'Was he high?': Elon Musk is back to complaining about short sellers on Twitter, but his gripes don't hold water with some investors

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Elon Musk makes a face while presenting an updated design of SpaceX's Big Falcon Rocket.

• Last week, Tesla CEO Elon Musk reached a settlement with the Securities and Exchange Commission agreed with the companies board of directors to be more constrained in his use of Twitter.
• On Friday, however, Musk was back to complaining about investors who bet against Tesla shares, saying they diminish the stock's true returns.
• "When CEOs criticize short selling, its usually because they're looking to deflect blame for their own failing," one prominent short seller told Business Insider.
• Follow Tesla's stock price in real-time here.

One week after settling with the Securities and Exchange Commission and agreeing to more oversight from Tesla's board about his communications, CEO Elon Musk was back to his usual Twitter antics.

In a series of tweets fired out Thursday, the billionaire not only berated short sellers - those investors betting against Tesla's stock - but also stockholders for lending out their shares to be shorted. Short sellers make money by borrowing a company's shares and selling them, with the aim of buying them back at a lower price and returning them, pocketing the difference

"There is no rational basis for a long holder to lend their stock to shorts, as it dilutes the shareholder base & gives the short a strong incentive to attack the company by whatever means possible, including regulators," Musk said.

Tesla shares fell as much as 4% overnight following Musk's tweets. They were down about 1% ahead of Friday's opening bell.

Musk went on to attack index funds, many of which passively own shares for their clients' retirement accounts. T Rowe Price, BlackRock, and Vanguard are among Tesla's top holders, according to data compiled by Bloomberg. These firms can lend out their holdings to short sellers, and collect a lending fee on top of any gains in the equity price.

"Where this breaks down is in passive index funds, which constitute most of the market," he continued. "The holders of those funds, mostly small investors & retirement funds, don't realize that their stocks are being lent to short sellers, diminishing their true equity return."

BlackRock, which owns about 3.8% of Tesla's outstanding shares, notably voted against Musk's reinstatement as chairman at the company's annual meeting in May. The push was lead by major proxy advisory firm Glass Lewis and supported by pension investment group CtW Investments.

'Was he high?'

While short sellers may have incentive for the underlying stock to drop, there's no connection between a stock being bet against and its price declining, according to market experts.

"Like his other comments, I struggle to see how that's true," Dan Yu, a short seller and founder of Gotham City Research, told Business Insider in regards to Musk's diminishing true return claim. "Was he high at the time of those tweets?"

He continued: "Highly shorted stocks have handily outperformed this year, and that's before accounting for the interest that owners accrue if they lend out their shares."

Musk has long derided short sellers on Twitter. "They want us to die so badly they can taste it," he tweeted in June 2017.

He went so far as to joke about sending a pair of short shorts to hedge fund manager David Einhorn of Greenlight Capital. It was later revealed, however, that a box of shorts tweeted by the hedge fund manager was actually sent by the brand Chubbies on Musk's behalf.

"When CEOs criticize short selling, its usually because they're looking to deflect blame for their own failings, and obscure the uncomfortable truth that their long holders are losing confidence and are selling." short seller Carson Block, founder of Muddy Waters Capital, told Business Insider.

Tesla is currently the third most-shorted stock in the United States, with 9.196 million shares - or 26% of its float - riding against it. It trails Apple and and Amazon.

Trista Kelley contributed to this report.

Markets Insider