united-states california fraud hypothetical
Concept of fraud in investment
<p>Let's say Elon Musk knew from reserve estimates, as well as basic physical reality, there wasn't enough lithium for his plans to work. This eventually resulted in battery shortages and collapsed the company.</p>
<p>Is Elon Musk at fault for misleading investors into a business he knew was physically impossible to work?</p>
<p>So you need a specific claim. Here</p>
<p><a href="https://chargedevs.com/newswire/elon-musk-debunks-scare-stories-about-a-shortage-of-lithium/" rel="nofollow noreferrer">https://chargedevs.com/newswire/elon-musk-debunks-scare-stories-about-a-shortage-of-lithium/</a></p>
<blockquote>
<p>While onstage, Musk stated that Lithium is the third most common element in the universe which is not accurate. In fact, Lithium is the 33rd most common element in Earth’s crust</p>
</blockquote>
<blockquote>
<p>, Musk pointed out...  that lithium is “virtually everywhere.”</p>
</blockquote>
<p>Ok so some have pointed out he could find a solution. In that case if he proposed a solution which was literally physically impossible would that be fraud?</p>

<p>The relevant questions would be whether the statement was material; what did he know about the truth of the statement; did he intend that the person would act in a particular way based on the statement; did the person know that the statement was false, did they rightfully rely on the statement being true, and were they harmed by that statement. Without that (plus &quot;representing as fact&quot; and falsity which I grant for the sake of discussion), it's not fraud. Also for the sake of discussion, I assume he said &quot;Lithium is the third most common element in the Universe&quot;, though of course you would have to prove that he actually said that.</p>
<p>Proving that the &quot;third most common element&quot; is a material claim is challenging. A reasonable person would not rely on irrelevant facts. Suppose I have a product that requires large amounts of helium, which is the second most abundant element in the universe. However, it's rare on Earth. What should matter to a reasonable person is not abstract frequency in the Universe, 99.9999% of which is inaccessible, but rather frequency on Earth, which is not Musk's putative claim. The statement that &quot;lithium is everywhere&quot; is true, unless unreasonably interpreted as saying &quot;Earth is a solid block of lithium&quot;.</p>
<p>If you can prove that he knew the statement was false, you could pass the &quot;knowingly&quot; test. There is no reckless ignorance of the truth (it is commonplace for people to say things that they think are true but turn out to be false). The underlying rationale for the &quot;knowledge&quot; requirement is to punish bad behavior, and really, how do <em>you</em> know that his statement is false? The requirements for verifying scientific statements before speaking in public are fairly low.</p>
<p>Investor ignorance of falsity is a crucial disqualifier for a fraud claim. If you plan to invest in X, you have a duty to investigate the associated claims, so the courts will assume that the investor <em>knew</em> that the lithium claim is false (it's easily verifiable, and requires no special access to the product or to secret lab results).</p>
<p>Finally, you would have to establish that somebody was actually harmed.</p>

<blockquote>
<p>Let's say Elon Musk knew from reserve estimates, as well as basic
physical reality, there wasn't enough lithium for his plans to work.
This eventually resulted in battery shortages and collapsed the
company.</p>
<p>Is Elon Musk at fault for misleading investors into a business he knew
was physically impossible to work?</p>
<p><strong>So you need a specific claim.</strong></p>
</blockquote>
<p>You are right that you need a specific claim, but the one that you identify isn't it.</p>
<p>The kind of specific claim you would need is, for example, a pro forma sales projection that predicts a number of batteries sold in 2023 that internal documents reveal that the company knew it was impossible to produce due to a lack of reserves.</p>
<p>To be material, the claim has to tie into false or misleading statements, or concealed facts, about the financial performance of the company or its reasonably anticipated future financial performance.</p>
<p>Generally, making statements like &quot;past performance does not assure future results&quot; will relieve someone of liability for statements that impact only future projections for the company's finances. But, if you make a statement about the future performance of a company that you know to be either false, or highly improbable, this will generally constitute actionable securities fraud, even if it could be construed as a statement of opinion about the future in a common law fraud action.</p>
<p>It is sufficient that a statement of opinion about the future returns of the company imply a false statement of a presently existing material fact (i.e. there aren't sufficient proven reserves of lithium to build as many batteries as projected for a given year), even if that connect the dots statement is not explicitly stated.</p>
<p>Moreover, a statement like the one quoted in the original post, could be actionable to the extent that it is provided as a &quot;non-answer&quot; to a question about whether there are sufficient exploitable lithium reserves available for the company to meet its projections, with an intent to divert attention away from what the person making the statement knows is the true answer, which is that there aren't.</p>
<p>This said, the law does not require someone making predictions about future events in connection with pro forma financials or earnings projections to have a step by step provable plan to overcome every known obstacle for getting there. A certain amount of optimism that things will be worked out is allowed.</p>
<p>For example, a statement like Musk's quoted in the question about the availability of lithium could fairly be interpreted as a way of saying that while lithium supplies could theoretically be a barrier to meeting production goals, that he reasonably believes that these obstacles will be overcome somehow or other. The statement is only securities fraud if he does not believe (or at least if no reasonable person would believe) that there is a reasonable probability that the lithium supply obstacle can be overcome somehow to meet the company's projected sales targets.</p>
<p>In general, the standard of proof for such statements under the case law interpreting securities fraud statutes is more lenient than the one for common law fraud.</p>
<p>In both cases, however, for a civil lawsuit for either common law fraud or for securities fraud, there must be proof of damages caused by the misrepresentation, and not merely a false material statement in isolation. This requirement often defeats an otherwise plausible securities fraud claim.</p>
