a result, instead of being injured by the fraud on these sales, Marcus actually benefitted from the fraud. 24 Id. at *29-30. In the instant case, Mr. Littleton is not claiming that he sold his call options with 25 exercise prices over $420 at artificially inflated prices; rather, he intimates that those options were 26 worth little given Mr. Musk’s statement that he would be taking Tesla private at only $420. 27 Likewise, Mr. Littleton is not claiming that he sold his put options at artificially inflated prices; 28 rather, he is maintaining that, once the truth began to be disclosed, he was injured as the seller of 5 1 put options. In short, unlike the situation in Perlmutter, Mr. Littleton could have lost money when he United States District Court Northern District of California 2 3 sold options during the class period. The Court therefore denies Mr. David’s motion to 4 reconsider. 5 B. Bridgestone’s Motion to Reconsider 6 The Court similarly denies Bridgestone’s motion to reconsider. 7 As an initial matter, the Court rejects Bridgestone’s attempt to cast the order appointing 8 Mr. Littleton as creating or endorsing a rule that diversity in holds (e.g., both long and short 9 positions) is more important than largest financial interest. The Court followed the prescriptions 10 of 15 U.S.C. § 78u-4. That statute provides in relevant part that “the court shall adopt a 11 presumption that the most adequate plaintiff . . . is the person or group of persons that . . . in the 12 determination of the court, has the largest financial interest in the relief sought by the class” and 13 “otherwise satisfies the requirements of Rule 23 of the Federal Rules of Civil Procedure.” 15 14 U.S.C. § 78u-4(3)(B)(iii). Rule 23 requires consideration of, inter alia, adequacy.2 15 The Court should also reject Bridgestone’s suggestion that the Court should give no 16 consideration to potential conflicts among the class because “‘equity conflict’ is ‘present in almost 17 every large, complex securities case.’” Luna v. Marvell Tech. Grp., Ltd., No. C 15-05477 WHA, 18 2017 U.S. Dist. LEXIS 178674, at *14 (N.D. Cal. Oct. 27, 2017). Equity conflict, as a general 19 matter, may be “an inappropriate basis for denial of class certification,” i.e., on the ground of 20 adequacy. But that does not mean that equity conflict never matters. And here, Mr. Littleton 21 makes a fair point that, even if “long” interests are typically good enough to represent “short” 22 interests, the instant case involves unique circumstances because there are allegations that Mr. 23 Musk took his actions precisely because he wanted to hurt short sellers. That short sellers may 24 25 26 27 28 Moreover, the statute continues that “[t]he presumption [above] may be rebutted only upon proof . . . that the most adequate plaintiff . . . will not fairly and adequately protect the interests of the class” or “is subject to unique defenses that render such plaintiff incapable of adequately representing the class.” 15 U.S.C. § 78u-4(3)(B)(iii). In the instant case, the chart that Bridgestone submitted regarding its transactions constitutes proof that it did not have short positions and that it purchased call options with an exercise price of more than $420 on August 7, 2018. 6 2 1 actually have benefitted once the truth began to be disclosed, see Reply at 10, is not dispositive. A 2 short seller, if not damaged, may not be a member of the class. But it is not possible to say at this 3 stage that no short sellers at all are a part of the class or that the number or significance of short 4 sellers is minimal. United States District Court Northern District of California 5 As for Bridgestone’s argument that the Court is prematurely conducting a damages 6 analysis, see Reply at 3, the Court is not entirely unsympathetic to the contention. Nevertheless, 7 “largest financial interest” requires the Court to consider loss and, where the claimed losses of the 8 parties contending for lead position is disputed, the Court must engage in some level of analysis to 9 determine the respective financial interests. Furthermore, it is plausible that Defendants would 10 subject Bridgestone to a unique defense if a large amount of its loss was not sufficiently tied to the 11 alleged fraud. Bridgestone makes a legitimate point that the defense may not win out because – as 12 suggested by several analysts – it was possible that the acquisition would go higher than $420 per 13 share. See Reply at 5 (stating that it is not surprising for “acquisition announcement [to] start a 14 bidding war that could lead to a higher transaction price” and citing analysts’ assessments 15 suggesting the price would be higher than $420). Nevertheless, that would still be a unique 16 defense that could preoccupy Bridgestone. 17 Finally, Bridgestone argues that, if the Court is questioning its purchase of $450 call 18 options, then it should likewise question Mr. Littleton’s purchase of call options greater than $420. 19 See Mot. at 9-10 (arguing that Mr. Littleton’s loss should likewise be reduced). But Bridgestone 20 points to purchases of call options made by Mr. Littleton before Mr. Musk made the statement 21 about taking Tesla private for $420 on August 7, 2018. See Mot. at 9 (referring to purchases made 22 by Mr. Littleton of $450 call options on August 3, 2018, and December 19, 2017; citing pages 6-7 23 of the chart at Docket No. 42-2). Bridgestone misses the point that its purchase of $450 call 24 options is problematic because it purportedly made the purchase after Mr. Musk made the above 25 statement. Bridgestone tries to save itself on reply by arguing that, even if it bought the $450 call 26 options after Mr. Musk’s statement, it also ended up selling the options (to close its position) 27 before the class period ended. See Reply at 11. But the point is that Defendants can argue 28 Bridgestone never relied on Mr. Musks’s statement for the initial purchase. In contrast, Mr. 7 1 Littleton can argue that he was forced to sell his $450 call options (during the class period) 2 because the value of the options decreased upon Mr. Musk’s statement. III. 3 4 CONCLUSION For the foregoing reasons, the Court denies the motions to reconsider. Mr. David and 5 Bridgestone have failed to show that a manifest failure by the Court to consider material facts or 6 dispositive legal arguments which were presented to the Court before such interlocutory order. 7 8 9 Mr. Littleton is ordered to file a consolidated amended complaint within thirty (30) days of the date of this order. This order disposes of Docket Nos. 156 and 158. 10 United States District Court Northern District of California 11 IT IS SO ORDERED. 12 13 Dated: December 17, 2018 14 15 16 ______________________________________ EDWARD M. CHEN United States District Judge 17 18 19 20 21 22 23 24 25 26 27 28 8
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