In re Tesla Inc. Securities Litigation

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4 UNITED STATES DISTRICT COURT

5 NORTHERN DISTRICT OF CALIFORNIA

6

7 IN RE TESLA, INC. SECURITIES Case No. 18-cv-04865-EMC

LITIGATION

8

FINAL PRETRIAL CONFERENCE

9 ORDER

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13

14 I. BACKGROUND

15 The lead plaintiff and class representative in this case is Glen Littleton. Mr. Littleton is an

16 investor who formerly traded for the Kansas City Board of Trade and the Chicago Mercantile

17 Exchange. Mr. Littleton has traded Tesla, Inc. securities since 2015. Mr. Littleton represents a

18 certified class (the “Class”) of all individuals and entities who purchased or sold Tesla stock,

19 options, and other securities from 12:48 p.m. EST on August 7, 2018 to August 17, 2018 (the

20 “Class Period”), and allegedly were damaged thereby.

21 The defendants in this case are Tesla, Inc., Elon Musk, Brad W. Buss, Robyn Denholm, Ira

22 Ehrenpreis, Antonio J. Gracias, James Murdoch, Kimbal Musk, and Linda Johnson Rice

23 (collectively, “Defendants”). Elon Musk (“Musk”) was Tesla’s Chief Executive Officer and

24 Chairman of the Board of Directors during the Class Period. Brad W. Buss, Robyn Denholm, Ira

25 Ehrenpreis, Antonio J. Gracias, James Murdoch, Kimbal Musk, and Linda Johnson Rice each

26 served as a director of Tesla’s Board during the Class Period. Defendant Denholm replaced Mr.

27 Musk as Tesla’s Chairman of the Board in November 2018.

1 Plaintiff intends to prove at trial that Mr. Musk and Tesla violated Sections 10(b) of the

2 Securities Exchange Act of 1934 (15 U.S.C. §§ 78j, 78t) and SEC Rule 10b-5(b) (17 C.F.R.

3 § 240.10b-5) promulgated thereunder. Specifically, on August 7, 2018, at 9:48 a.m. PST, Mr.

4 Musk tweeted the following message to over 22 million followers: “Am considering taking Tesla

5 private at $420. Funding secured.” Musk made additional, subsequent tweets about the potential

6 transaction including: “Investor support is confirmed. Only reason why this is not certain is that

7 it’s contingent on a shareholder vote.” The Court will refer to these two tweets on August 7 as the

8 Musk Tweets. On April 1, 2022, the Court issued an order granting in part Plaintiff’s motion for

9 partial summary judgment regarding these statements, finding certain statements were false and

10 that scienter—recklessness—had been established as a matter of law. See Docket No. 387

11 (Summary Judgment Order).

12 Further, Plaintiff alleges that these tweets were material and artificially affected the price

13 of Tesla’s stock and other securities immediately after they were made. Defendants contend that

14 Plaintiff has not and cannot prove that any of Mr. Musk’s statements were materially false, and

15 that these statements regarding secured funding, as opposed to Mr. Musk’s statement that he

16 planned to take Tesla private at $420 per share, did not result in any artificial price inflation. The

17 parties dispute the materiality and significance of an August 13, 2018 “update” contained in a blog

18 post from Mr. Musk regarding the potential going private transaction.

19 Following the tweets on August 7, 2018, there was intense media and investor scrutiny of

20 the proposed going-private transaction. After reaching a high of $386.48 on August 7, 2018,

21 Tesla’s stock price declined to $335.45 by close on August 16, 2018. On August 17, 2018, The

22 New York Times published an article based on a lengthy interview with Musk and others, which

23 included a statement by the reporter that funding for a Tesla take-private “was far from secure.”

24 Plaintiff alleges that The New York Times article corrected the false and/or materially misleading

25 information previously disseminated by Defendants about the going-private transaction and, as a

26 result, finally dissipated the artificial impact on the prices of Tesla stock and other securities.

27 Defendants disagree and argue that the article did not disclose any new information regarding the

1 Plaintiff intends to prove that Defendants’ false statements were materially misleading and

2 damaged Plaintiff and the Class (i.e., caused economic losses) and that losses were realized by the

3 Class during the Class Period. Plaintiff further intends to prove that the members of Tesla’s Board

4 are liable under Section 20(a) of the Securities Exchange Act of 1934 (15 U.S.C. § 78t) as control

5 persons for securities laws violations by Tesla.

6 Defendants deny liability and intend to prove at trial that Plaintiff’s claims have no merit.

7 Among other things, Defendants intend to prove that Plaintiff and the Class cannot prove the

8 material falsity of the challenged statements or reliance thereon; cannot prove the challenged

9 statements were material; cannot prove that Mr. Musk acted with the requisite scienter with

10 respect to a materially false statement; cannot show damages or loss causation; and cannot show

11 that there is control person liability.

12 II. TRIAL DATE & LENGTH OF TRIAL

13 Jury selection shall take place on January 17, 2023, beginning at 8:30 a.m. Counsel shall

14 be present in the Courtroom at 8:00 a.m.

15 The jury trial shall begin on January 17, 2023, immediately following the conclusion of

16 jury selection. Trial shall last from 8:30 a.m. to 1:30 p.m. on each day, except for Thursdays,

17 which are dark. On all trial days counsel shall be present in the Courtroom at 8:00 a.m. to discuss

18 any matters requiring resolution prior to commencement of trial at 8:30 a.m.

19 The trial shall last for approximately ten days: from January 17, 2023, to February 1, 2023.

20 The ten allotted trial days will include jury selection. Each party will be given eighteen hours to

21 present their case. This includes time examining witnesses (whether on direct or cross), and

22 opening statements and closing arguments.

23 The Court will hold a second pretrial conference by Zoom on January 4, 2023, at 10:00

24 a.m.

25 III. ADVANCED NOTICE OF WITNESSES AND EXHIBITS

26 Each party shall provide 48 hours/two court days in advance for notice of witnesses and

27 exhibits to be called each day. The Court reserves the authority to exclude witness for non-

1 All objections to witnesses and exhibits must be filed with the Court at least one court day

2 (24 hours) before the witness is scheduled to testify. The Court will address objections before

3 8:30 a.m. on the following day. All objections should be provided in writing and filed with the

4 Court, and a courtesy copy should be given to chambers immediately. The courtesy copy should

5 be provided electronically to the Courtroom Deputy and should include a version of the objections

6 in Microsoft Word as well as PDF.

7 Should a party fail to have enough witnesses to complete the trial day, the Court shall

8 charge the surplus time remaining on that day against the party’s total allotted time. For instance,

9 if a party concludes a witness’s examination with an hour remaining in the day and is not prepared

10 to call another witness, then the Court will subtract that hour from the party’s allotted eighteen

11 hours.

12 IV. WITNESSES

13 A. Plaintiff

14 Mr. Littleton has identified the following individuals as witnesses that he may call in his

15 case-in-chief.

16 (1) Deepak Ahuja. Mr. Ahuja will testify regarding, among other things, his

17 experience as Tesla’s Chief Financial Officer, his reaction to the August 7,

18 2018 tweets, discussions with investors regarding the potential going private,

19 his attendance at Tesla board meetings, and his involvement with the August 7,

20 2018 blog post.

21 (2) Dave Arnold. Mr. Arnold will testify regarding, among other things, to his

22 experience as Tesla’s Senior Director of Global Communications, in particular,

23 his conversations with various investors and news outlets following Mr. Musk’s

24 tweets on August 7, 2018, his familiarity with the topics of public reporting

25 regarding the August 7 tweets, his involvement in the drafting of the August 7,

26 2018 letter to Tesla employees and the August 13 blog post, and his practice of

27 escalating critical media inquiries and press coverage to Mr. Musk, the Tesla

1 (3) Ryan Brinkman (by deposition). Mr. Brinkman will testify regarding, among

2 other things, his professional background and experience as an analyst at

3 JPMorgan, the market’s response to Defendants’ statements on August 7 and

4 13, 2018, and considerations behind his decision to initially increase, and later

5 reduce, JPMorgan’s price target for Tesla stock.

6 (4) Brad Buss. Mr. Buss will testify regarding, among other things, his experience

7 as a member of Tesla’s Board of Directors, the Board’s consideration and

8 discussion of Mr. Musk’s proposal to take Tesla private, Mr. Musk’s use of

9 Twitter as a means of Tesla marketing, and Tesla’s implementation of a

10 disclosure policy relating to Mr. Musk’s Twitter usage. Mr. Buss is a defendant

11 in this case.

12 (5) Aaron Chew. Mr. Chew will testify regarding, among other things, his

13 experience as Tesla’s Senior Director of Investor Relations in the summer of

14 2018, investor feedback on Musk’s use of Twitter generally and in particular in

15 August of 2018, his interactions with NASDAQ on August 7, 2018, his

16 correspondence with Tesla investors regarding the August 7, 2018 tweets, and

17 feedback regarding the proposed going private.

18 (6) Dan Dees (by deposition). Mr. Dees will testify regarding, among other things,

19 his professional background and experience at Goldman Sachs Group Inc. (GS)

20 and, in particular, his interactions with Mr. Musk, the Tesla Board, Silver Lake

21 Partners, and others concerning the proposed take-private transaction, GS’s role

22 and engagement as financial advisor, and GS’s outreach to potential sources of

23 funding after Mr. Musk’s August 7, 2018 tweets.

24 (7) Robyn Denholm. Ms. Denholm will testify regarding, among other things, her

25 experience as a member of Tesla’s Board of Directors, the Board’s

26 consideration and discussion of Mr. Musk’s proposal to take Tesla private, her

27 role and experience as a member of Tesla’s audit committee and the Special

1 knowledge of Mr. Musk’s use of Twitter, the Board’s knowledge of Mr.

2 Musk’s use of Twitter, and Tesla’s implementation of a disclosure policy

3 relating to Mr. Musk’s Twitter usage. Ms. Denholm is a defendant in this case.

4 (8) Egon Durban. Mr. Durban will testify regarding, among other things, his

5 professional background and experience as one of Silver Lake Partner’s

6 managing partners, his interactions with Mr. Musk and others concerning the

7 proposal to take Tesla private at $420 per share, the work that Silver Lake

8 performed in connection with the going private, and Silver Lake’s presentation

9 to the Tesla board on August 23.

10 (9) Joseph Fath (by deposition). Mr. Fath will testify regarding, among other

11 things, his professional background and experience as a portfolio manager at T.

12 Rowe Price, his and T. Rowe Price’s response to Defendants’ statements on

13 August 7 and 13, 2018, T. Rowe Price’s ability to invest in Tesla if the

14 proposed going-private transaction were to have occurred, and his meeting with

15 Mr. Musk to discuss concerns about Mr. Musk’s Twitter use.

16 (10) Timothy Fries. Mr. Fries will testify regarding, among other things, his reasons

17 for investing in Tesla, his response to Defendants’ statements on August 7 and

18 13, 2018, and the losses he suffered in Tesla securities due to Mr. Musk and

19 Tesla’s false statements.

20 (11) Antonio Gracias. Mr. Gracias will testify regarding, among other things, his

21 Valor fund’s investment in Tesla and Valor’s involvement with Tesla, the

22 nature of his relationship with Mr. Musk, his role and experience as a member

23 of Tesla’s audit committee, his knowledge of Musk’s use of Twitter, the

24 Board’s knowledge of Musk’s use of Twitter and the economic benefits to

25 Tesla derived from it, and the Board’s consideration and discussion of Mr.

26 Musk’s proposal to take Tesla private. Mr. Gracias is a defendant.

27 (12) Michael Hartzmark (expert). Dr. Hartzmark will testify regarding the opinions

1 2021, including the price and trading of Tesla’s securities during the Class

2 Period and the amount of inflation/deflation and damages allegedly caused by

3 Defendants’ statements on August 7 and 13, 2018.

4 (13) Steven Heston (expert). Professor Steven Heston will testify regarding the

5 opinions set forth in his expert report dated November 8, 2021, including,

6 various pricing models and principles concerning option securities, the changes

7 in the prices and implied volatilities of Tesla options during and around the

8 Class Period, and methods for measuring the impact on Tesla option prices as a

9 result of the alleged misstatements.

10 (14) Nii Owuraka Koney (by deposition). Mr. Koney will testify regarding, among

11 other things, his professional background and experience as an analyst at

12 Jennison, Mr. Musk’s prior interest in taking Tesla private, the market’s

13 response to Defendants’ statements on August 7 and 13, 2018, and his

14 communications with Tesla’s investor relations regarding the potential going

15 private.

16 (15) Plaintiff Glen Littleton. Mr. Littleton will testify regarding, among other

17 things, his personal and professional background, including his reasons for

18 investing in Tesla, his response to Defendants’ statements on August 7 and 13,

19 2018, and the losses he suffered in Tesla securities due to Musk and Tesla’s

20 false statements.

21 (16) Joshua Mitts (expert). Professor Mitts will testify regarding the opinions set

22 forth in his expert report dated November 8, 2021, including the market

23 conditions for Tesla stock at and around August 2018, the short interest in Tesla

24 common stock, and Musk’s conduct and public statements with regard to short

25 investors in Tesla.

26 (17) Elon Musk. Mr. Elon Musk will testify regarding, among other things, his

27 desire to take Tesla private, with whom he had discussed taking Tesla private

1 August 7, 2018 concerning his proposal to take Tesla private at $420 per share,

2 including his conversations with the Saudi PIF and Tesla’s Board of Directors,

3 his outreach to Tesla institutional investors after the August 7, 2018 tweets, his

4 usage of Twitter both before and after the August 7, 2018 tweets, the August

5 13, 2018 blog post, and practices concerning public announcements of past

6 deals.

7 (18) Kimbal Musk. Mr. Kimbal Musk will testify regarding, among other things, his

8 relationship with his brother Elon, his knowledge of his brother’s desire to take

9 Tesla private, his experience as a member of Tesla’s Board of Directors, the

10 Board’s consideration and discussion of Mr. Musk’s proposal to take Tesla

11 private, and his communications about Musk’s tweets on August 7, 2018.

12 (19) Rick Polhemus (by deposition). Mr. Polhemus will testify regarding, among

13 other things, his professional background and experience at Morgan Stanley

14 and, in particular, his work in investment banking, capital raises for Tesla

15 including Tesla’s IPO, periodic discussions with Tesla’s CFO regarding the

16 company’s capital needs, his response as well as Morgan Stanley’s response to

17 the potential going private transaction, and Morgan Stanley’s involvement with

18 the going private transaction.

19 (20) Guhan Subramarian (expert). Professor Subramanian will testify regarding the

20 opinions set forth in his expert report dated November 8, 2021, including

21 customary practices and procedures in management buyouts as well as his

22 experience with the Dell Inc. buyout, that Mr. Musk’s conduct with respect to

23 the proposed going private transaction allegedly deviated from ordinary

24 practices in the industry, and that the proposal to take Tesla private was inter

25 alia illusory.

26 (21) Martin Viecha. Mr. Viecha will testify regarding, among other things, his

27 experience as Tesla’s Director of Investor Relations and his conversations with

1 B. Defendants

2 Defendants have identified the following individuals as witnesses that they may call in

3 their case-in-chief or cross-examine.

4 (1) Elon Musk. Mr. Musk, who is also listed on Plaintiff’s witness list, will testify

5 regarding, among other things, the statements at issue in this case and

6 background related thereto; facts related to the materiality of the statements

7 challenged by Plaintiff, and to whether those statements altered the total mix of

8 information available, including relative to the events that took place between

9 July 31, 2018 and August 17, 2018; the potential go-private transaction and

10 communications related thereto; facts related to the capacity in which Mr. Musk

11 acted when he made communications, including the statements challenged by

12 Plaintiff; facts related to the board’s good faith; and facts related to whether the

13 board directly or indirectly controlled Mr. Musk’s Twitter account.

14 (2) Sam Teller. Mr. Teller is Tesla’s former Director of the Office of the CEO.

15 Defendants expect that Mr. Teller will testify regarding the statements at issue

16 in this case and background related thereto; facts related to the materiality of

17 the statements challenged by Plaintiff, and to whether those statements altered

18 the total mix of information available, including relative to the events that took

19 place between July 31, 2018 and August 17, 2018; and the potential go-private

20 transaction and communications related thereto.

21 (3) Deepak Ahuja. Mr. Ahuja also appears on Plaintiff’s witness list. Mr. Ahuja is

22 Tesla’s former Chief Financial Officer. Defendants expect that Mr. Ahuja will

23 testify regarding, among other things, the statements at issue in this case and

24 background related thereto; facts related to the materiality of the statements

25 challenged by Plaintiff, and to whether those statements altered the total mix of

26 information available, including relative to the events that took place between

27 July 31, 2018 and August 17, 2018; and the potential go-private transaction and

1 (4) Robyn Denholm. Ms. Denholm is also on Plaintiff’s witness list. She is a

2 member of Tesla’s Board of Directors. Ms. Denholm will testify regarding,

3 among other things, her experience as a member of Tesla’s Board of Directors,

4 Mr. Musk’s communications with the board regarding the potential go-private

5 transaction, board meetings and communications regarding the potential go-

6 private transaction, facts related to whether the Board of Directors directly or

7 indirectly controlled Mr. Musk’s Twitter account, and facts related to whether

8 the Board of Directors acted in good faith.

9 (5) Ira Ehrenpreis. Mr. Ehrenpreis is a member of Tesla’s Board of Directors. Mr.

10 Ehrenpreis will testify regarding, among other things, his experience as a

11 member of Tesla’s Board of Directors, Mr. Musk’s communications with the

12 board regarding the potential go-private transaction, board meetings and

13 communications regarding the potential go-private transaction, facts related to

14 whether the Board of Directors directly or indirectly controlled Mr. Musk’s

15 Twitter account, and facts related to whether the Board of Directors acted in

16 good faith.

17 (6) James Murdoch. Mr. Murdoch is a member of Tesla’s Board of Directors. Mr.

18 Murdoch will testify regarding, among other things, his experience as a member

19 of Tesla’s Board of Directors, Mr. Musk’s communications with the board

20 regarding the potential go-private transaction, board meetings and

21 communications regarding the potential go-private transaction, facts related to

22 whether the Board of Directors directly or indirectly controlled Mr. Musk’s

23 Twitter account, and facts related to whether the Board of Directors acted in

24 good faith.

25 (7) Kimball Musk. Mr. Musk is also listed on Plaintiff’s witness list. Mr. Musk

26 will testify regarding, among other things, the statements at issue in this case

27 and background related thereto; facts related to the materiality of the statements

1 information available, including relative to the events that took place between

2 July 31, 2018 and August 17, 2018; the potential go-private transaction and

3 communications related thereto; facts related to the capacity in which Mr. Musk

4 acted when he made communications, including the statements challenged by

5 Plaintiff; facts related to the Board of Directors’ good faith; and facts related to

6 whether the Board of Directors directly or indirectly controlled Mr. Musk’s

7 Twitter account.

8 (8) Antonio Gracias. Mr. Gracias is a former member of Tesla’s Board of

9 Directors. Mr. Gracias will testify regarding, among other things, his

10 experience as a member of Tesla’s Board of Directors, Mr. Musk’s

11 communications with the board regarding the potential go-private transaction,

12 board meetings and communications regarding the potential go-private

13 transaction, facts related to whether the Board of Directors directly or

14 indirectly controlled Mr. Musk’s Twitter account, and facts related to whether

15 the Board of Directors acted in good faith.

16 (9) Brad Buss. Mr. Buss is also on Plaintiff’s witness list. Mr. Buss is a former

17 member of Tesla’s Board of Directors. Mr. Buss will testify regarding, among

18 other things, his experience as a member of Tesla’s Board of Directors, Mr.

19 Musk’s communications with the board regarding the potential go-private

20 transaction, board meetings and communications regarding the potential go-

21 private transaction, facts related to whether the Board of Directors directly or

22 indirectly controlled Mr. Musk’s Twitter account, and facts related to whether

23 the Board of Directors acted in good faith.

24 (10) Linda Johnson Rice. Ms. Johnson Rice is a former member of Tesla’s Board of

25 Directors. Ms. Johnson Rice will testify regarding, among other things, her

26 experience as a member of Tesla’s Board of Directors, Mr. Musk’s

27 communications with the board regarding the potential go-private transaction,

1 transaction, facts related to whether the Board of Directors directly or indirectly

2 controlled Mr. Musk’s Twitter account, and facts related to whether the Board

3 of Directors acted in good faith.

4 (11) Larry Ellison. Mr. Ellison is a former member of Tesla’s Board of Directors.

5 Defendants expect that Mr. Ellison will testify regarding the potential go-

6 private transaction and communications related thereto.

7 (12) JB Straubel. Mr. Straubel is a Tesla co-founder and its former Chief

8 Technology Officer. Defendants expect that Mr. Straubel will testify regarding,

9 among other things, the potential go-private transaction and communications

10 related thereto.

11 (13) Egon Durban. Mr. Durban is also listed on Plaintiff’s witness list. He is a

12 Managing Partner at Silver Lake Partners. Defendants expect that Mr. Durban

13 will testify regarding, among other things, the potential go-private transaction

14 and communications related thereto.

15 (14) Dan Dees. Mr. Dees is also listed on Plaintiff’s witness list (by deposition). He

16 is Co-Head of Global Investment Banking at Goldman Sachs. Defendants

17 expect that Mr. Dees will testify regarding, among other things, the potential

18 go-private transaction and communications related thereto.

19 (15) Rick Polhemus. Mr. Polhemus is also listed on Plaintiff’s witness list (by

20 deposition). He is a Managing Director at Morgan Stanley. Defendants expect

21 that Mr. Polhemus will testify regarding, among other things, the potential go-

22 private transaction and other transactions and communications related thereto.

23 (16) Daniel Fischel (expert). Defendants expect Mr. Fischel will testify, among

24 other things, that Mr. Musk’s actions in August 2018 were consistent with his

25 prior-stated interest in taking Tesla private and in protecting investors who

26 believed in his vision, it was reasonable to believe that the proposed go-private

27 transaction would have been funded if it moved forward, the $420 potential

1 benefited from the fraud that Plaintiff alleges. Mr. Fischel will also critique the

2 opinions of Dr. Hartzmark, Professor Mitts, and Professor Subramanian.

3 (17) Amit Seru (expert). Professor Seru has been identified as one of Defendants’

4 expert witnesses, and his opinions are disclosed in his expert reports.

5 Defendants expect Professor Seru will testify, among other things, that

6 Professor Heston’s methodology for estimating damages to Tesla option

7 holders is fundamentally flawed in the context of a merger or acquisition deal,

8 and that Professor Heston’s other opinions are speculative, unsupported by

9 academic literature, and fail to use actual prices to measure damages.

10 Defendants expect Professor Seru will testify, among other things, that Dr.

11 Hartzmark’s implementation of Professor Heston’s methodology is similarly

12 speculative, unreliable, and inaccurate.

13 (18) Yasir Al-Rumayyan. Mr. Al-Rumayyan is the Governor of the PIF, the

14 sovereign wealth fund of the Kingdom of Saudi Arabia. Defendants expect that

15 Mr. Al-Rumayyan will testify regarding the potential go-private transaction and

16 communications related thereto.

17 (19) Saad Al Jarboa. Mr. Al Jarboa is employed by the PIF. Defendants expect that

18 Mr. Al Jarboa will testify regarding the potential go-private transaction and

19 communications related thereto.

20 (20) Naif Al Mogren. Mr. Al Mogren is employed by the PIF. Defendants expect

21 that Mr. Al Mogren will testify regarding the potential go-private transaction

22 and communications related thereto.

23 (21) Turqi Alnowaiser. Mr. Alnowaiser is employed by the PIF. Defendants expect

24 that Mr. Alnowaiser will testify regarding the potential go-private transaction

25 and communications related thereto.

26 (22) Glen Littleton. Mr. Littleton is the Class Plaintiff. Defendants plan to cross-

27 examine Mr. Littleton.

1 (23) Guhan Subramanian. Professor Subramanian has been identified as one of

2 Plaintiff’s expert witnesses. Defendants plan to cross-examine Professor

3 Subramanian.

4 (24) Joshua Mitts. Professor Mitts has been identified as one of Plaintiff’s expert

5 witnesses. Defendants plan to cross-examine Professor Mitts.

6 (25) Steven Heston. Dr. Heston has been identified as one of Plaintiff’s expert

7 witnesses. Defendants plan to cross-examine Dr. Heston.

8 (26) Michael Hartzmark. Dr. Hartzmark has been identified as one of Plaintiff’s

9 expert witnesses. Defendants plan to cross-examine Dr. Hartzmark.

10 (27) Timothy Fries. Mr. Fries is on Plaintiff’s witness list. Defendants plan to

11 cross-examine Mr. Fries.

12 (28) Dave Arnold. Mr. Arnold is on Plaintiff’s witness list. Defendants plan to

13 cross-examine Mr. Arnold.

14 (29) Martin Viecha. Mr. Viecha is on Plaintiff’s witness list. Defendants plan to

15 cross-examine Mr. Viecha.

16 (30) Aaron Chew (by deposition). Mr. Chew is on Plaintiff’s witness list.

17 Defendants plan to cross-examine Mr. Chew.

18 (31) Ryan Brickman (by deposition). Mr. Brinkman is on Plaintiff’s witness list.

19 Defendants plan to cross-examine Mr. Brinkman.

20 (32) Joshua Fath (by deposition). Mr. Fath is on Plaintiff’s witness list. Defendants

21 plan to cross-examine Mr. Fath.

22 (33) Nii Owuraka Koney (by deposition). Mr. Koney is on Plaintiff’s witness list.

23 Defendants plan to cross-examine Mr. Koney.

24 ///

25 ///

26 ///

27 ///

1 V. THE AUGUST 13, 2018 BLOG POST

2 In addition to the Musk Tweets, Plaintiff alleges that the August 13, 2018 blog post

3 || contains fraudulent statements in violation of federal securities laws. In particular, Plaintiff

4 alleges that the portion of the blog post featured below is misleading because it omits information

5 regarding interactions that Mr. Musk had with the Saudi PIF in the days following August 7, 2018.

6

Why did | say “funding secured”?

7 30ing back almost two years, the Saudi Arabian sovereign wealth fund has approached me

10 has more than enough capital needed to execute on such a transactior

a 12 mine meeting the nie GING Directo f the fund ERIS regret tn a naa not moved □

13 support for funding a going private transaction for Tesla at this time. | understood from

a him that no other decision makers were needed and that they were eager to proceed.

I

Oo eft the July 31st meeting with no question that a deal with the Saudi sovereign fund

5 referred to “funding secured” in the August 7th annc 1¢ ement

16

17 Under this omission theory of liability, Plaintiff contends that Mr. Musk’s characterization

2 18 of the likelihood of the privatization transaction occurring as of August 7 is at odds with the actual

19 state of affairs given his text exchange with Yassir al-Rumayyan of the Saudi PIF on August 12

20 telling him that the Saudi PIF’s opportunity to invest was “over.” Ex. 121.! By omitting

21 information regarding the apparent deterioration of his relationship with the Saudi PIF, Mr. Musk

22 || misled investors and the market into believing that the privatization transaction was still on the

23 table.

24 Defendants object that this theory is both procedurally and substantively untenable. See

25 Docket No. 504. Because the Court finds that Plaintiff failed to plead or timely disclose this

26 theory of liability, the Court concludes that this theory is precluded from trial and does not

27

28 ' Unless otherwise noted, the cited exhibits may be found at Docket Nos. 453 and 485.

1 consider Defendants’ arguments on the merit.

2 Under the Private Securities Litigation Reform Act (“PSLRA”) and the Court’s Standing

3 Order, Plaintiff was required to disclose all allegedly misleading statements and omissions along

4 with “the reason or reasons why the statement is misleading” at the pleadings stage. See 15 U.S.C.

5 § 78u—4(b)(1)(B); Civil Standing Order R. 10. Plaintiff did not do so. Plaintiff cited the August

6 13 blog post in his complaint and included portions of the blog post in the addendum, but he did

7 not allege that the blog post was misleading because of the near-breakdown of communications

8 between Mr. Musk and the PIF.

9 During the pretrial conference, Plaintiff acknowledged that this theory was not specifically

10 alleged in the pleadings, but claimed that he had sufficiently disclosed this theory of liability to

11 Defendants during discovery and pretrial proceedings and, in particular, within his responses to

12 Defendants’ contention interrogatories. After reviewing the relevant portions of the interrogatory

13 responses, the Court disagrees. While the interrogatory responses assert that “the August 13 blog

14 post” was misleading because of, inter alia, the breakdown between Mr. Musk and the Saudi PIF,

15 Plaintiff did not allege that the specific statements from the blog post quoted above were

16 actionable under that theory. See Docket No. 503-1 (Plaintiff’s Interrogatory Responses) at 6, 8–

17 9. Instead, the interrogatory response broadly contended that “the August 13 blog post left

18 investors with a misleading impression of the nature and status of Musk’s proposal to take Tesla

19 private at $420 per share as well as misrepresented the status of Musk and Tesla’s discussions

20 with the Saudi Arabia Public Investment Fund and other existing and potential investors.” Id. at 8

21 (capitalization altered for clarity). It was inadequate for Plaintiff to generally allege that the entire

22 blog post—which is fourteen paragraphs long and spans three pages of the Consolidated

23 Complaint—supported this theory of liability. See Docket No. 184 at 24–26. The failure to

24 articulate particular statements within the blog post which supported Plaintiff’s theory runs

25 counter to the heightened pleading requirements of the PSLRA and the Court’s Standing Order

26 which require that the plaintiff’s complaint “specify each statement alleged to have been

27 misleading” and “the reason or reasons why the statement is misleading,” among other things. See

1 allegedly fraudulent statement or omission and the reason why the statement was false or

2 misleading). Notably, in July, Plaintiff argued that this same interrogatory response purportedly

3 put Defendants on notice of this particular omissions theory with respect to a different statement in

4 the blog post. See Docket No. 452-1 at 3–5 (arguing that blog post statement “I have continued to

5 communicate with the Managing Director of the Saudi fund . . .” was misleading in part because

6 Mr. Musk omitted facts regarding the alleged deterioration of his relationship with the Saudi PIF).

7 Further, without linking the particular statement asserted here—“I left the July 31 meeting with no

8 question that a deal with the Saudi fund could be closed . . .”—to this particular theory of liability,

9 Plaintiff did not sufficiently disclose this theory to Defendants. To find otherwise would be an

10 end-run around the PSLRA. Cf. 15 U.S.C. § 78u—4(b)(1)(B) (requiring that “the complaint shall

11 specify each statement alleged to have been misleading [and] the reason or reasons why the

12 statement is misleading”); see also In re Twitter, Inc. Sec. Litig., No. 16-cv-05314-JST, 2020 WL

13 4188787, at *4 (N.D. Cal. May 19, 2020) (precluding plaintiff from asserting statements as a basis

14 for liability at trial where plaintiffs failed to allege statements in complaint). Such vague and

15 imprecise pleading cannot be squared with the heightened pleading requirements of the PSLRA.

16 In sum: because Plaintiff did not timely plead or disclose this theory of liability, he is

17 precluded from arguing that these statements from the August 13 blog post are independently

18 actionable under an omissions theory of liability.

19 VI. MOTIONS IN LIMINE

20 A. Mr. Littleton’s Motions in Limine

21 1. Motion in Limine No. 2 (Docket No. 480)

22 Plaintiff moves to preclude Defendants from introducing any undisclosed testimony,

23 opinion, or evidence from Professor Fischel or Professor Seru.2 Professor Fischel is Defendants’

24 loss causation expert, while Professor Seru rebuts Professor Heston’s methodology for estimating

25 damages to option holders and Professor Hartzmark’s calculation of damages for Tesla option

26

27

2 Because Plaintiff does not identify any previously undisclosed testimony, opinion, or evidence

1 holders. See Ex. 423 (Fischel Rebuttal Report) ¶ 5; Ex. 370 (Expert Rebuttal Report of Amit

2 Seru) ¶ 7. Plaintiff argues that Professor Fischel’s expert reports did not disclose evidence

3 concerning: (1) “the immateriality of the alleged misstatements and omissions;” and (2) “opinions

4 on Tesla common stock.” Mot. at 6. Because information not disclosed in expert reports is

5 inadmissible at trial “unless the failure was substantially justified or is harmless,” see Fed. R. Civ.

6 P. 26(a)(2), 37(c)(1), Plaintiff contends that Professor Fischel is barred from offering such

7 evidence or testimony at trial.

8 As set forth below, the Court GRANTS IN PART AND DENIES IN PART this motion.

9 The motion is DENIED with respect to materiality because Professor Fischel implicitly discussed

10 materiality in his report. But because Professor Fischel did not opine on Tesla’s stock options in

11 his reports, the Court GRANTS the motion with respect to that issue.

12 a. Professor Fischel Implicitly Opined that the Musk Tweets were Immaterial

13 Plaintiff argues that Professor Fischel should not be permitted to offer evidence or opinion

14 regarding the materiality of the Musk Tweets because his reports “are silent as to the immateriality

15 of any of the alleged misstatements and omissions,” and “any untimely introduction of evidence

16 would be highly prejudicial to Plaintiff.” Mot. at 3, 5. Plaintiff observes that Professor Fischel’s

17 reports do not contain the words “immaterial,” “material,” and “materiality” “except when

18 paraphrasing Plaintiff’s allegations and the report of Plaintiff’s expert, Dr. Michael Hartzmark.”

19 Id. at 3, 3 n.2. Plaintiff further argues that during his deposition, Professor Fischel conceded that

20 the statements and omissions were in fact material. Id. at 3. And “given this unambiguous

21 testimony,” Plaintiff contends that Professor Fischel “should not be permitted to change his

22 testimony at trial in an effort to walk back his prior conclusions and introduce opinions and

23 testimony to the contrary.” Id. at 4.

24 Although the words “immaterial,” “material,” and “materiality” do not appear in the report,

25 Professor Fischel implicitly asserted that the “funding secured” statement did not impact the

26 market and was thus immaterial. For instance, Professor Fischel observed that Tesla’s stock price

27 increased rather than decreased following Mr. Musk’s discussion of his tweets in his blog post on

1 Fischel Rebuttal Report ¶¶ 5, 23–24. Professor Fischel also criticized Dr. Hartzmark’s purported

2 failure to disaggregate the impact of “funding secured” from other statements in the Musk Tweets

3 because Defendants contend that Tesla’s stock price rose because of the $420 per share

4 information, not the fact that funding was secured. Opp. at 2–3; see also Fischel Rebuttal Report

5 ¶¶ 5, 9–14 (“Dr. Hartzmark’s analysis of alleged damages is fundamentally flawed from the outset

6 because he makes no attempt to isolate the effect of the allegedly false information from the

7 uncontested true statement that Mr. Musk was considering taking Tesla private at $420 per

8 share.”). Professor Fischel also argued that market participants “understood from the beginning

9 that Mr. Musk’s proposal lacked details and was uncertain,” see Fischel Rebuttal Report ¶ 5, and

10 that “it is reasonable to believe that the Company’s stock price still would have increased” even

11 without the alleged misrepresentations. Id. ¶ 35. These portions of Professor Fischel’s reports

12 support Defendants’ theory that the “funding secured” statement was immaterial.

13 As to Plaintiff’s second argument that Professor Fischel’s purportedly inconsistent

14 deposition testimony warrants exclusion of his opinions, see Mot. at 3, Plaintiff has not identified

15 any legal basis to support exclusion of evidence simply because a witness’s testimony is

16 inconsistent with their report. A prior inconsistent statement is grounds for impeachment. See

17 Fed. R. Evid. 613. Plaintiff may, of course, choose to cross-examine Professor Fischel regarding

18 the purported inconsistency. But Plaintiff has not shown that the inconsistency is grounds for

19 exclusion under Federal Rule of Civil Procedure 37(c)(1).

20 In sum: the fact that Professor Fischel’s reports do not include the specific words

21 “immaterial,” “material,” and “materiality” does not mean that Professor Fischel does not offer

22 opinions related to materiality in his reports. Plaintiff’s argument elevates form over substance.

23 Professor Fischel may opine on materiality, but his testimony will be limited to the opinions in his

24 report which set forth the bases for his contention that the Musk Tweets were immaterial.

25 ///

26 ///

27 ///

1 b. Professor Fischel did not Opine on Tesla Stock Options in His Report

2 In contrast to materiality, Professor Fischel did not discuss Tesla stock options in his

3 reports.3 The closest that Professor Fischel came is when he criticized Professor Hartzmark’s use

4 of “Bloomberg evaluated prices” for Tesla’s Notes. See Fischel Rebuttal Report ¶¶ 37–38.

5 Professor Fischel opined that Professor Hartzmark should have used actual transaction prices

6 instead of the “Bloomberg evaluated prices” to evaluate artificial inflation for Tesla’s Notes. Id.

7 Because Defendants mount a similar challenge to Professor Heston’s analysis of Tesla’s stock

8 options, see Section VI.B.2 infra, Defendants argue that Professor Fischel’s attacks on Professor

9 Hartzmark’s analysis of damages for Tesla’s Notes applies with equal force to Professor

10 Hartzmark’s analysis of damages to Tesla options holders. Opp. at 6. But notes are not stock

11 options. Defendants cannot simply substitute the topic of one argument for another. Moreover, it

12 is not clear that Professor Hartzmark’s use of “Bloomberg evaluated prices” is analogous to

13 Professor Heston’s use of straddles. Defendants have not shown that Professor Fischel opined on

14 stock options in his reports.

15 Because Professor Fischel’s critique of Professor Hartzmark’s use of artificial data for

16 stock options was not timely disclosed, Defendants needed to show that its failure to comply with

17 Rule 37 was “substantially justified” or “harmless.” See Fed. R. Civ. P. 37; see also San

18 Francisco Baykeeper v. W. Bay Sanitary Dist., 791 F. Supp. 2d 719, 733 (N.D. Cal. 2011)

19 (holding that the plaintiff’s failure to disclose witnesses prior to filing its motion was substantially

20 justified and harmless). Defendants did not make this showing. Therefore, the Court GRANTS

21 Plaintiff’s motion as it applies to Professor Fischel’s opinions regarding Tesla stock options.

22 c. Conclusion

23 In sum, the Court GRANTS IN PART AND DENIES IN PART Plaintiff’s second

24 motion in limine. Despite the lack of express wording, Professor Fischel’s reports bear on the

25 materiality of the alleged misstatements. He may testify regarding the materiality of the tweets.

26 But Professor Fischel may not opine regarding Tesla’s stock options: these opinions were not

27

1 disclosed in his reports, and Defendants have not shown that this failure was substantially justified

2 or harmless.

3 2. Motion in Limine No. 3 (Docket No. 481)

4 Plaintiff moves to preclude Defendants from arguing or introducing into evidence at trial,

5 documents or testimony from Elon Musk that relate to subjects that contradict the Court’s

6 summary judgment order. Mot. at 1. Plaintiff contends that because the Court has already

7 decided as a matter of law that the Musk Tweets were false and made with the requisite scienter,

8 “any evidence or testimony regarding the truth of the statements or Mr. Musk’s state of mind

9 when making the tweets are irrelevant to the remaining elements of Plaintiff’s claims.” Id. But

10 because, as explained below, Mr. Musk’s testimony regarding these issues is relevant to

11 materiality and other issues remaining in the case, the Court DENIES this motion in limine.

12 a. Background

13 On April 1, 2022, the Court held that Plaintiff was entitled to partial summary judgment

14 for certain issues, ruling that:

15 [B]ased on the evidence presented, there is no genuine dispute that

the first three representations at issue were false and that Mr. Musk

16 recklessly made those representations. To that extent, the motion is

granted. In all other respects, the motion for partial summary

17 judgment is denied.

18 Docket No. 387 (Summary Judgment Order) at 32–33. As the Court subsequently made clear at

19 the June 16, 2022 hearing, however, Plaintiff must still prove at trial that Mr. Musk’s statements

20 were materially false and the level of scienter. See Docket No. 445 at 5:6–8 (June 16, 2022

21 Hearing Tr.) (“To be clear, I did not find materiality with respect to the misrepresentation or a

22 reckless disregard or knowingly scienter with regard to any such material misrepresentations.”).

23 While the Court found that Mr. Musk “recklessly made” the three tweets at issue, see Summary

24 Judgment Order at 32–33, the Court did not determine whether or not Plaintiff had shown that Mr.

25 Musk “knowingly” made the tweets (which is subject to a higher standard).

26 The Court addresses Plaintiff’s evidentiary objections regarding Mr. Musk’s testimony

27 below.

1 b. Mr. Musk’s Testimony is Relevant

2 The first question is whether Mr. Musk’s testimony regarding (1) the truth of the August 7,

3 2018 tweets or (2) his state of mind when he tweeted is relevant to any issue remaining in the case.

4 The answer is yes. Mr. Musk’s testimony is relevant because it is probative of materiality,

5 scienter, and the apportionment of damages (should liability be established).

6 i. Mr. Musk’s Testimony is Probative of the Materiality of the Tweets

7 Mr. Musk’s testimony regarding the objective facts leading up to the August 7 tweets is

8 relevant because it provides context into the statements at issue and thus goes towards whether the

9 tweets are materially false. In his deposition, for instance, Mr. Musk described the July 31

10 meeting with members of the Saudi PIF in which they discussed taking Tesla private and the

11 Saudi PIF investing in Tesla. See Exhibit T (Elon Musk Depo. Tr.) at 92:12-22, 99:17–100:15,

12 102:21–103:11. Mr. Musk testified extensively regarding his interactions with the Saudi PIF and

13 their alleged representations to him regarding funding for the privatization transaction. Id. at 100:

14 11-12, 102:11–103:15, 107:18-25.

15 An alleged misstatement or omission is material where there is a “substantial likelihood

16 that a reasonable shareholder would consider it important in deciding how to vote.” TSC Indus.,

17 Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976). “The determination requires delicate

18 assessments of the inferences a reasonable shareholder would draw from a given set of facts and

19 the significance of those inferences to him, and these assessments are peculiarly ones for the trier

20 of fact.” Id. at 450 (internal quotation marks omitted).

21 The law is clear that context matters for purposes of determining materiality. See id. at 449

22 (explaining that the materiality standard requires showing “a substantial likelihood that, under all

23 the circumstances, the omitted fact would have assumed actual significance in the deliberations of

24 the reasonable shareholder”) (emphasis added); 17 C.F.R. § 240.10b–5(b) (“It shall be

25 unlawful . . . [t]o make any untrue statement of a material fact or to omit to state a material fact

26 necessary in order to make the statements made, in the light of the circumstances under which they

27 were made, not misleading.”) (emphasis added); see also Matrixx Initiatives, Inc. v. Siracusano,

1 content, and context of the [statement]”). To understand whether “Funding secured” is a

2 materially false statement, then, the jury must first understand the full context, including the actual

3 status of the funding. Mr. Musk’s testimony provides context for the tweets. TSC Indus., 426

4 U.S. at 449.

5 In sum: his testimony regarding his efforts to take Tesla private, the meeting with the

6 Saudi PIF, and other background information regarding the tweets is relevant to materiality. Facts

7 regarding the actual status of the funding and the Saudi PIF’s representations therein may inform

8 the jury’s determination of whether Mr. Musk’s statements regarding the funding were materially

9 false. His testimony will provide key contextual facts that will aid the jury in their consideration

10 of the statements at issue.

11 ii. Mr. Musk’s Testimony is Also Relevant to Scienter

12 For the same reasons, Mr. Musk’s testimony is also relevant to the element of scienter. To

13 establish scienter, Mr. Littleton must prove that Mr. Musk “knew that a statement was materially

14 false or misleading” or acted with deliberate recklessness as to its material falsity. See GIA-GMI,

15 LLC v. Michener, No. 06-cv-7949-SBA, 2007 WL 2070280, at *9 (N.D. Cal. July 16, 2007)

16 (articulating “knowingly” element as requiring knowledge of material falsity). As noted above,

17 the Court found that Mr. Musk “recklessly made” the three tweets at issue, see Summary

18 Judgment Order at 32–33, but the Court did not determine whether Mr. Musk “knowingly” made

19 false tweets. Mr. Musk’s testimony of the events giving rise to the August 7 tweets may be

20 probative to whether Mr. Musk acted knowingly or merely recklessly.

21 iii. Evidence of Mr. Musk’s Knowledge is Relevant to Apportionment

22 Finally, evidence of Mr. Musk’s knowledge is also relevant to the question of

23 apportionment of damages. Under the PSLRA, defendants are jointly and severally liable “only if

24 the trier of fact specifically determines that [the defendant] knowingly committed a violation of the

25 securities laws.” See 15 U.S.C. § 78u-4(f)(2)(A) (emphasis added). A defendant who engages in

26 “reckless conduct,” on the other hand, “shall be liable solely for the portion of the judgment that

27 corresponds to the percentage of [their] responsibility . . .” 15 U.S.C. § 78u-4(f)(2)(B)(i).

1 “knowing [they were] false” as opposed to merely with “recklessness as to [their] falsity,”

2 Summary Judgment Order at 26, 32–33, the issue of scienter is still undecided. Indeed, both

3 parties’ verdict forms provide that the jury will decide whether each defendant engaged in a

4 knowing or reckless violation in this case. Opp. at 5; see also Docket Nos. 476, 484. Because Mr.

5 Musk is entitled to introduce evidence demonstrating that his statements were merely reckless and

6 not knowing, his testimony regarding the statements at issue is also relevant to the question of

7 apportionment.

8 In sum: Mr. Musk’s testimony regarding the tweets at issue is relevant because it is

9 relevant to materiality, the degree of scienter, and apportionment of damages.

10 c. The Risk of Juror Confusion is Minimal

11 Plaintiff contends that even if the evidence is relevant, it should be excluded under Rule

12 403 because the probative value of this evidence is substantially outweighed by the risk of

13 confusing the jury. Mot. at 5. Plaintiff further contends that if Defendants are allowed to offer

14 this evidence, Plaintiff will want to introduce evidence to rebut it, which will—in Plaintiff’s

15 view—lead to a mini-trial on a collateral issue that the Court has already decided, i.e. the falsity of

16 the Musk Tweets. Id. Plaintiff is wrong.

17 The risk of juror confusion is slight and does not substantially outweigh the probative

18 value discussed above. Defendants are bound by the Court’s summary judgment order and cannot

19 make any arguments to the jury that contradict the Court’s summary judgment order. Opp. at 3.

20 The Court will make clear to the jury that the questions of falsity and recklessness have already

21 been resolved.

22 d. Conclusion

23 In sum: Defendants may not argue at trial that the Musk Tweets were true. The issues of

24 factual falsity and Mr. Musk’s recklessness were decided as a matter of law at summary judgment.

25 Crucially, however, Mr. Musk’s testimony regarding the tweets remains probative and relevant to

26 the questions of materiality, the level of scienter, and to the appointment of damages. The Court

27 DENIES Plaintiff’s Motion in Limine No. 3.

1 3. Motion in Limine No. 4 (Docket No. 482)

2 In a slight twist on the preceding motion in limine, Plaintiff moves to preclude

3 “Defendants from introducing any evidence or testimony at trial that would dispute the factual

4 findings or otherwise cause a jury to question the Court’s holding” on summary judgment. Mot. at

5 1. The thrust of Plaintiff’s motion is again that because the Court has already found that literal

6 falsity and scienter were proven, evidence which bears on falsity and scienter for the August 7,

7 2018 tweets is irrelevant. Id. Plaintiff casts a broad net with this motion: he cites testimony from

8 Sam Teller and any representative of the PIF as illustrative of the type of evidence that he seeks to

9 exclude, id., but his motion is not limited to these witnesses. See id. at 4 (quoting deposition

10 testimony of various members of Tesla’s Board of Directors, including Robyn Denholm, Ira

11 Ehrenpreis, and James Murdoch).4 As with the previous motion in limine, the Court DENIES this

12 motion because it rests on the faulty premise that this evidence is irrelevant.

13 Mr. Teller is Tesla’s former Director of the Office of CEO. At Mr. Teller’s deposition, he

14 testified extensively regarding the July 31 meeting that he attended at the Tesla Fremont factory

15 that included members of the PIF and Mr. Musk. See Ex. J (Teller Depo. Tr.) at 130:8–143:23.

16 According to Mr. Teller, Yasir Al-Rumayyan told Mr. Musk during the meeting that the Saudi PIF

17 “want[ed] to diversify from oil,” that he had “support from the most senior levels of the

18 government,” and that Mr. Al-Rumayyan was “the decisionmaker.” Id. at 142:1-15. And when

19 Mr. Musk told Mr. Al-Rumayyan that the privatization transaction would require a lot of money,

20 “like tens of billions of dollars,” Mr. Al-Rumayyan responded with something to the effect of

21 “Don’t worry about it. We got it.” Id. at 143:2-9. Mr. Teller also testified regarding Mr. Musk’s

22 communications with Mr. Al-Rumayyan on August 10. Id. at 246:4–248:4; see also Ex. X (Teller

23 Depo. Tr.) at 242:8-243:16.

24

25

4 The Court focuses on Mr. Teller and the PIF members because they feature prominently in

Plaintiff’s motion. But because the members of the Board of Directors are encompassed within

26

the motion, the Court notes that their understanding of the Musk Tweets is relevant to a potential

“good faith” defense to control person liability. See Howard v. Everex Sys., Inc., 228 F.3d 1057,

27

1065 (9th Cir. 2000) (“[A] defendant is entitled to a good faith defense if he can show no scienter

1 a. The Testimony of Sam Teller and Representatives of the PIF is Relevant to

2 Materiality and Scienter

3 Plaintiff contends that the anticipated testimony by Mr. Teller offers no insight into the

4 materiality of the Musk Tweets. Mot. at 3. Plaintiff further attacks Mr. Teller’s testimony

5 because (1) Mr. Teller was traveling from August 3 to August 7 and did not remember

6 conversations that occurred during this time, and (2) Mr. Teller’s testimony about events that

7 occurred after August 7 is irrelevant because materiality is determined at the time that the

8 statement is made. Id.

9 Mr. Teller’s testimony (and that of the PIF representatives) about objective facts bearing

10 upon the Musk Tweets is relevant for materiality and scienter. To determine whether a

11 misrepresentation is material, the jury will be tasked with determining whether the misrepresented

12 fact would have been significant to a reasonable investor. TSC Indus., 426 U.S. at 445. To make

13 that determination, the jury will need to hear evidence regarding the actual state of affairs so that

14 the jury can determine whether the difference between the actual state of funding and Mr. Musk’s

15 misrepresentations regarding funding would have been significant to a reasonable investor.

16 Mr. Teller and various PIF representatives were personally involved in discussions

17 regarding the prospective financing to take Tesla private. See Opp. at 3 (citing portions of Mr.

18 Teller’s deposition). As noted above, Mr. Teller testified about the July 31 meeting between Mr.

19 Musk and members of the Saudi PIF at his deposition. See Ex. J (Teller Depo. Tr.) at 130:8-

20 143:23. As a result, Mr. Teller (and, presumably, the PIF representatives who attended the

21 meeting) may offer testimony about the actual state of affairs leading up to the Musk Tweets.

22 Such testimony would be probative of materiality because it may inform the difference between

23 Mr. Musk’s representations regarding funding and the actual state of funding.

24 Mr. Teller’s failure to recall certain events at his deposition does not mean that he is not a

25 competent witness. Should Mr. Teller testify differently at trial, then Plaintiff may impeach him

26 with his prior deposition testimony.

27 As for Plaintiff’s theory that Mr. Teller’s testimony about events that occurred after

1 about an August 10 phone call between Mr. Musk and Mr. Al-Rumayyan. See Ex. X at 242:8-

2 243:16. According to Mr. Teller, the “overall takeaway” of this phone call was that Mr. Al-

3 Rumayyan “was not, in fact, the final decisionmaker. And that was news to us. And Elon silently

4 kind of made a gesture to me like – signaling like what’s he talking about? Like, I guess you

5 could summarize it as like a WTF.” Id. at 243:10-16. Mr. Teller’s testimony about the August 10

6 conversation between Mr. Musk and Mr. Al-Rumayyan bears on Mr. Musk’s understanding of the

7 state of funding on or around August 7, and is thus relevant to whether Mr. Musk acted knowingly

8 or merely recklessly.

9 It is possible that Mr. Teller’s testimony may be inadmissible for other reasons, such as

10 hearsay or being cumulative.5 The Court’s ruling here does not preclude Plaintiff from raising

11 these evidentiary objections at trial.

12 b. Testimony from Mr. Teller, the Saudi PIF, and Other Witnesses Regarding

13 the Tweets or Mr. Musk’s Scienter does not Violate Rule 403

14 The Court finds that the probative value of the testimony from Mr. Teller and the Saudi

15 PIF representatives regarding Mr. Musk’s tweets and the facts that led to his tweets is not

16 substantially outweighed by the risk of unfair prejudice or confusion. And as noted above, the risk

17 of juror confusion is minimal because the Court will explain that factual falsity has already been

18 proven.

19 c. Conclusion

20 Because testimony from other witnesses regarding the Musk Tweets and Mr. Musk’s

21 scienter is relevant to disputed issues in the case, the Court DENIES Plaintiff’s Motion in Limine

22 No. 4.

23 4. Motion in Limine No. 5 (Docket No. 483)

24 Plaintiff moves to exclude all testimony and evidence pertaining to events and information

25 beyond the 90-day lookback period under the theory that such evidence is irrelevant or unduly

26

27

5 To the extent that Mr. Teller’s testimony is offered to show Mr. Musk’s state of mind, however,

1 prejudicial. Mot. at 1. The Court GRANTS IN PART AND DENIES IN PART this motion.

2 The Court DENIES this motion because Plaintiff has failed to demonstrate how events within the

3 PSLRA’s 90-day lookback period are per se relevant or that events that occurred after the 90-day

4 lookback period are per se irrelevant. But because the specific evidence that Plaintiff has

5 identified in his motion is either inadmissible or irrelevant, the Court GRANTS the motion with

6 respect to that evidence.

7 a. The PSLRA 90-Day Lookback Period is Used to Cap Damages

8 Under the PSLRA, the 90-day “lookback period” is used to limit a plaintiff’s damage

9 award; it measures the difference between the price a plaintiff paid for the stock and the mean

10 closing price in the 90 days following the corrective disclosure. See 15 U.S.C. § 78u-4(e)(1). In

11 particular, the PSLRA provides that:

12 Except as provided in paragraph (2), in any private action arising

under this chapter in which the plaintiff seeks to establish damages by

13 reference to the market price of a security, the award of damages to

the plaintiff shall not exceed the difference between the purchase or

14 sale price paid or received, as appropriate, by the plaintiff for the

subject security and the mean trading price of that security during the

15 90-day period beginning on the date on which the information

correcting the misstatement or omission that is the basis for the action

16 is disseminated to the market.

17 15 U.S.C. § 78u-4(e)(1). The 90-day lookback period limits the ultimate damages a plaintiff can

18 recover because a pure out-of-pocket damages measure “‘may substantially overestimate

19 plaintiff’s actual damages.’” In re Mego Fin. Corp. Sec. Litig., 213 F.3d 454, 461 n.4 (9th Cir.

20 2000) (emphasis in original) (quoting Sen. Rep. 104-98, at 20 (1995)); see also Mandalevy v. BofI

21 Holding, Inc., No. 17-cv-667, 2022 WL 4474263, at *9 n.3 (S.D. Cal. Sept. 26, 2022) (stating that

22 the 90-day lookback “prevents the possibility of class members receiving a windfall should a

23 corrective disclosure drop the share price, but the price later rebounds despite the disclosure”). In

24 other words, the 90-day lookback period is a timeline for capping damages; whether events within

25 those 90-days bear on liability is not the subject of the lookback period of § 78u-4(e)(1). That

26 provision does not supersede normal rules of relevance.

27 b. Post-Class Period Events are not Per Se Irrelevant

1 after the class period is per se irrelevant and thus inadmissible. See, e.g., Wade v. WellPoint, Inc.,

2 892 F. Supp. 2d 1102, 1134 n.21 (S.D. Ind. 2012) (stating that events after the class period “bear

3 no relevance to Defendants’ knowledge at the time of the alleged misstatements and omissions”).

4 Here Plaintiff is not asking the Court to bar evidence after the Class Period; rather, Plaintiff seeks

5 to bar all evidence after the 90-day lookback period. Mot. at 1. But as noted above, the 90-day

6 lookback period is not a metric for determining relevancy. The Court rejects Plaintiff’s suggested

7 imposition of such a rule as unsupported by statute.6

8 c. The Specific Evidence Cited by Plaintiff Is Irrelevant

9 As part of his motion, Plaintiff argued that the following specific post-Class Period

10 evidence is inadmissible: (1) publicity stunts by Mr. Musk, such as Mr. Musk’s November 16,

11 2021 “Twitter poll;”7 (2) any “good acts” by Mr. Musk, such as donations to various charities;8 (3)

12 Mr. Musk’s “lack of consumption” (e.g., not owning a yacht); (4) evidence that “Tesla is driven

13 by a sense of charitable or moral purpose;” (5) evidence of Plaintiff’s post-Class Period

14 investments and trading; and (6) evidence related to Tesla’s economic and financial performance

15 since 2018. Mot. at 2. The majority of this evidence is not in dispute. Defendants do not contend

16 that the Twitter poll from November 2021 is relevant. Opp. at 3. Nor do they intend to offer

17 evidence regarding Mr. Musk’s donations to charities, or Tesla’s current share price or subsequent

18 trading prices in Tesla’s securities. Id. at 3, 6. Finally, Defendants acknowledge that character

19 evidence such as charitable acts is generally inadmissible. See id. at 4 (Defendants do not intend

20 to offer “evidence of good character with respect to Mr. Musk or any of the Director Defendants,

21 unless of course Plaintiff attacks their character for truthfulness”).

22 As for Defendants’ contention that Tesla’s “mission” to ensure a sustainable future is

23 relevant, see id. at 4 n.1, the Court disagrees. Defendants have not shown that Tesla’s “mission”

24

25

6 The Court need not address whether it is appropriate to apply, e.g., the close of the Class Period

on August 17, 2018, as a relevancy cutoff date as neither party seeks such a ruling.

26

7 Mr. Musk asked his followers on Twitter whether he should sell Tesla stock to pay taxes in an

27

effort to take a stand against “tax avoidance.” Mot. at 2 (citing Ex. DD).

1 has any probative value for any fact of consequence in the case. See Fed. R. Evid. 401. In

2 Defendants’ view, “Tesla’s mission and long-term strategic goals were intimately tied to Elon

3 Musk’s rationale for considering a go-private transaction in the summer of 2018, as Musk and

4 numerous other witnesses and documents confirm.” Opp. at 4 n.1. But Mr. Musk’s desire to take

5 Tesla private is not at issue. This case deals with Mr. Musk’s knowledge of the falsity of the

6 “funding secured” statement, not his rationale for considering the go-private transaction. As a

7 result, Defendants have not shown that Tesla’s “mission” is relevant.

8 Lastly, the parties dispute the relevance of Plaintiff’s post-Class Period investments and

9 trading in Tesla. First, Defendants assert that “[t]he fact that the lead Plaintiff—the individual

10 who is supposedly typical and representative of the entire class—still invests in Tesla is probative

11 of whether the alleged misrepresentations were at all material to the reasonable investor.” Opp. at

12 5. Second, Defendants argue that Plaintiff’s continued investment in Tesla “presents a basic

13 credibility issue” because these investments are “inconsistent” with his allegations of fraud. Id. at

14 5–6. These arguments are meritless. Plaintiff’s decision to invest in Tesla in December 2019—

15 eighteen months after the Musk Tweets—has no relevance as to whether he or anyone else would

16 have found the misrepresentations material in 2018. Furthermore, there is no inconsistency

17 between Plaintiff’s allegations that Defendants committed fraud in August 2018 and Plaintiff’s

18 decision to invest in Tesla in December 2019. Therefore, the Court grants Plaintiff’s motion to

19 exclude evidence of Plaintiff’s trades in Tesla stock after the Class Period.

20 d. Conclusion

21 The Court DENIES Plaintiff’s motion to preclude all events after the 90-day lookback

22 period. However, the Court GRANTS Plaintiff’s motion to exclude the specific evidence

23 identified in his motion: (1) publicity stunts by Mr. Musk, such as Mr. Musk’s November 16, 2021

24 “Twitter poll;” (2) any “good acts” by Mr. Musk, such as donations to various charities; (3) Mr.

25 Musk’s “lack of consumption” (e.g., not owning a yacht); (4) evidence that “Tesla is driven by a

26 sense of charitable or moral purpose;” (5) evidence related to Tesla’s economic and financial

27 performance since 2018; and (6) evidence of Mr. Littleton’s post-Class Period investments and

1 B. Defendants’ Motions in Limine

2 1. Motion in Limine No. 4 (Docket No. 478)

3 Defendants move to preclude Plaintiff from offering evidence of Tesla’s and Musk’s

4 settlement agreements with the Securities and Exchange Commission (SEC) as well as the

5 underlying SEC complaints. Mot. at 1–2. As described below, the Court GRANTS this motion

6 on Rule 403 grounds because the danger of unfair prejudice outweighs the probative value of the

7 SEC settlements and complaints. The Court further finds that the SEC complaints are hearsay and

8 that while the SEC settlement agreements may be admissible to show Mr. Musk’s bias under Rule

9 408, their probative value is dwarfed by the substantial Rule 403 concerns.

10 a. Background

11 On August 8, 2018—the day after the Musk Tweets—it became public knowledge that the

12 SEC had initiated an investigation related to Musk’s August 7, 2018 tweets. See Consolidated

13 Compl. ¶ 192. On September 27, 2018, the SEC filed a securities-fraud complaint against Mr.

14 Musk personally; two days later, the SEC filed a related complaint against Tesla. Mot. at 2; see

15 also Case No. 18-cv-8865 (S.D.N.Y. Sept. 27, 2018); Case No. 18-cv-8947 (S.D.N.Y. Sept. 29,

16 2018)). Tesla’s stock price decreased at a statistically significant level on September 28 following

17 the first SEC complaint. Hartzmark Report ¶ 144. On the same day that the second complaint

18 was filed, Mr. Musk and Tesla entered into settlement agreements with the SEC. Mot. at 2 (citing

19 Exs. A, B). Neither Musk nor Tesla admitted any liability or wrongdoing, and the settlement did

20 not impact their “right to take legal or factual positions in litigation or other legal proceedings in

21 which the Commission is not a party.” Id. After news of the SEC settlements broke, Tesla’s stock

22 price rose at a statistically significant level. Hartzmark Report ¶ 145.

23 Defendants acknowledge that evidence of the SEC’s investigation may be admissible

24 because news of the investigation became public during the Class Period and bears on Plaintiff’s

25 theory of consequential harm. See Opp. at 1. But Defendants distinguish between the fact of the

26 investigation and the facts following the investigation (i.e., the complaints and settlements).

27 Specifically, Defendants argue that the SEC settlement agreements are inadmissible under Federal

1 Defendants argue that both are irrelevant and unduly prejudicial under Rules 401–403. Mot. at 1.

2 b. Relevance and Rule 403

3 Plaintiff first argues that the SEC investigation, which ultimately resulted in the SEC’s

4 complaints and settlements, is powerful evidence of the consequential harm9 of Defendants’ fraud.

5 Opp. at 3 (citing Hartzmark Report ¶ 46). The SEC investigation is indisputably relevant:

6 Professor Hartzmark, Plaintiff’s loss causation expert, opines that the SEC investigation caused by

7 the Musk Tweets proximately led to a decline in Tesla’s stock price, resulting in damages to the

8 Class. Hartzmark Report ¶¶ 13, 46, 78, 115; see also Docket No. 494 (Order Denying Motion to

9 Exclude) at 23–28 (describing Hartzmark’s theory of consequential harm). But the problem with

10 Plaintiff’s theory is that while it is true that the SEC investigation—which began during the Class

11 Period—may be relevant to loss causation and damages, this theory does not explain how the

12 complaints and settlements—which materialized more than a month after the end of the Class

13 Period—are relevant.

14 Plaintiff claims that the complaints and settlements are relevant because the statistically

15 significant stock price movements following these filings could “rebut any attempt by Defendants

16 to attribute movements in the prices of Tesla securities during the Class Period to news and

17 developments that are less directly related to the August 7, 2018 tweets.” Opp. at 4. Because the

18 complaints and settlements resulted from and directly concerned the August 7, 2018 tweets, stock

19 price movements following those events could support the argument that stock price movements

20 during the Class Period were also because of the tweets. In other words, stock prices responded to

21 significant news related to the subject matter of the tweets. Therefore, such evidence could be

22 used to rebut arguments that other non-related events caused the stock price movements. Given

23 the liberal relevancy standard of Rule 401—requiring only that evidence have “any tendency to

24 make a fact more or less probable than it would be without the evidence and the fact is of

25 consequence in determining the action”—the complaints and settlements could have some

26

27

9 Dr. Hartzmark defines “Consequential Harm” as harm that “is a direct and foreseeable

1 relevance to Plaintiff’s damages and causation argument, even if only by inference. See Fed. R.

2 Evid. 401 (punctuation omitted) (emphasis added).

3 But the relevancy of this evidence is minimal at best. As noted below in the discussion of

4 hearsay, the complaints and settlements resulted in no agency findings. Thus, their probative

5 value (even if admissible) is minimal. It is also outweighed by the risk of undue prejudice because

6 a jury could be tempted to find liability based on the SEC complaints and subsequent settlements.

7 See United States v. Bailey, 696 F.3d 794, 801 (9th Cir. 2012) (stating that evidence of a

8 complaint may “permitted the jurors to succumb to the simplistic reasoning that if the defendant

9 was accused of the conduct, it probably or actually occurred,” and “[s]uch inferences are

10 impermissible”). The risk of unfair prejudice is heightened here because, as Plaintiff himself

11 notes, Plaintiff’s claims are “virtually identical to the SEC claims with regard to the August 7,

12 2018 tweets [].” Opp. at 6. Courts from around the country have excluded material from federal

13 agencies where the agency has made a determination regarding one of the parties. See Siqueiros v.

14 Gen. Motors LLC, No. 16-cv-07244-EMC, 2022 WL 3974752, at *4 (N.D. Cal. Aug. 31, 2022)

15 (collecting authorities). The fact that the SEC complaints are “virtually identical” to the case at

16 hand increases the risk that the jury would impermissibly assume that Defendants are liable for the

17 accused conduct and thus magnifies the unfair prejudice.

18 Additionally, this evidence raises other Rule 403 issues, such as a risk of confusing the

19 issues and undue delay. Admission of the SEC materials could create a “mini-trial” in which

20 Defendants would have to defend against both Plaintiff’s claims and the SEC’s now-dismissed

21 claims. See Grace v. Apple, Inc., No. 17-cv-00551-LHK, 2020 WL 227404, at *2 (N.D. Cal. Jan.

22 15, 2020) (excluding evidence of prior litigations to avoid “time-consuming tangents” and a “side

23 trial,” among other Rule 403 considerations)).10 Plaintiff suggests that a mini trial would not

24 develop because “Plaintiff’s claims are virtually identical to the SEC claims with regard to the

25

26

10 Plaintiff argues that Defendants’ reliance on Grace v. Apple is unpersuasive because in Grace,

the court excluded evidence of prior litigations which involved four district court trials and three

27

appeals. The evidence here, however, only involves “a two-month investigation and three or four

1 August 7, 2018 tweets;” thus, “[t]here are no additional factual issues unique to the SEC

2 complaints that would require some superfluous mini-trial.” Opp. at 6. This is not necessarily

3 true, however: Defendants allege that they would proffer evidence “as to the Commission’s history

4 of singling out Musk and Tesla for increased scrutiny, as well as all the reasons Musk and Tesla

5 opted to settle the SEC’s claims instead of litigating.” Mot. at 6. And regardless of whether the

6 two claims involve the same factual issues, Defendants will want to explain their decision to settle

7 the claims.11 Defendants’ decision to settle with the SEC should not bear on any issues at trial, but

8 there is a risk that the jury may become confused or unduly influenced.

9 Plaintiff argued at the pretrial conference that admission of the investigation without the

10 subsequent proceedings would prejudice him because it would lead the jury to conclude that

11 nothing materialized from the investigation. But any such prejudice could be remedied by a

12 proper limiting instruction. Upon request, the Court will issue a limiting instruction informing the

13 jury that they should not make any assumptions regarding the outcome of the SEC investigation.

14 In addition to Rule 403, there are also issues with hearsay and Rule 408.

15 c. Hearsay

16 The SEC complaints are hearsay for which no exception to the rule against hearsay applies.

17 Plaintiff incorrectly contends that the complaints are admissible as factual findings from a legally

18 authorized investigation under Rule 803(8)(A)(iii). Opp. at 5. Rule 803(8) provides that “[a]

19 record or statement of a public office” is admissible if “it sets out . . . in a civil case . . . factual

20 findings from a legally authorized investigation. . .” and “the opponent does not show that the

21 source of information or other circumstances indicate a lack of trustworthiness.” Fed. R. Evid.

22 803(8)(A)(iii). Plaintiff has not provided any evidence to show that the SEC complaints include

23 “factual findings” as opposed to mere “allegations.” Because the public record exception is

24 limited to where there are factual findings, this hearsay exception does not apply to the SEC

25 complaints. See United States v. Klein, No. 16-cr-44, 2017 WL 1316999, at *3–4 (E.D.N.Y. Feb.

26

11 Defendants explained that they would want to introduce evidence that Tesla was “in the throes

27

of . . . ‘production hell’ in connection with the Tesla Model 3, a new, mass-market vehicle that had

1 10, 2017) (excluding SEC complaint on hearsay grounds because complaint contained

2 “allegations,” not “factual findings,” making Rule 803(8) inapplicable); In re EpiPen (Epinephrine

3 Injection, USP) Mktg., Sales Pracs. & Antitrust Litig., 507 F. Supp. 3d 1289, 1348 n.21 (D. Kan.

4 2020) (same).

5 The Court concludes that the public record exception does not apply and thus the SEC

6 complaints are inadmissible hearsay. The Court turns to Rule 408, which is Defendants’ final

7 evidentiary objection to the SEC materials.

8 d. Rule 408

9 “Federal Rule of Evidence 408 bars the admission of settlement agreements to prove

10 liability.” Brocklesby v. United States, 767 F.2d 1288, 1292 (9th Cir. 1985) (citation omitted); see

11 also United States v. Whitney, 180 F. App’x 670, 673 (9th Cir. 2006) (holding that evidence that

12 the defendant settled with the SEC was properly excluded under Rule 408). But such evidence

13 can be “offered for another purpose, such as proving bias or prejudice of a witness. . . .” Fed. R.

14 Evid. 408(b).

15 Plaintiff argues that the SEC settlements are admissible under Rule 408(b) because they

16 show Mr. Musk’s bias against short sellers and bear on Mr. Musk’s credibility.12 In Plaintiff’s

17 view, the Musk Tweets were “a deliberate attempt to ‘burn’ short sellers and cause them financial

18 harm.” Opp. at 5 (citing Consolidated Compl. ¶ 162). Plaintiff asserts that the SEC settlements

19 provide “relevant and necessary context” to some of Mr. Musk’s tweets, such as the tweet from

20 October 4, 2018 which states: “Just want to [sic] that the Shortseller Enrichment Commission is

21 doing incredible work. And the name change is so on point!” Id. at 4–5. But Plaintiff can

22 demonstrate this supposed bias by offering the October 4, 2018 tweet without reference to the

23 settlement agreements. Plaintiff has failed to show that the SEC settlements are necessary to show

24 Mr. Musk’s purported bias against short sellers.

25 In sum: while the SEC settlement agreements may be admissible to show Mr. Musk’s bias

26 under Rule 408, the Court finds that their probative value is dwarfed by the substantial Rule 403

27

1 concerns.

2 e. Conclusion

3 To the extent that Plaintiff seeks to use the SEC settlement agreements to show bias rather

4 than liability, Rule 408 does not bar their admission. But because the probative value of the SEC

5 materials is low and the risk of unfair prejudice is high, especially because the complaints are

6 hearsay, the Court GRANTS Defendants’ motion to exclude this evidence under Rule 403.

7 2. Motion in Limine No. 5 (Docket No. 479)

8 Defendants move to exclude the opinions of Steven Heston and Michael Hartzmark’s

9 opinions that rely on Professor Heston’s opinions. Mot. at 1. Professor Heston created a damages

10 model to predict damages to Tesla stock option holders during the Class Period. Id. Professor

11 Hartzmark implemented Professor Heston’s predictions to calculate damages for Tesla option

12 holders during the Class Period. Id. Defendants, who characterize Professor Heston’s model as

13 “junk financial engineering,” raise four challenges to Professor Heston’s report. Id. Defendants’

14 core challenge focuses on Professor Heston’s use of theoretical prices based on synthetic Tesla

15 instruments to calculate the “re-valued fitted option value,” rather than actual market data for the

16 2,443 Tesla options traded during the Class Period. Id. at 1–2.

17 As set forth below, the Court finds that Professor Heston’s use of the Black-Scholes-

18 Merton model to calculate the counterfactual but-for price of stock options is sufficiently reliable

19 to pass muster under Daubert. The process of calculating but-for prices inevitably requires some

20 degree of theoretical modeling, and the Black-Scholes-Merton model appears sufficiently

21 scientifically valid and widely accepted. But Professor Heston’s use of artificial data to calculate

22 the “re-valued fitted option value” (i.e. the “actual” price) is another matter. There are substantial

23 questions regarding Professor Heston’s use of adjusted prices rather than the actual observed

24 trading data for each individual stock option. Unlike with counterfactual prices, which must be

25 modeled, the actual prices for Tesla’s stock options are observable from actual market data.

26 Professor Heston’s decision to use theoretical prices derived from straddles rather than the actual

27 market price for each Tesla stock option appears to be unprecedented, and poses serious Daubert

1 during the pretrial conference Plaintiff agreed to rerun the stock option calculations using actual

2 option price data instead of the theoretical prices. Finally, the Court finds that Professor

3 Hartzmark sufficiently addressed potentially confounding factors to survive Daubert, so it

4 DENIES Defendants’ motion to exclude on that ground.

5 a. Legal Standard

6 Under Daubert, in assessing the admissibility of expert testimony under Federal Rule of

7 Evidence 702,13 the Court must perform “a preliminary assessment of whether the reasoning or

8 methodology underlying the testimony is scientifically valid and of whether that reasoning or

9 methodology properly can be applied to the facts in issue.” Daubert v. Merrell Dow Pharms. Inc.,

10 509 U.S. 579, 592–93 (1993); see also Kumho Tire Co., Ltd. v. Carmichael, 526 U.S. 137, 141

11 (1999) (explaining that Daubert standards apply to all expert testimony, not only scientific

12 experts). The Supreme Court has identified a non-exhaustive list of factors that may bear on the

13 inquiry:

14 • whether the theory or technique can be or has been tested;

• whether the theory or technique has been subjected to peer

15 review and publication;

• the known or potential rate of error with a scientific technique;

16 • acceptance of the technique by a relevant scientific community;

17 Daubert, 509 U.S. at 593–94; see also United States v. Hankey, 203 F.3d 1160, 1167 (9th Cir.

18 2000). None of these factors is dispositive and, ultimately, “[t]he inquiry envisioned by Rule 702

19 is. . . a flexible one” which is focused “solely on principles and methodology, not on the

20 conclusions that they generate.” Id. at 594–95. The district court “must act as a ‘gatekeeper’ to

21 exclude junk science that does not meet Federal Rule of Evidence 702’s reliability standards by

22 making a preliminary determination that the expert’s testimony is reliable.” Ellis v. Costco

23 Wholesale Corp., 657 F.3d 970, 982 (9th Cir. 2011) (citation omitted). The trial court “has broad

24 latitude not only in determining whether an expert’s testimony is reliable, but also in deciding how

25

13 “A witness who is qualified as an expert by knowledge, skill, experience, training, or education

26

may testify in the form of an opinion or otherwise if: (a) the expert’s scientific, technical, or other

specialized knowledge will help the trier of fact to understand the evidence or to determine a fact

27

in issue; (b) the testimony is based on sufficient facts or data; (c) the testimony is the product of

1 to determine the testimony’s reliability.” Id. (citation omitted).

2 In this role, the judge is “a gatekeeper, not a fact finder,” and the “gate [should] not be

3 closed to [a] relevant opinion offered with sufficient foundation by one qualified to give it.”

4 Primiano v. Cook, 598 F.3d 558, 568 (9th Cir. 2010). The purpose of the gatekeeping role is to

5 ensure that expert testimony is “properly grounded, well-reasoned and not speculative,” but it is

6 not meant to substitute for “[v]igorous cross-examination, presentation of contrary evidence, and

7 careful instruction on the burden and proof [which] are the traditional and appropriate means of

8 attacking shaky but admissible evidence.” Fed. R. Evid. 702, Adv. Comm. Notes (2000)

9 (quotation omitted). Thus, “[a]fter an expert establishes admissibility to the judge’s satisfaction,

10 challenges that go to the weight of the evidence are within the province of a fact finder, not a trial

11 court judge.” Pyramid Technologies, Inc. v. Hartford Cas. Ins. Co., 752 F.3d 807, 814 (9th Cir.

12 2014).

13 Because the Court acts as a gatekeeper and not a factfinder, an expert whose methodology

14 is otherwise reliable should not be excluded simply because the facts upon which his or her

15 opinions are predicated are in dispute, unless those factual assumptions are “indisputably wrong.”

16 See Guillory v. Domtar Indus. Inc., 95 F.3d 1320, 1331 (5th Cir. 1996) (excluding expert opinion

17 based on a “fictitious set of facts”); see also Fed. R. Evid. 702, Adv. Comm. Notes (2000)

18 (explaining that “[w]hen facts are in dispute, experts sometimes reach different conclusions” and a

19 trial court is not “authorize[d] . . . to exclude an expert’s testimony on the ground that the court

20 believes one version of the facts and not the other”). Indeed, Rule 702 is “broad enough to allow

21 an expert to rely on hypothetical facts that are supported by the evidence.” Fed. R. Evid. 702,

22 Adv. Comm. Notes (2000). “It traditionally falls upon cross-examination to negate the facts or

23 factual assumptions underlying an expert’s opinion.” In re MyFord Touch Consumer Litig., 291

24 F. Supp. 3d 936, 967 (N.D. Cal. 2018).

25 b. Overview of Professor Heston and His Report

26 Professor Heston is a Professor of Finance at the University of Maryland, Robert H. Smith

27 School of Business. Exhibit 368 (Heston Report) ¶ 1. He has held faculty positions as a Professor

1 sector at Goldman Sachs, where he served as Vice President in two different divisions. Id. ¶¶ 1, 4.

2 According to Plaintiff, Professor Heston is “the preeminent scholar for option pricing theory and

3 practice in the United States.” Opp. at 1.

4 Professor Heston was asked to examine the price movements of Tesla’s stock options14

5 over the Class Period. Heston Report ¶ 10. In his report, Professor Heston offered five opinions

6 based on his observations and analysis of Tesla stock option pricing following the Musk Tweets.

7 Id. § 2 (Summary of Opinions). Professor Heston’s opinions are as follows: (1) at-the-money-

8 forward Tesla option prices, including straddles, provide a reasonable and reliable measurement of

9 option prices relative to underlying stock prices; (2) following 12:48 p.m. on August 7, 2018,

10 Tesla stock price rose, and long-term ATM-forward Tesla option straddle prices fell sharply; (3)

11 all long-term Tesla put options lost value on August 7, 2018; (4) prices of long-term out-of-the

12 money Tesla call options fell, while prices of long-term in-the-money Tesla call options rose on

13 August 7, 2018; and (5) the combined impact of the alleged misstatements on Tesla option prices

14 can be reliably and reasonably calculated using the Black-Scholes-Merton model. Id. ¶¶ 11–15.

15 In sum, Professor Heston concluded that:

16 [O]n August 7, 2018, following 12:48 p.m., the price of Tesla

common stock rose which generally increased the prices of Tesla

17 call options and decreased the prices of Tesla put options.

Simultaneously, long-term ATM-forward straddle prices fell

18 significantly as a percentage of the stock price (i.e., implied

volatility fell). Given but-for stock prices and but-for implied

19 volatilities, the Black-Scholes-Merton formulas can quantify the

impact of but-for stock prices and implied volatilities on all Tesla

20 options traded during the Class Period.

21 Id. ¶ 16.

22 c. Heston’s Report and Methodology

23 Professor Heston’s report is divided into six sections. In the first two sections, he provides

24 information regarding his qualifications and he summarizes his opinions. Id. §§ 1 and 2. In the

25 third section, Professor Heston provides background information on stock options and financial

26

14 A stock option confers a right (but not an obligation) to buy stock at a fixed price, called the

27

“strike price.” Heston Report ¶ 18. There are two types of options: a call option (which is an

1 terminology. Id. § 3 (Background on Equity Options). Professor Heston also discusses six factors

2 that can affect option prices, including implied volatility. Id. ¶ 59.

3 Because implied volatility is important to Professor Heston’s analyses, the Court discusses

4 the matter. Volatility is a measure of how much prices vary in a given market. United States v.

5 Bogucki, 316 F. Supp. 3d 1177, 1181 (N.D. Cal. 2018). Mathematically, it represents the average

6 deviation from the mean price. Id. “A high-volatility stock varies widely in price over a given

7 period of time, whereas a low-volatility stock varies little.” Id. at 1181–82. There are two

8 accepted methods for defining volatility: implied volatility and historical volatility. In re Zoran

9 Corp. Derivative Litig., No. 06-cv-05503-WHA, 2008 WL 941897, at *6 n.3 (N.D. Cal. Apr. 7,

10 2008). Historical volatility uses the past fluctuations of a stock price to arrive at volatility over a

11 given time period. Id. Implied volatility uses the trading prices of actual options (as opposed to

12 the underlying stock) to arrive at a result. Id. “Implied volatility thus takes into account the

13 current market view of the future volatility of the underlying stock while historical volatility uses

14 historical fluctuations.” Id.; see also Heston Report ¶ 60 (explaining the difference between

15 historical volatility and implied volatility).

16 Importantly, “[w]hen volatility is high, an option is generally more valuable, because the

17 chance that the option will need to be exercised increases.” Bogucki, 316 F. Supp. 3d at 1182.

18 Meanwhile, an option is generally less valuable when volatility is low. Id. “This should make

19 sense intuitively: markets with high volatility are more uncertain, so traders have more incentive

20 to hedge.” Id. As Professor Heston puts it: “put and call options protect their holders from

21 downside risk: the most a holder can ever lose with an option is the premium.”15 Heston Report

22 ¶ 68. “Option holders therefore benefit from implied volatility, because they stand to rake in large

23 profits given extreme favorable price movements, but are protected against similarly extreme

24 unfavorable price changes.” Id.

25 Another important financial concept that Professor Heston explains in the background

26 section is an option straddle. A “long straddle” is formed when an investor buys both a call and

27

1 put option of the same underlying asset with the same strike price and expiry date. Id. ¶ 73. The

2 rationale behind a long straddle is that the investor believes that the stock price will change

3 substantially but is not sure whether the price will rise or fall. Id. A “short straddle” occurs when

4 an investor sells a call and put option of the same underlying asset with the same strike price and

5 expiry date. Id. ¶ 74.16 A short straddle writer is betting that the stock price will remain stable

6 (i.e., that there will be less implied volatility). Id. When holders buy a straddle, they benefit from

7 a large change in the stock price, regardless of the direction. Id. ¶ 75. If the stock price goes up,

8 for instance, the investor will exercise the call option and allow the put option to expire;

9 conversely, if the stock price decreases, the investor will exercise the put option and allow the call

10 option to expire. Id.

11 In the fourth section of Professor Heston’s report, he explains options theory and the

12 Black-Scholes-Merton (“BSM”) model. See Heston Report § 4. The BSM model is a theoretical

13 mathematical valuation of an option contract consisting of various equations. Id. ¶¶ 101, 105.

14 The BSM model considers several variables, including stock price, strike price, implied volatility,

15 and time to expiration, in order to determine the value of a stock option. Id. ¶ 101; see also id. ¶¶

16 105–06 (listing the variables used in the BSM formula and explaining how the variables interact

17 with each other). Aside from implied volatility, the other variables in the BSM formula are

18 directly observable; as a result, the BSM model can be used to derive implied volatility. See

19 Heston Report ¶¶ 59–60, 82; see also Exhibit HH (Heston Depo. Tr.) at 104:6-24 (explaining that

20 he calculated implied volatility by “inverting” price “to find what volatility would match that

21 price”). According to Professor Heston, the BSM model is the accepted industry and academic

22 standard for option pricing. Id. § 4.4; see also id. ¶ 113 (“[The] Black-Scholes option pricing

23 model is the most widely used formula, with embedded probabilities, in human history.”) (citation

24 omitted). Many variations on the BSM model have emerged in the decades following its original

25 publication which relax or generalize particular assumptions. Id. ¶ 113. The original BSM

26

27

16 As explained in the Heston Report, there is no temporal element to a “short” versus “long”

1 formula assumes that implied volatility is constant across stock and strike prices. Id. ¶ 61.

2 In the fifth section of Professor Heston’s report, he described his analyses of Tesla’s stock

3 options during the Class Period. See Heston Report § 5 (“Equity Options on Tesla Common Stock

4 During the Class Period”). Professor Heston found that there were 2,443 Tesla option series

5 traded during the Class Period, which were roughly evenly divided between call options and pull

6 options. Id. ¶ 114. The strike prices of these option series ranged from $10 to $700, and the

7 maturities ranged from August 10, 2018 to January 17, 2020. Id. In total, seventeen maturity

8 dates were traded. Id. ¶ 114 n.71.

9 Professor Heston further found that Tesla common stock price movements affected the

10 value of Tesla options. Id. ¶¶ 118–23. He observed that the price of long-term17 at-the-money

11 (“ATM”)-forward18 straddles dropped sharply after 12:48 p.m. on August 7, 2018. Id. ¶¶ 130–31,

12 133. Heston opined that all of the long-term Tesla stock options lost value because of a drop in

13 implied volatility. Id. ¶¶ 154, 161. The short-term stock options, on the other hand, slightly

14 gained in value. Id. ¶ 133. As Professor Heston put it, “the longer term an option was, the more

15 its price fell on the afternoon of August 7, 2018.” Id. ¶ 146. According to Professor Heston, the

16 straddle price movements that Professor Heston observed on August 7 deviated in statistically

17 significant ways from Tesla’s straddle price movements in the six months preceding August 7. Id.

18 ¶ 137. Professor Heston opined that these option price movements were consistent with the

19 academic literature on option prices following a merger and buyout announcement: typically,

20 implied volatility decreases when the deal is perceived as “close to being successful.” Id. ¶¶ 134–

21 35 (internal citation omitted).

22

17 Professor Heston defined long-term Tesla options as those expiring on or after October 19,

23

2018. Id. ¶ 131. Of the seventeen different maturity dates traded during the Class Period, nine of

them were on or after October 19, 2018. See id. ¶ 131 n.81.

24

18 Options can be “in-the-money” (“ITM”), “at-the-money” (“ATM”), or “out-of-the-money”

25

(“OTM”). Id. ¶ 21. Generally, an investor will only an exercise an option if it is in-the-money—

i.e. it would be profitable to exercise the option. Id. ¶¶ 21, 33, 42. An option is at-the-money

26

when the current price of the stock (the “spot price”) equals the strike price. Id. ¶ 21. An ATM-

forward straddle, as opposed to a simple ATM straddle, means that the forward (rather than the

27

spot) price equals the strike for both option positions in the straddle. Id. ¶¶ 80 & 80 n.32

1 In the sixth section of Professor Heston’s report, he applies the BSM model and other

2 economic principles to calculate Tesla’s “counterfactual” prices for Tesla’s stock options. See

3 Heston Report § 6 (“The BSM Model Can Calculate Counterfactual Option Prices.”). Professor

4 Heston uses an “impact quantum”19 to calculate the difference between option prices based on

5 actual option transactions and the calculated price for an option using counterfactual stock price

6 and implied volatility. Id. ¶ 164. Professor Heston’s methodology is designed to capture the

7 change in option prices as opposed to the level of prices. Id. (“We apply the BSM model with a

8 robust methodology that measures changes in value, thereby differencing out potential biases in

9 levels.”) (emphasis in original); Ex. C (Heston Depo. Tr.) at 249:11-17; cf. Heston Rebuttal Report

10 ¶ 22.

11 Professor Heston’s five-step methodology for calculating the counterfactual prices for

12 Tesla’s stock options is as follows. First, he creates a synthetic Tesla instrument—an ATM-

13 forward straddle—based on the actual prices of Tesla put and call options just below and just

14 above the money to calculate the price of a straddle that is exactly at-the-money.20 Heston Report

15 ¶ 165(a); Ex. C (Heston Depo. Tr.) at 72:25–73:6. Second, based on the price of the ATM-

16 forward straddle, Professor Heston applies the BSM model to derive the implied volatility.

17 Heston Report ¶ 165(a); Ex. HH (Heston Depo. Tr.) at 93:10–14 (“I’m observing the actual quoted

18 price of a portfolio of options, which is exactly at-the-money forward, and then I’m inverting that

19 actual price to find what volatility would match that price.”). Professor Heston refers to this

20 calculated implied volatility as the “Actual Implied Volatility.” Heston Report ¶ 165(a). Third,

21 Professor Heston calculates the price for the ATM-forward straddle, and a corresponding implied

22

19 An impact quantum measures the magnitude of a shift. Heston Report ¶¶ 163, 181 (explaining

23

that an impact quantum shows a dollar or percentage amount by which an option would have been

more or less expensive). As Professor Heston says in his rebuttal report, “the measurement of

24

impact quantum is the difference between option values under one set of assumptions, and option

values under an alternative but-for scenario. It is essentially the change in option values under two

25

different scenarios.” Heston Rebuttal Report ¶ 29.

26

20 Professor Heston created an ATM-forward straddle “because ATM-forward straddle prices

represent the total price of a portfolio of ATM-forward options for a particular maturity.” Id. ¶ 81.

27

Professor Heston further explained that, according to the BSM model, “implied volatility of an

1 volatility, for the seventeen Tesla option maturities traded during the Class Period. Fourth, for

2 each of the seventeen ATM-forward straddles, Professor Heston uses Tesla’s stock price on each

3 day of the Class Period and the calculated implied volatility, to derive a “Re-Valued Fitted Option

4 Value.” Id. ¶ 165(b). Finally, Professor Heston opines that a “but-for” option price can be

5 calculated for each Tesla option traded during the Class Period by plugging into his formula a

6 “counterfactual implied volatility and stock price,” which is based on Tesla’s implied volatility

7 and stock price at 12:47 p.m. on August 7, 2018 (i.e. the minute before Mr. Musk published his

8 first tweet), and identifying the difference between the Re-Valued Fitted Option Value and But-for

9 Fitted Option Value. Id. ¶¶ 166, 183; see also Table 5 (providing an “illustrative impact

10 example”).

11 d. Professor Heston’s Use of the BSM Model for But-For Prices is Sound

12 Professor Heston was tasked with analyzing the price movements of options on Tesla stock

13 during the Class Period and attempting to create, through the use of statistical modeling,

14 counterfactual (but-for) option prices in a world where the Musk Tweets did not exist. In this

15 hypothetical but-for world, Tesla’s stock options would still have been bought and sold, and

16 option prices still would have risen and fallen. Of course, the precise prices and levels of implied

17 volatility are unknowable: this counterfactual world is marked by educated guesses and well-

18 informed assumptions. As a result, some form of modeling must be used to derive counterfactual

19 prices. The question for the Court is whether Professor Heston’s model to predict these

20 counterfactual but-for prices is sufficiently reliable to satisfy Daubert.

21 The Court finds that Professor Heston’s use of the BSM model to derive implied volatility

22 and calculate counterfactual prices is sufficiently reliable for Daubert. Putting aside Professor

23 Heston’s use of artificial data, which is discussed below, his methodology is otherwise sufficiently

24 sound: it draws from peer-reviewed and published work and is subject to peer testing, and the

25 BSM model enjoys widespread acceptance in the scientific community. Academic research

26 supports the general idea of modelling option values by fitting an implied volatility curve.

27 Hartzmark Rebuttal Report ¶ 27 (citing John Hull, Option, Futures and Other Derivatives (2015)).

1 Litig., 273 F.R.D. 586, 618 (C.D. Cal. 2009), for which Robert Merton and Myron Scholes

2 received the Nobel Memorial Prize in Economics. Heston Report ¶ 111. The Black-Scholes paper

3 from 1973 has over 40,000 citations on Google Scholar. Heston Rebuttal Report ¶ 12. And

4 Defendants themselves do not dispute that the BSM model can be used to predict option prices in

5 certain circumstances; as explained below, the issues raised in their motion primarily flow from

6 Professor Heston’s use of “theoretical prices” for “synthetic Tesla instruments” that did not

7 actually trade. Opp. at 1, 2 n.1.

8 To the extent that Defendants take issue with Professor Heston’s assumption that implied

9 volatility will remain constant across a portfolio of options with the same date of expiry for but-for

10 prices, the Court finds that this assumption is sufficiently supported for Daubert. The use of one

11 implied volatility for all options with the same maturity is an assumption that is derived from the

12 BSM model itself. See Heston Report ¶ 61; see also Heston Rebuttal Report ¶ 25 (“By definition,

13 the BSM formula assumes constant implied volatility.”). As noted by Plaintiff, “the application of

14 one implied volatility to value multiple option series for the same maturity is widely accepted in

15 the finance industry and, indeed, Tesla itself does this when valuing options for its financial

16 statements.” Opp. at 2, 4; see also Ex. II (Excerpts from Tesla Inc.’s 10-K, dated December 31,

17 2021) at 60, 82–83 (showing that Tesla uses the Black-Scholes option-pricing model to derive the

18 fair value of stock option awards); Ex. JJ (Seru Depo. Tr.) at 28:3-6 (testifying that he was aware

19 that Tesla uses the Black-Scholes formula to value its options for accounting purposes and that use

20 of the Black-Scholes model to evaluate stock options was “a pretty standard practice”).

21 In the same vein, to the extent that Defendants argue that Professor Heston’s methodology

22 is unreliable because his calculations (based on an assumed constant implied volatility) yielded

23 different figures than Professor Seru’s calculations (based on a variable implied volatility), this

24 does not warrant exclusion under Daubert. As to Defendants’ disagreement with Professor

25 Heston’s choice—based on the BSM model—to assume a constant rate of implied volatility,

26 Professor Heston’s decision is supported by academic research; there is evidence that models

27 using constant implied volatility perform better than models with variable implied volatility for

1 Defendants are, of course, free to argue to the jury that a different model with different

2 assumptions is better suited to calculating option price changes. But these differences do not

3 make Professor Heston’s methodology fatally unreliable under Daubert.

4 In sum, the Court is satisfied that Professor Heston’s use of the BSM model to derive

5 implied volatility and calculate the but-for curve satisfies Daubert.

6 The Court next addresses Professor Heston’s use of theoretical data instead of actual

7 market data for each stock option at issue to calculate the “actual option curve,” or, as Professor

8 Heston refers to it, the “re-valued fitted option value.” Heston Report ¶ 183.

9 e. Professor Heston’s Use of Theoretical Data Raises Serious Questions

10 Defendants argue that Professor Heston’s model for calculating damages to Tesla’s option

11 holders is unreliable because it does not compare actual Tesla option prices or quotes with “but

12 for” prices. Mot. at 1. Instead, Professor Heston calculates prices for 17 synthetic Tesla

13 instruments via ATM-forward straddles and then applies these prices to the 2,443 Tesla options

14 that traded during the Class Period, even though—according to Defendants—these stock options

15 had “markedly different strike prices, maturities, and moneyness.” Id. at 3. Professor Heston and

16 Professor Hartzmark use the difference between these calculated predicted “actual” prices with the

17 calculated but-for prices to measure damages. Defendants assert that the flaws in Professor

18 Heston’s use of model-generated price predictions are evidenced by the fact that, at least a

19 hundred times, his model assigns damages to some class members which exceed their investment.

20 Id. at 3–4. Defendants conclude that Professor Heston’s use theoretical prices rather than actual

21 market data is “junk financial engineering with no semblance to reality.” Mot. at 2.

22 Defendants have raised serious questions about Professor Heston’s use of theoretical data

23 to calculate the “re-valued” curve. As noted above, the “but-for” curve requires predictive

24 modeling to derive counterfactual prices. But it is not clear why calculated theoretical re-valued

25 prices are needed to determine damages when actual option prices and implied volatility exist, are

26 available, and can be used to generate the actual curve. During the hearing, in response to the

27 Court’s questioning, Plaintiff could not point to any precedent in caselaw or practice where

1 each specific stock option. Plaintiff also conceded that he could use actual option prices to

2 compare with the hypothetical but-for price to calculate damages. Finally, the instances where the

3 purported damages for certain investors exceeded their investments indicate a potential problem

4 with the integrity of the model for which Plaintiff had no good answer. During the hearing, in

5 response to the concerns expressed by the Court, Plaintiff agreed to use actual, not adjusted, data

6 to calculate the “actual” (not but-for) curve. As a result, the Court need not decide whether

7 Professor Heston’s use of theoretical data to calculate the “re-valued fitted option value” fails

8 Daubert; that issue is now moot.

9 The Court now turns to a purported failure to account for potential confounding factors,

10 which is the final issue raised by Defendants in their motion.21

11 f. Implications for Hartzmark’s Report

12 Finally, Defendants object that neither Professor Heston nor Professor Hartzmark showed

13 that the changes in implied volatility were not caused by confounding variables (such as market-

14 wide or industry-specific forces). Id. at 1, 6–7. As discussed below, Professor Hartzmark

15 conducted an event study in which he accounted for market and industry factors and potential

16 firm-specific confounding news that could have impacted Tesla’s common stock price. Hartzmark

17 Report ¶¶ 49, 146–50. The question for the Court is whether Professor Hartzmark sufficiently

18 addressed potentially confounding factors for implied volatility.

19 Both Professor Heston and Professor Hartzmark found that there were “large and unusual

20 movements” in options prices and related implied volatility following the Musk Tweets, which

21 Professor Hartzmark opined were caused by the Musk Tweets and “reflected an increased

22 probability of a going private transaction being completed.” Hartzmark Report ¶¶ 185–86; see

23 also id. ¶ 206 (noting that “the predominant cause” of Tesla’s stock price declines and anomalous

24 changes in implied volatility over the Class Period was the continual incorporation of news (or

25 lack thereof) correcting the alleged misrepresentations and omissions of the Musk Tweets and the

26

21 The other issues raised by Defendants in their motion with respect to Professor Heston’s

27

methodology—such as the purportedly “nonsensical” results and their disagreement with

1 revelations about the Consequential Harm). In reaching this conclusion, Professor Hartzmark first

2 adjusted for overall market-wide and industry-wide influences which lowered Tesla’s stock

3 price.22 Hartzmark Report ¶¶ 147–48 (calculating the adjusted price of Tesla common stock from

4 August 7 to 17); see also Table 5 (listing adjusted prices for Tesla common stock). Professor

5 Hartzmark also conducted an event study and reviewed hundreds of news articles and analyst

6 reports to determine whether Tesla’s stock price might have been impacted by disclosure of

7 company-specific information unrelated to the alleged misstatements. Id. ¶¶ 149–150. Professor

8 Hartzmark did not find any materially negative new confounding information that would have

9 caused Tesla’s stock price to fall. Id. ¶¶ 150–69; see also Table 6 (listing disclosures with

10 potentially confounding news).

11 It stands to reason that Professor Hartzmark’s event study which found no new, company-

12 specific confounding information decreased Tesla’s stock price carries some weight with respect

13 to implied volatility. While the Court recognizes that implied volatility is different from stock

14 price, they are related, and neither party described any evidence nor articulated any reason to

15 believe that the observed movements in implied volatility were due to something other than the

16 Musk Tweets. And in fact, both Professor Heston and Professor Hartzmark cited academic

17 research demonstrating that implied volatility typically falls for options with successively longer

18 expiration dates following announcement of a merger or buyout. Heston Report ¶ 134; Hartzmark

19 Report ¶¶ 187–88, 194. Professor Heston found that this “exact pattern [was] visible in the Tesla

20 options data”: after 12:48 p.m. on August 7, “the longest maturing options lost the most value and

21 recovered the slowest, while the very short-term options saw little effect.” Heston Report ¶ 135

22 (emphasis in original); see also Hartzmark Report ¶ 189 (describing how other analysts noted a

23 relationship between changes in volatility of Tesla’s long-dated options and the Musk Tweets).

24 According to Professor Heston, this pattern deviated significantly from the previously observed

25

22 During the hearing, Plaintiff explained that Professor Hartzmark uses these adjusted prices when

26

determining the but-for price for Tesla’s stock options to account for market-wide influences. See

Docket No. 507 (October 25, 2022 PTC Tr.) at 58:5-9 (“So when it comes to determining the but-

27

for price for stock options, Dr. Hartzmark doesn’t propose to use the $305.50, which is the

1 relationship between short- and long-term straddles in the six months leading up to August 7 and

2 the six months following August 7; the pattern remained in flux during the Class Period. Heston

3 Report ¶¶ 136, 138; see also Figure 16 (showing statistically significant deviations in short- and

4 long-term straddles on multiple days in the Class Period). Professor Heston found that “[i]t was

5 not until August 17, 2018, that the relationship between short- and long-term straddles returned to

6 the normal levels observed historically.” Heston Report ¶ 139; see also Hartzmark Report ¶ 190

7 (“Professor Heston demonstrates that for longer-term options the volatility over the Class Period

8 immediately declines and then rises by August 17, 2018.”).

9 In light of the event study for stock price and the evidence put forth linking changes in

10 implied volatility to privatization transactions analogized here, and in the absence of any evidence

11 suggesting that unrelated facts contributed to the changes in implied volatility, the Court finds that

12 Professor Hartzmark sufficiently addressed potentially confounding factors to survive Daubert.

13 See S.E.C. v. Leslie, No. 07-cv-3444, 2010 WL 2991038, at *15 (N.D. Cal. July 29, 2010) (“While

14 [defendant] certainly may argue to the jury that [the expert] did not reliably filter out other

15 confounding variables that would have affected the stock price[,] . . . he has not shown that [the]

16 opinion is so unreliable that it must be excluded.”); Smilovits v. First Solar, Inc., No. 12-cv-0555,

17 2019 WL 7282026, at *9 (D. Ariz. Dec. 27, 2019) (“Defendants’ criticisms that Feinstein

18 discounted the confounding information and exaggerated the impact of the alleged fraud go to his

19 credibility and the weight of his opinions, not their admissibility.”). Defendants’ motion to

20 exclude Professor Hartzmark’s report on the basis of a purported failure to disaggregate

21 confounding information for stock options is DENIED.

22 g. Conclusion

23 Professor Heston’s use of the BSM model to derive the but-for curve is sufficiently

24 justifiable to pass Daubert scrutiny. Defendants raised substantial questions regarding Professor

25 Heston’s use of theoretical data to calculate the “actual” curve, but because Plaintiff agreed to

26 rerun his calculations to use actual, not adjusted market data, for each individual stock option, the

27 Court ultimately does not rule on whether that aspect of Professor Heston’s methodology fails

1 an alleged failure to address confounding information.

2 VII. CONCLUSION

3 In summary, the Court rules on the parties’ motions in limine as follows:

4 • Plaintiff’s Motion in Limine No. 2 to Exclude Testimony, Opinion, and Evidence

5 by Defendants’ Experts not Contained in their Written Reports (Docket No. 480):

6 GRANTED IN PART AND DENIED IN PART. Despite the lack of express

7 wording, Professor Fischel’s reports bear on materiality, so he may testify

8 regarding the materiality of the Musk Tweets. But Professor Fischel may not opine

9 regarding Tesla’s stock options because these opinions were not disclosed in his

10 reports, and Defendants have not shown that this failure was substantially justified

11 or harmless.

12 • Plaintiff’s Motion in Limine No. 3 to Preclude Evidence or Testimony from Elon

13 Musk that Contradicts the Court’s Summary Judgment Order (Docket No. 481):

14 DENIED. Defendants may not argue at trial that the Musk Tweets were true. The

15 issues of factual falsity and Mr. Musk’s recklessness were decided as a matter of

16 law at summary judgment. But Mr. Musk’s testimony regarding the Musk Tweets

17 remains probative and relevant to the questions of materiality, the level of scienter,

18 and to the appointment of damages.

19 • Plaintiff’s Motion in Limine No. 4 to Exclude Irrelevant and Duplicative Evidence

20 re: Falsity or Scienter (Docket No. 482): DENIED. As with the previous motion in

21 limine, this motion rests on the faulty premise that this evidence is irrelevant.

22 • Plaintiff’s Motion in Limine No. 5 to Preclude Evidence re: Post-Class Period

23 Events (Docket No. 483): GRANTED IN PART AND DENIED IN PART.

24 Plaintiff has failed to demonstrate how events within the PSLRA’s 90-day

25 lookback period are per se relevant or that events that occurred after the 90-day

26 lookback period are per se irrelevant. But because the specific evidence that

27 Plaintiff has identified in his motion is either inadmissible or irrelevant, the Court

1 • Defendants’ Motion in Limine No. 4 to Exclude Evidence Regarding the SEC

2 Complaints and Settlements (Docket No. 478): GRANTED. The danger of unfair

3 prejudice outweighs the probative value of these materials.

4 • Defendants’ Motion in Limine No. 5 to Exclude the Opinions of Steven Heston and

5 Michael Hartzmark’s Opinions that Rely on Them (Docket No. 479): DENIED.

6 Professor Heston’s use of the BSM model to calculate the counterfactual but-for

7 price of stock options is sufficiently reliable for Daubert. And while Defendants

8 raised serious questions about Professor Heston’s use of artificial data to calculate

9 the “actual” price, the Court DENIES this portion of the motion as moot in light of

10 Plaintiff’s decision to rerun his analyses using actual option price data instead of

11 the theoretical prices derived from straddles. Defendants’ motion to exclude

12 Professor Hartzmark’s report on the basis of a purported failure to disaggregate

13 confounding information for stock options is DENIED.

14

15 IT IS SO ORDERED.

16

17 Dated: December 7, 2022

18

19 ______________________________________

EDWARD M. CHEN

20 United States District Judge

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