Elon Musk is facing a new lawsuit accusing him of making billions of dollars in illegal profits by selling Tesla stock based on insider information. The suit, filed by the Employees’ Retirement System of Rhode Island (ERSRI) on Tuesday, seeks to force the Tesla CEO to return what it calls “unlawful profits.” This legal action comes just two days before Tesla shareholders are set to vote on reinstating Musk’s controversial $56 billion pay package, which was voided in January by a Delaware judge.
The lawsuit alleges that Musk and his brother, Kimbal Musk, a Tesla director, sold Tesla stock worth $30 billion between late 2021 and the end of 2022. The timing of these sales was allegedly based on insider knowledge that would soon cause Tesla’s stock price to drop. Specifically, the lawsuit claims that Musk concealed his intention to use the funds to acquire Twitter, now rebranded as X, while selling the stock at artificially inflated prices.
Additionally, the lawsuit accuses Musk of selling Tesla stock when he knew the company’s vehicle deliveries had significantly fallen short of public projections. By withholding this negative information, Musk allegedly profited from Tesla’s inflated stock value, benefiting personally at the expense of other shareholders.
Allegations of insider trading and conflict of interest
The ERSRI lawsuit is not the first to accuse Musk of insider trading. In late September, another Tesla shareholder, Michael Perry, filed a similar lawsuit accusing Musk of selling more than $7.5 billion in Tesla stock in late 2022, also based on non-public information. Both lawsuits allege that Musk used his privileged position within Tesla to manipulate the stock market to his advantage.
The Rhode Island pension fund, which holds about 140,000 shares of Tesla, valued at around $24 million as of Tuesday’s closing price of $170.66, expressed concerns that Tesla’s board of directors has not taken sufficient steps to oversee Musk’s conflicts of interest. The lawsuit claims that Musk’s financial decisions have been disloyal to Tesla and its shareholders, citing various incidents where Musk allegedly diverted Tesla resources to his other ventures.
Accusations of misuse of Tesla resources
Beyond the allegations of insider trading, the lawsuit accuses Musk of improperly using Tesla employees and resources to support his other business ventures, particularly X (formerly Twitter) and xAI, Musk’s artificial intelligence startup. According to the lawsuit, Musk redirected Tesla employees to work for X and caused Tesla to begin paying for advertising on the social media platform after he took ownership.
The ERSRI lawsuit also claims that Musk helped xAI hire Tesla employees and diverted high-demand artificial intelligence (AI) semiconductors, originally intended for Tesla’s use, to both X and xAI. These chips, crucial for advanced computing tasks, are reportedly in short supply. This has raised concerns among shareholders that Musk’s focus on AI development outside Tesla is jeopardizing the company’s interests.
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Last week, news broke that Musk had diverted Nvidia AI processors meant for Tesla to other ventures, causing further alarm among shareholders. Musk addressed the concerns in a post on X, stating that Tesla currently lacks the necessary infrastructure to store and activate the chips, which were initially acquired for Tesla’s use.
Regulatory Probes and Musk’s broader legal challenges
Musk is also the subject of an ongoing regulatory investigation to determine whether he violated federal securities laws in 2022 when he began purchasing Twitter stock. This probe could further complicate his legal challenges and potentially lead to additional penalties if wrongdoing is found.
Meanwhile, Tesla’s shareholders are set to vote on whether to reinstate Musk’s $56 billion pay package, which had previously been voided by a Delaware judge due to concerns that Musk improperly influenced the decision-making process behind the compensation plan.
As these legal battles continue, the question remains whether Musk’s actions, as alleged in the lawsuit, will result in further penalties or restrictions on his leadership of Tesla and other ventures.
