In Elon Musk’s trial, fraud isn’t just about false statements

Illustration of a brain with abstract shapes and money elements.

Illustration: Shoshana Gordon/Axios

In a San Francisco federal court earlier this week, a jury was told that their work It is not to determine if Tesla CEO Elon Musk’s 2018 tweets about taking the company private they were fake.

  • Rather, the group must decide on its state of mind at the time.

Why it matters: The legal concept of knowinglyor the state of mind required to be held responsible for certain actions, is essential for white collar crimes such as fraud.

Get up to speed fast: Musk’s trial began Wednesday, with both sides giving opening statements to jurors. Importantly, the jury must assume that Musk’s tweets were false statements and that he was reckless in posting them.

  • But jurors will have to determine whether he (and, separately, Tesla) he knew these statements were false, as well as whether they were material. That is, they could influence the actions of investors and cause financial damage.

What they are saying: “[Musk] I knew that no investor had confirmed their support for the transaction to go private,” the plaintiffs’ attorney told the jury after describing meetings Musk had with Saudi Arabia’s public pension fund.

  • “Yet [he] Tweeted Aug 7: Investor Support Confirmed, Past Tense,” he added.

The other side: “What Mr. Musk was communicating was that he was serious about wanting to take Tesla private,” Musk’s lawyer told the jury, and that the CEO understood that funding would not be an issue, just potentially getting approval from shareholders.

  • And he added: “Due to the circumstances, due to the leak [in the press about a possible take-private deal], because Mr. Musk was thinking out loud, he tweeted the wrong words. In his mind, the funding was secured.”

Be smart: “It is knowingly [a] Really simple concept: it denotes the fact that the conduct is intentional and is meant to be done,” Thomas Gorman, a partner at Dorsey & Whitney, tells Axios.

  • There are three things to prove fraud: that the statements were false, that the person knew they were false, and that the statements were material.
  • In some cases, the mere proof that the defendant acted extremely recklessly, that is, regardless of whether his statements are true, is enough to prove scienter.

Between lines: “At trial, the way to prove that someone knew something or acted recklessly is through emails.” says David Slovick, a partner at Barnes & Thornburg. “[There’s] almost always an email or an internal report… or they have testimony from someone inside.”

In another part of Silicon Valley, there is another case where the legal principle can be applied. Sam Bankman-Fried, disgraced former CEO of FTX, took his ongoing comment about “what happened” to the Substack newsletter service, creating two posts this week.

  • His insistence on continuing to speak publicly about the company has been universally baffling, given all the lawsuits he faces. But this could all be about…you guessed it: knowingly.
  • Since the early days of FTX’s collapse, Bankman-Fried has claimed that he was unaware of the company’s true financial condition and had long walked away from the day-to-day management of Alameda Research’s business activities.

Yes, but: The fragments of the court documents are already contradicting any claims that he did not know or believed otherwise.

  • For example, former Alameda CEO Caroline Ellison said at her plea hearing that she and Bankman-Fried created misleading financial statements last year for Alameda lenders.
  • Meanwhile, government documents recently obtained by the NYT show that a senior FTX engineer brought Alameda’s inappropriate use of funds to Bankman-Fried’s attention, but was told “it was fine.”
  • A Bankman-Fried spokesman declined to comment.

The bottom line: Who knew what, and when, is the name of the fraud prosecution game.

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