A federal judge just ruled that Tesla must face a shareholder lawsuit over Elon Musk's tweet saying he was considering taking the company private

Reuters / Rebecca Cook

• Tesla must face a lawsuit claiming it misled shareholders when Elon Musk tweeted that he was considering taking the company private, a federal judge ruled Wednesday.
• Musk tweeted in August 2018 that he had secured funding to take the company private at $420 per share, which turned out not to be true.
• The tweet has led to multiple headaches for the company, including a $40 million settlement with the SEC, Musk stepping down as Tesla's board chair, and restrictions on his communications.
• Wednesday's ruling will give investors the chance to try to prove that Musk's tweet caused them to lose billions of dollars by creating volatility in Tesla's stock price.
• Visit Business Insider's homepage for more stories.

A federal judge said Tesla must face a lawsuit claiming it misled shareholders when CEO Elon Musk tweeted in August 2018 that he was considering taking the electric car company private.

US District Judge Edward Chen ruled on Wednesday that shareholders could try to prove Musk's tweet was the "proximate cause" of volatility in Tesla's stock price, causing billions of dollars of alleged losses that prompted the lawsuit.

Musk had tweeted on August 7, 2018: "Am considering taking Tesla private at $420. Funding secured."

But it was later established that he had not lined up funding, and Musk backed down from the going-private offer.

According to the lawsuit, "Musk's tweets were an ill-conceived attempt to manipulate the stock price of Tesla upward in order to burn investors who had sold Tesla stock short," and, "had the desired effect of creating a massive one-day increase in the price of Tesla stock and causing short sellers large losses."

The tweet also prompted a lawsuit by the Securities and Exhange Commission that ultimately ended in a $40 million settlement, with Musk agreeing to step down as chairman of Tesla's board and be replaced by an independent board leader. The company was also required to appoint two new independent directors and a new committee to oversee Musk's communications.

Musk's tweets have continued to cause headaches for Tesla since then. In February 2019, Musk tweeted that the automaker would produce 500,000 vehicles that year, before correcting the tweet, leading the SEC to accuse him of violating his previous agreement to get his tweets preapproved.

Tesla did not immediately respond to a request for comment.

(Reporting by Jonathan Stempel in New York; Editing by Tom Brown)