throbber
Case 1:21-cv-09441 Document 1 Filed 11/15/21 Page 1 of 19
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`UNITED STATES DISTRICT COURT
`SOUTHERN DISTRICT OF NEW YORK
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`Plaintiff JPMorgan Chase Bank, National Association, London Branch (“JPMorgan”), by
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`and through its undersigned attorneys, as and for its Complaint against Defendant Tesla, Inc.
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`(“Tesla”), alleges, upon knowledge as to itself, and otherwise upon information and belief, as
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`follows:
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`NATURE OF THE ACTION
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`1.
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`This is a breach of contract action to recover over $162 million dollars
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`immediately due and payable by Tesla to JPMorgan. JPMorgan and Tesla entered into a series
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`of warrant transactions, which required Tesla to deliver either shares of its stock or cash to
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`JPMorgan if, at the time the warrants expired, Tesla’s share price was above the contractual
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`“strike price.” The warrants did expire with Tesla’s share price above that strike price.
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`JPMorgan demanded the due shares or cash, but Tesla has flagrantly ignored its clear contractual
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`obligation to pay JPMorgan in full. JPMorgan brings this action to enforce its right to payment.
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`2.
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`The warrants Tesla sold to JPMorgan included standard provisions intended to
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`protect the parties against the economic effects on the warrants of announcements of significant
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`JPMORGAN CHASE BANK, NATIONAL
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`ASSOCIATION, LONDON BRANCH,
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`- against -
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`TESLA, INC.,
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`Plaintiff,
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`Defendant.
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`Case No. ______
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`COMPLAINT
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`Case 1:21-cv-09441 Document 1 Filed 11/15/21 Page 2 of 19
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`corporate transactions involving Tesla. An issuer’s announcement that it is exploring a going-
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`private transaction is exactly the type of announcement contemplated by these provisions. These
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`contractual provisions required JPMorgan, as the agreed-upon “Calculation Agent” responsible
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`for making certain calculations under the governing agreements, to adjust the terms of the
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`warrant transactions to account for the economic effects of such an announcement. As is market
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`standard, the agreements granted the Calculation Agent broad discretion to determine both how
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`to measure these economic effects and what adjustments to make as a result, so long as
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`JPMorgan did so in good faith and in a commercially reasonable manner.
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`3.
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`On August 7, 2018, Tesla’s CEO Elon Musk announced such a significant
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`corporate transaction via Twitter, tweeting “Am considering taking Tesla private at $420.
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`Funding secured.” In the weeks that immediately followed the August 7 announcement, Tesla
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`made additional statements and took various additional actions confirming it was considering a
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`going-private transaction, including hiring advisors and forming a special committee of its board.
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`Although the SEC later revealed—in a securities fraud complaint alleging that Mr. Musk’s
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`tweets were false and intended to mislead the market—that there had never been a firm offer to
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`take Tesla private, that was not known at the time. Rather, Tesla’s August 7 announcement
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`caused immediate and significant economic effects as the market attempted to price in the
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`likelihood of Tesla going private and making a tender offer at $420. Those economic effects
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`substantially decreased the value of the warrants. As required by the terms of the governing
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`agreements, JPMorgan appropriately reduced the warrant strike price on August 15 to maintain
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`the same fair market value as the warrants had before Tesla’s announcement.
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`4.
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`On August 24, 2018, Tesla suddenly reversed course and announced it was
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`abandoning the going-private transaction. Tesla’s second announcement increased the value of
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`Case 1:21-cv-09441 Document 1 Filed 11/15/21 Page 3 of 19
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`the warrants, and thus required a second adjustment under the governing agreements—this time a
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`strike price increase that reversed some, but not all, of the initial reduction. Other than a
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`subsequent (mechanical) adjustment triggered by Tesla’s 5-to-1 stock split in 2020, the resulting
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`strike price remained the same until the warrants expired in June and July 2021, when Tesla’s
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`stock price was well above both the original and adjusted strike prices.
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`5.
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`Even though JPMorgan’s adjustments were appropriate and contractually
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`required, Tesla has refused to settle at the contractual strike price and pay in full what it owes to
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`JPMorgan. Tesla is in flagrant breach of its contractual obligations. As a result, more than
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`$162 million is immediately due and payable to JPMorgan by Tesla.
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`PARTIES
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`6.
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`JPMorgan Chase Bank, N.A., London Branch (defined above as JPMorgan) is a
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`U.K. branch of JPMorgan Chase Bank, N.A., a national banking association organized under the
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`laws of the United States with its head office in Columbus, Ohio. JPMorgan is a party to the
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`Base Warrant Confirmation dated February 27, 2014 and the Additional Warrant Confirmation
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`dated March 28, 2014 (the “Confirmations,” and each a “Confirmation”).
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`7.
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`Defendant Tesla, Inc. (defined above as Tesla) is a corporation organized under
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`the laws of Delaware with its principal place of business in Palo Alto, California. Tesla is
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`JPMorgan’s counterparty to the Confirmations.
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`JURISDICTION AND VENUE
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`8.
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`This Court has jurisdiction over the subject matter of this action pursuant to
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`28 U.S.C. § 1332(a) because the parties are completely diverse and the amount in controversy
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`exceeds $75,000, exclusive of interest and costs.
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`Case 1:21-cv-09441 Document 1 Filed 11/15/21 Page 4 of 19
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`9.
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`Venue is proper in this District because in Section 8(r) of the Confirmations, the
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`parties “irrevocably submit to the exclusive jurisdiction of the federal and state courts located in
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`the Borough of Manhattan, in the City of New York in any suit or proceeding arising out of or
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`relating to the Agreement, this Confirmation or any transactions contemplated hereby.” Venue is
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`also proper pursuant to 28 U.S.C. § 1391 because a substantial part of the events or omissions
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`giving rise to the claim occurred in this District.
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`10.
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`This Court has personal jurisdiction over Defendant pursuant to C.P.L.R. 302(a)
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`and N.Y. General Obligations Law § 5-1402 because Defendant irrevocably consented to this
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`Court’s jurisdiction under Section 8(r) of the Confirmations and waived the right to object to this
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`Court’s jurisdiction.
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`11.
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`Under Section 8(s) of the Confirmations, both parties “irrevocably waive[d] any
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`and all rights to trial by jury with respect to any legal proceeding arising out of or relating to the
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`Agreement, this Confirmation or any transactions contemplated hereby.”
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`I.
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`The Warrant Transactions
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`FACTUAL ALLEGATIONS
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`12.
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`On February 27, 2014 and March 28, 2014, Tesla Motors, Inc. (since renamed
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`Tesla, Inc.) sold to JPMorgan a series of stock warrants expiring in 2021 (the “2021 Warrants”),
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`as part of a larger capital markets transaction.1 The 2021 Warrants are subject to agreements in
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`the form of the 2002 ISDA Master Agreement (the “Master Agreement”), which sets forth the
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`general terms of the parties’ relationship. The specific terms of the 2021 Warrants are set forth
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`in the Confirmations negotiated by Tesla and JPMorgan, which, in turn, incorporate by reference
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`1 Concurrently with the sale of the 2021 Warrants, Tesla also issued certain convertible notes and purchased call
`options (known as a bond hedge) from JPMorgan. The bond hedge and warrant transactions, collectively, benefitted
`Tesla by mitigating the stock dilution resulting from Tesla’s issuance of the convertible notes and were structured to
`allow Tesla to make certain federal income tax deductions.
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`Case 1:21-cv-09441 Document 1 Filed 11/15/21 Page 5 of 19
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`the terms of the 2006 ISDA Definitions (the “2006 Definitions”) and the 2002 ISDA Equity
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`Derivative Definitions (the “2002 Equity Definitions,” and collectively with the Master
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`Agreement, the Confirmations, and the 2006 Definitions, the “Agreements”).2 Under
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`Section 8(r) of the Confirmations, the Agreements are construed in accordance with New York
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`law.
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`13.
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`Each of the 2021 Warrants was a call option for Tesla’s common stock. In
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`exchange for a premium paid up front by JPMorgan to Tesla, the Agreements gave JPMorgan the
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`right to purchase, on the warrant’s designated expiration date, one share of Tesla common stock
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`per underlying 2021 Warrant at a specified “strike price.” The Confirmations divided the 2021
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`Warrants into forty individual tranches, each consisting of a specified number of underlying
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`2021 Warrants with a specified expiration date (“Expiration Date”). The Expiration Dates
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`ranged from June 1, 2021 to July 27, 2021. For any tranche, if the 2021 Warrants expired “in the
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`money,” that is to say, if Tesla’s stock price on the applicable Expiration Date exceeded the
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`warrants’ strike price, Tesla was required to settle on a net share basis by delivering a number of
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`shares of common stock with a value equal to the product of X (the difference between Tesla’s
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`stock price and the strike price) and Y (the number of underlying 2021 Warrants comprising
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`such tranche).3 If the 2021 Warrants expired “out of the money,” that is to say, if Tesla’s stock
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`price on the applicable Expiration Date was less than the strike price, no amounts would be due
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`by either party.
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`14.
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`The initial strike price for the 2021 Warrants was $560.6388 (the “Original Strike
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`Price”).
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`2 In the event of any inconsistency between the 2006 Definitions and the 2002 Equity Definitions, the latter governs.
`In the event of any inconsistency between the Master Agreement and the Confirmations, the Confirmations govern.
`See Confirmations § 1.
`3 Alternatively, Tesla had the option of choosing to settle by paying this amount in cash, which it did not elect.
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`Case 1:21-cv-09441 Document 1 Filed 11/15/21 Page 6 of 19
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`II.
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`The Agreements Include Announcement Event Protection
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`15.
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`Recognizing that announcements of significant corporate transactions involving
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`Tesla could disrupt the markets and significantly impact the value of the 2021 Warrants, the
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`parties agreed to include in the Agreements common provisions protecting the parties from the
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`economic effects of such announcements on the 2021 Warrants.
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`16.
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`Specifically, Article 12 of the 2002 Equity Definitions establishes certain
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`protections in the event of Extraordinary Events, including Merger Events and Tender Offers,
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`and the Confirmations add an “Announcement Event” as an additional Extraordinary Event. An
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`“Announcement Event” is defined in the Confirmations as:
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`(i) The public announcement of any Merger Event or Tender Offer or the announcement
`by the Issuer of any intention to enter into a Merger Event or Tender Offer,
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`(ii) the public announcement by Issuer of an intention to solicit or enter into, or to
`explore strategic alternatives or other similar undertaking that may include, a Merger
`Event or Tender Offer or
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`(iii) any subsequent public announcement of a change to a transaction or intention that
`is the subject of an announcement of the type described in clause (i) or (ii) of this
`sentence (including, without limitation, a new announcement relating to such a
`transaction or intention or the announcement of a withdrawal from, or the
`abandonment or discontinuation of, such a transaction or intention) (in each case,
`whether such announcement is made by Issuer or a third party);
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`provided that, for the avoidance of doubt, the occurrence of an Announcement Event with
`respect to any transaction or intention shall not preclude the occurrence of a later
`Announcement Event with respect to such transaction or intention.
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`17.
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`The Confirmations further specified that the “Consequence[] of [an]
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`Announcement Event[]” is a “Modified Calculation Agent Adjustment as set forth in
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`Section 12.3(d)” of the 2002 Equity Definitions. That section provides (as modified pursuant to
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`the Confirmations) that:
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`on or after the relevant date of the Announcement Event, the Issuer and the Shares will
`not change, but the Calculation Agent shall either
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`Case 1:21-cv-09441 Document 1 Filed 11/15/21 Page 7 of 19
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`(i)(A) make such adjustment to the exercise, settlement, payment or any other terms of
`the Transaction (including, without limitation, the spread) as the Calculation Agent
`determines appropriate to account for the economic effect on the Transaction of such
`Announcement Event (including adjustments to account for changes in volatility,
`expected dividends, stock loan rate or liquidity relevant to the Shares or to the
`Transaction), which may, but need not, be determined by reference to the adjustment(s)
`made in respect of such Announcement Event by an options exchange to options on the
`relevant Shares traded on such options exchange and (B) determine the effective date of
`that adjustment, or
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`(ii) if the Calculation Agent determines that no adjustment that it could make under (i)
`will produce a commercially reasonable result, notify the parties that the relevant
`consequence shall be the termination of the Transaction, in which case “Cancellation and
`Payment” will be deemed to apply and any payment to be made by one party to the other
`shall be calculated in accordance with Section 12.7, and in respect of an Option
`Transaction, the Calculation Agent shall determine the amount of such payment as if
`“Calculation Agent Determination” applied to the Option Transaction.
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`18.
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`The parties designated JPMorgan as the Calculation Agent in Section 3 of the
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`Confirmations.
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`III. Tesla Announces Its Consideration of a Going-Private Transaction
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`19.
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`On August 7, 2018, during trading hours and without any prior warning, Tesla’s
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`Chief Executive Officer Elon Musk tweeted, “Am considering taking Tesla private at $420.
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`Funding secured.”
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`20.
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`At the time, Mr. Musk was not only Tesla’s CEO, but also the chair of its board of
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`directors and its largest shareholder. In a Form 8-K filed on November 5, 2013, Tesla had
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`identified Mr. Musk’s personal Twitter account as a source of material public information about
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`the company and encouraged investors to review that account. Because the tweet violated
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`Nasdaq rules requiring at least 10 minutes’ advance notice before a listed corporation publicly
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`disclosed a going-private transaction, Nasdaq temporarily halted trading in Tesla’s stock
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`following Mr. Musk’s tweet, evidencing that the exchange considered the tweet to constitute an
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`announcement by the company itself.
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`Case 1:21-cv-09441 Document 1 Filed 11/15/21 Page 8 of 19
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`21.
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`After Mr. Musk’s tweet, Tesla’s Chief Financial Officer, its head of
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`communications, and its General Counsel drafted an email—attributed to Mr. Musk—detailing
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`the going-private plan. The email was sent to Tesla employees and published the same day on
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`both Mr. Musk’s Twitter account and Tesla’s blog (which Tesla had also designated as a source
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`of material public information about the company). In the email, and in a series of tweets
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`responding to his Twitter followers, Mr. Musk elaborated on his plans to take Tesla private. He
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`concluded in a tweet that “Investor support is confirmed. Only reason why this is not certain is
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`that it’s contingent on a shareholder vote.”
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`22.
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`That same day, in response to various inquiries from research analysts, Tesla’s
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`head of investor relations confirmed that Mr. Musk’s tweet signified a “firm offer” to take Tesla
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`private that was “as firm as it gets.” Specifically, she wrote in response to press inquiries about
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`the tweet:
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`
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`
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`
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`“I can only say that the first Tweet clearly stated that ‘financing is secured.’ Yes,
`there is a firm offer.”
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`“[A]part from what has been tweeted and what was written in a blog post, we
`can’t add anything else. I only wanted to stress that Elon’s first tweet, which
`mentioned ‘financing secured’ is correct.”
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`“The very first tweet simply mentioned ‘Funding secured’ which means there is a
`firm offer. Elon did not disclose details of who the buyer is . . . . I actually don’t
`know [whether there is a commitment letter or a verbal agreement], but I would
`assume that given we went full-on public with this, the offer is as firm as it
`gets.”
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`23.
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`The next day, on August 8, Tesla’s board of directors issued a press release
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`confirming that, even prior to the tweet, it had already begun exploring a plan to go private:
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`“Last week, Elon [Musk] opened a discussion with the board about taking the company private.
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`This included discussion as to how being private could better serve Tesla’s long-term interests,
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`Case 1:21-cv-09441 Document 1 Filed 11/15/21 Page 9 of 19
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`and also addressed the funding for this to occur. The board has met several times over the last
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`week and is taking the appropriate next steps to evaluate this.”
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`24.
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`In the days following Mr. Musk’s tweets, the Tesla blog post, and the statement
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`from Tesla’s board, Tesla and Mr. Musk, on its behalf, continued to make statements that
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`confirmed they were seriously exploring a going-private transaction. For example, on
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`August 13, Mr. Musk tweeted, “I’m excited to work with Silver Lake and Goldman Sachs as
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`financial advisors, plus Wachtell, Lipton, Rosen & Katz and Munger, Tolles & Olson as legal
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`advisors, on the proposal to take Tesla private.” And on August 14, the Tesla board issued a
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`press release announcing the creation of a special committee to evaluate a going-private
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`transaction.
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`IV.
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`JPMorgan Makes the First Adjustment
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`25.
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`Tesla’s August 7 announcement regarding the proposed going-private transaction
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`caused an 11% spike in Tesla’s stock price based on market expectations of a tender offer or
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`buyout at $420 per share. Conversely, that expectation caused the implied volatility of Tesla’s
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`stock on August 7 to drop 16.69 points, a reduction of 36% from the previous day’s value,
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`thereby materially reducing the fair value of the 2021 Warrants.4
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`26.
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`Tesla’s announced intention to pursue a going-private transaction constituted an
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`Announcement Event under the Agreements; it was either “the announcement by the Issuer of
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`any intention to enter into a Merger Event or Tender Offer,” or at the very least, certainly “the
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`4 Implied volatility is the expected volatility of a stock (in this case, Tesla’s common stock) over the life of the
`relevant stock option (in this case, the call options represented by the 2021 Warrants). It is a critical input to the
`Black-Scholes models typically used to value options like the 2021 Warrants. The other four inputs to the Black-
`Scholes models are the price of the underlying asset (in this case, Tesla’s stock), the strike price of the option, the
`time until expiration of the option, and the risk-free interest rate. All other things being equal, the higher the implied
`volatility, the higher the value of an option to the option-holder. For example, the 16.69 point drop in the value of
`the implied volatility following Tesla’s announcement, a reduction of 36%, would have caused the 2021 Warrants’
`then-fair market value at the time of the announcement to drop approximately $80.9 million, without any
`corresponding change in the strike price and based on Tesla’s then-current stock price.
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`Case 1:21-cv-09441 Document 1 Filed 11/15/21 Page 10 of 19
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`public announcement by Issuer of an intention to solicit or enter into, or to explore strategic
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`alternatives or other similar undertaking that may include, a Merger Event or Tender Offer.”
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`As a result, JPMorgan, as Calculation Agent, was obligated under the terms of the Agreements to
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`adjust the terms of the 2021 Warrants to account for the economic effect of Tesla’s
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`announcement.
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`27.
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`As Calculation Agent, JPMorgan was granted broad and sole discretion in making
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`any determination it was called upon to make under the Agreements—including the
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`determinations of both the economic effect of Tesla’s announcement with respect to its going-
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`private plans and the appropriate adjustment to account for that effect—subject only to the
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`requirement that its determinations “be made in good faith and in a commercially reasonable
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`manner.”
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`28.
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`Following its standard practice, JPMorgan determined the economic effect of
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`Tesla’s announcement by looking to the resulting change in the average implied volatility of
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`publicly listed options on Tesla’s common stock with a maturity and strike price similar to the
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`2021 Warrants. Rather than use the 36% day-on-day change in Tesla’s implied volatility from
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`August 6 to August 7, JPMorgan’s approach looked to the average implied volatility over a
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`period of time to limit the impact of statistical anomalies, and thereby avoid penalizing Tesla for
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`what may have been an outsized day-on-day change in implied volatility. In this case, JPMorgan
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`looked at the average implied volatility prior to the announcement (from June 25 through August
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`6) and compared it to the average implied volatility after the announcement (from August 7
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`through August 15). Based on these calculations, JPMorgan concluded that the average implied
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`volatility dropped by 12.41 points, a reduction of 26.4%.
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`Case 1:21-cv-09441 Document 1 Filed 11/15/21 Page 11 of 19
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`29.
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`Next, consistent with its standard practice, JPMorgan determined that the
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`appropriate adjustment to account for this economic effect would be a change to the strike price
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`of the 2021 Warrants that preserved their fair value in light of this reduction in average implied
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`volatility, keeping all other pricing inputs constant. Following a methodology that takes into
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`account the differences between the bespoke 2021 Warrants and the listed Tesla options for
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`which implied volatility data is publicly available—a methodology that, like the use of an
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`average implied volatility, would tend to result in adjustments more favorable to Tesla—
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`JPMorgan determined that the strike price had to be reduced from $560.6388 to $424.66 (the
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`“First Adjustment”) to maintain the same fair value for the 2021 Warrants as they had before the
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`Announcement Event. JPMorgan made the First Adjustment effective August 15 and modified
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`its hedge positions the same day.
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`30.
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` Although the Confirmations do not specifically require JPMorgan to provide
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`notice of such an adjustment, JPMorgan notified Tesla of the First Adjustment by letter on
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`August 17, 2018. Shortly after the notice, Tesla contacted JPMorgan to inquire about the First
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`Adjustment. The parties scheduled a call to discuss the adjustment for Friday, August 24, but at
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`the last minute and without explanation, Tesla postponed that call.
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`V.
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`Tesla Suddenly Abandons Its Going-Private Plans and JPMorgan Makes the
`Second Adjustment
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`31.
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`After the close of trading on August 24, Tesla published a blog post, attributed to
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`Mr. Musk, announcing that Tesla was abandoning the going-private proposal. JPMorgan treated
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`Tesla’s August 24 announcement as it was contractually required to—as a new Announcement
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`Event requiring JPMorgan, in its capacity as Calculation Agent, to adjust the strike price for the
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`2021 Warrants to account for the economic effect of this second announcement.
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`Case 1:21-cv-09441 Document 1 Filed 11/15/21 Page 12 of 19
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`32.
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`Tesla’s August 24 announcement was itself also an Announcement Event because
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`it was a “subsequent public announcement of a change to a transaction or intention that is the
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`subject of an announcement of the type described in clause (i) or (ii) of this sentence (including,
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`without limitation, a new announcement relating to such a transaction or intention or the
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`announcement of a withdrawal from, or the abandonment or discontinuation of, such a
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`transaction or intention).” The definition of Announcement Event is clear that “the occurrence
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`of an Announcement Event with respect to any transaction or intention shall not preclude the
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`occurrence of a later Announcement Event with respect to such transaction or intention.”
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`Accordingly, although Tesla made two announcements concerning the same going-private
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`transaction relatively close in time to each other, they were, under the clear language of the
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`Confirmation, two distinct Announcement Events requiring two distinct and independent
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`adjustments.
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`33.
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`Because JPMorgan, as Calculation Agent, was obligated to adjust the terms “to
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`account for the economic effect on the Transaction of such Announcement Event,” 2002 Equity
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`Definitions § 12.3(d); Confirmation § 2 at 9, JPMorgan had to determine the actual economic
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`effect of Tesla’s second announcement. JPMorgan thus employed the same methodology as it
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`had for its First Adjustment, comparing the average implied volatility before the second
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`announcement (from August 16, the first day after the effective date of the First Adjustment,
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`through Friday, August 24) to the average implied volatility after that announcement (from
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`Monday, August 27 through August 29).
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`34.
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`Based on these calculations, JPMorgan concluded that the average implied
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`volatility increased by 5.74 points, or 14.3%, as a result of the August 24 announcement, and
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`determined that increasing the strike price to $484.35 was the appropriate adjustment to maintain
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`12
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`Case 1:21-cv-09441 Document 1 Filed 11/15/21 Page 13 of 19
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`the same pre-announcement fair value for the 2021 Warrants (the “Second Adjustment” and,
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`together with the First Adjustment, the “Adjustments”). JPMorgan made the Second Adjustment
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`effective August 29 and modified its hedge positions the same day.
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`35.
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`After receiving notice from JPMorgan of the Second Adjustment on August 29,
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`Tesla protested that no adjustment should be necessary at all because it had so quickly
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`abandoned its going-private plans. Consistent with its obligations under the Agreements,
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`JPMorgan shared a written explanation describing its calculations, including supporting market
`
`data and quotations, and held several conference calls with Tesla to explain its calculations.
`
`Tesla did not provide any specific objection to JPMorgan’s explanations on these calls, and
`
`following these calls, Tesla did not communicate further with JPMorgan regarding the
`
`Adjustments for six months. Accordingly, JPMorgan continued to hedge the Warrants based on
`
`the adjusted strike price.
`
`36.
`
`In the meantime, it was revealed that there had never been a serious going-private
`
`proposal and that Tesla’s original August 7 announcement was knowingly false. On September
`
`27 and 29, 2018, the Securities and Exchange Commission (“SEC”) filed civil complaints
`
`against Mr. Musk and Tesla, respectively, alleging that Mr. Musk’s August 7 tweets had been
`
`fraudulent and that Tesla did not have adequate controls and procedures in place to ensure the
`
`information published on Mr. Musk’s Twitter account was accurate and complete. According to
`
`the SEC’s complaint against Mr. Musk, which was based on its investigation of Tesla and
`
`interviews with Mr. Musk, there was no agreement, either formal or informal, about the terms of
`
`any going-private offer or the price of such a transaction prior to Mr. Musk’s August 7 Tweet,
`
`and funding was far from secured. Mr. Musk had merely discussed the possibility of taking
`
`Tesla private with a Saudi investment fund on July 31, but they had never discussed even the
`
`
`
`
`
`13
`
`
`
`

`

`Case 1:21-cv-09441 Document 1 Filed 11/15/21 Page 14 of 19
`
`
`
`most fundamental terms of such a proposal. Mr. Musk had unilaterally settled on the $420 price
`
`without discussing it with any sources of funding or any relevant stakeholders. Mr. Musk had
`
`also informed the Tesla board of directors by phone on August 3 of the Saudi fund’s expression
`
`of interest in taking Tesla private, and the board identified several difficulties with such a
`
`transaction. Mr. Musk admitted to the SEC that, prior to his August 7 tweet, he believed there
`
`was “a lot of uncertainty” and only a 50% chance the going-private transaction would occur.
`
`Nevertheless, according to the SEC, Musk had a motive to falsely tweet about the going-private
`
`transaction because artificially driving up Tesla’s stock price would harm those shorting Tesla
`
`stock.
`
`37.
`
`Tellingly, Tesla and Mr. Musk swiftly settled with the SEC on the same day it
`
`filed its complaint against Tesla. Tesla and Mr. Musk agreed that each would pay a $20 million
`
`fine, Mr. Musk would be removed as chair of Tesla’s board of directors for three years, and
`
`Tesla would establish new controls and procedures to oversee Mr. Musk’s communications. By
`
`November 2018, nine private securities fraud class action lawsuits also had been filed against
`
`Tesla and Mr. Musk, premised largely on the SEC’s allegations. The Northern District of
`
`California eventually denied Tesla’s motion to dismiss those consolidated securities class
`
`actions, concluding in relevant part that “Plaintiff has adequately pled that Mr. Musk made false
`
`or materially misleading statements in the scope of his role as CEO of Tesla, with knowledge of
`
`the inaccuracies of his statements—or was, at minimum, deliberately reckless when making such
`
`public disclosures,” and that these statements and Mr. Musk’s scienter were attributable to Tesla.
`
`38.
`
`Despite these serious allegations of fraud, Tesla sent a letter to JPMorgan about
`
`the 2021 Warrants on February 13, 2019 arguing that the Adjustments made by JPMorgan
`
`pursuant to the terms of the Warrants were “unreasonably swift and represented an opportunistic
`
`
`
`
`
`14
`
`
`
`

`

`Case 1:21-cv-09441 Document 1 Filed 11/15/21 Page 15 of 19
`
`
`
`attempt to take advantage of changes in volatility in Tesla’s stock.” Tesla’s letter, however, did
`
`not dispute that Announcement Events had occurred, did not challenge any of the specific
`
`calculations or supporting materials JPMorgan had provided six months earlier, and did not offer
`
`any support for its assertion that JPMorgan’s methodology was unreasonable.
`
`39.
`
`Contrary to Tesla’s accusation that JPMorgan’s adjustment was “unreasonably
`
`swift,” the Agreements call for an adjustment either “on or after the relevant date of such
`
`Announcement Event.” 2002 Equity Definitions § 12.3(d); Confirmation at 9. Thus, the
`
`Agreements would have permitted an adjustment immediately on August 7—which, as noted
`
`above, would have resulted in an even greater reduction of the strike price—but JPMorgan
`
`instead waited more than a week, allowing time for the market to absorb Tesla’s announcement
`
`and for JPMorgan to gather a robust data set to calculate the economic effect of the
`
`announcement. JPMorgan was not required to wait any longer, and it obviously had no clue that
`
`Tesla’s announcement was based on a lie or that those announced plans would be abandoned
`
`mere days after the announced hiring of multiple significant financial and legal advisors.5
`
`40.
`
`Accordingly, JPMorgan sent Tesla a response rejecting all of its allegations with
`
`regard to the Adjustments. Tesla never bothered to respond to JPMorgan’s letter, and in fact, did
`
`not raise any further objection to the Adjustments for two years. Indeed, Tesla had no response
`
`even when JPMorgan provided Tesla with notice of a third adjustment on August 28, 2020,
`
`
`5 Tesla also claimed that none of its three other warrant dealers had made similar adjustments. But Tesla has never
`substantiated that claim. Moreover, even if it were true, it has no bearing on whether JPMorgan acted in good faith,
`or whether its methods for calculating the adjustment were commercially reasonable. Tesla’s other warrant dealers
`generally held fewer warrants, and thus had less exposure, than JPMorgan. In addition, according to Tesla’s August
`24 blog post, two of Tesla’s other warrant dealers were advising Mr. Musk on his going-private proposal.

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