Axios Pro Rata

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January 21, 2023

Welcome back to another Saturday edition! This week we're diving into some legal news and concepts.

  • 👋 Reminder: Feel free to send me tips or comments by replying to this email or on Twitter @imkialikethecar.

Today’s Smart Brevity™ count is 1,038 words, a 4-minute read.

1 big thing: Fraud isn't just false statements

Illustration of a brain with abstract shapes and money elements.

Illustration: Shoshana Gordon/Axios

In a San Francisco federal courtroom earlier this week, a jury was given very specific instructions by a judge. They were told their job within the next three weeks isn’t to determine whether Tesla CEO Elon Musk’s 2018 tweets about taking the company private were false.

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

Why it matters: The legal concept of scienter, or the required state of mind to be held liable for certain actions, is central to white collar crimes like fraud.

Catch up quick: Musk’s trial kicked off on Wednesday, with both sides’ opening statements to the jurors. Importantly, the jury is to assume that Musk’s tweets were false statements, and he acted recklessly in posting them.

  • But jurors will have to determine whether he (and separately, Tesla) knew these statements were false, as well as whether they were material. That is, whether they could've influenced investors’ actions, and caused financial damage.

What they’re saying: “[Musk] knew that no investors had confirmed support for the transaction going private,” the plaintiffs' lawyer told the jury after describing meetings he held with Saudi Arabia’s public pension fund.

  • “Yet [he] tweeted out on August 7: investor support confirmed – past tense,” he added.

The other side: “What Mr. Musk was communicating was that he was serious about wanting to taking Tesla private,” Musk’s attorney told jurors, and that the CEO’s understanding was that funding wouldn’t be an issue — only potentially getting shareholder approval.

  • He added: “Because of the circumstances, because of the leak [in the press about the Saudis' new stake in Tesla], because Mr. Musk was thinking out loud, he tweeted the wrong words. In his mind, funding was secured.”

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

  • There are three elements to proving fraud: that the statements were false, that the person knew they were false, and that the statements were material.
  • In some cases, merely proving that the defendant acted extremely recklessly — that is, with disregard to whether their statements are true — is enough to prove scienter.

Between the lines: “At trial, the way you prove that somebody knew a thing or recklessly acted is through emails,” says Barnes & Thornburg partner David Slovick. “[There's] almost always an email or an internal report…or they have the testimony of somebody inside.”

Elsewhere in Silicon Valley, there's another case where the legal principle may apply. Disgraced former FTX CEO Sam Bankman-Fried took his ongoing commentary on “what happened” to newsletter service Substack, creating two posts this week.

  • His insistence on continuing to talk publicly about the company has been universally baffling, given all the lawsuits he’s facing. But this could all be about…you guessed it: state of mind.
  • From the earliest days of FTX’s collapse, Bankman-Fried has claimed that he didn’t realize the true condition of the company’s financials, and that he had long stepped away from the day-to-day management of Alameda Research’s trading activities.

Yes, but: Already, bits and pieces in court documents are contradicting any claims that he didn’t know, or believed otherwise.

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

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

2. Notes from the trial

Illustration of a hand touching a phone with a dollar bill on the screen

Illustration: Sarah Grillo/Axios

We’re about one-third into the trial over Elon Musk’s “funding secured” tweets, with about two more weeks to go until the expected end date of Feb. 1, plus jury deliberations.

State of play: So far, after both sides’ opening statements, the jury has heard from two of the investors suing, in addition to Guhan Subramanian, a Harvard business and law professor, as an expert witness.

The intrigue: Musk himself began his testimony on Friday in the last half hour. He will resume on Monday.

1 jury thing: During jury selection on Tuesday, a number of potential jurors indicated they already had some negative views of Musk.

  • Several described him as “arrogant” (though one man also credited him with being a genius).
  • Many also said much of their opinion came about since his taking over of Twitter.

3. FTX catch-up

Illustrated collage of the FTX logo, money and rectangles.

Illustration: Shoshana Gordon/Axios

Speaking of the embattled crypto exchange, the fallout from its collapse continues.

Driving the news: Yesterday, Digital Currency Group-owned lender Genesis filed for Chapter 11 bankruptcy protection.

  • While Genesis’ troubles began separately from FTX — with its larger exposure to Three Arrows Capital — the crypto exchange's troubles put the nail in that coffin.

Catch up quick:

  • Three former FTX/Alameda execs have been charged by the DOJ, SEC, and CFTC: Sam Bankman-Fried, Caroline Ellison, and Gary Wang. The latter two have pleaded guilty, and settled some of their charges. Bankman-Fried has pleaded not guilty.
  • Former engineering director Nishad Singh has reportedly met with prosecutors.
  • FTX investor Sequoia Capital said last week that it believes it was misled by the company.

Meanwhile, FTX continues to work its way through bankruptcy:

  • On Friday, law firm Sullivan & Cromwell was given the green light to represent the exchange despite concerns over some conflict of interest.
  • Bankman-Fried and FTX's new CEO, John Ray III, have sparred publicly, notably about the status of the U.S. subsidiary.
  • FTX also said that it has located $5.5 billion in assets.

📚 Due Diligence

  • The SEC has never been busier investigating both private and public companies in the Bay Area, suggests agency head (TechCrunch)
  • FTX wants a do-over as SBF keeps talking (Axios)
  • The trial over Elon Musk's failed attempt to take Tesla private enters its third day (NBC)

🧩 Trivia

In lieu of trivia this week, check out the final form with instructions given to the jury in Elon Musk's trial.

  • It includes worksheets of calculations jurors will have to tally up! 😮
  • Read the form here, and the final jury instructions here.

🧮 Final Numbers

Data: Yahoo! Finance; Chart: Axios Visuals
Data: Yahoo! Finance; Chart: Axios Visuals
  • Musk tweeted that he had "funding secured" to take Tesla private on August 7, 2018 (the big spike in the chart above).

🙏 Thanks for reading! And to Javier E. David and Elizabeth Black for editing. See you on Monday for Pro Rata's weekday programming, and please ask your friends, colleagues and defense attorneys to sign up.