JPMorgan says Tesla owes the bank $162 million

JPMorgan has sued Tesla, claiming that the electric car company owes the bank $162 million related to a 2014 stock warrant agreement. The dispute centers around adjustments the companies made to the agreement following Tesla CEO Elon Musk’s 2018 “[f]unding secured” tweet and the resulting fallout.

The lawsuit was filed late Monday in the Southern District of New York. Tesla did not immediately respond to a request for comment, and has disbanded its US press team.

According to the suit, which was first reported by Reuters, JPMorgan purchased a number of warrants from Tesla in 2014 — back when the company was still trying to fund the construction of the original Gigafactory.

Stock warrants give the buyer (JPMorgan, in this case) a right to purchase shares in a company (Tesla) at a set price within a certain window of time. The warrants JPMorgan bought from Tesla in 2014 were set to expire in June and July of 2021.

Initially, the companies agreed to a “strike price” of $560.6388. If the warrants expired and Tesla’s stock price was less than that strike price, neither company would owe the other anything. But if Tesla’s stock price was above the strike price at expiration, JPMorgan says Musk’s company was basically supposed to hand over stock equal to the difference in those prices.

Being a massive, complicated financial transaction, JPMorgan made sure there were all sorts of legal protections in place. One was a hedge against any big announcements related to mergers or buyouts that could affect Tesla’s stock price. If something like that were to come along, the bank and the automaker were able to agree on a new strike price for the warrants.

Which brings us to the tweet. Musk famously tweeted on August 7th, 2018 that he was “considering taking Tesla private at $420. Funding secured.” Later that day, Tesla’s chief financial officer, its head of communications, and its chief lawyer wrote an email attributed to Musk that was published on Tesla’s blog explaining his announcement. Musk also tweeted that “[i]nvestor support is confirmed. Only reason why this is not certain is that it’s contingent on a shareholder vote.” Tesla’s investor relations head also told some press that there was a “firm offer.”

Basically none of that was true, though, as everyone found out after the Securities and Exchange Commission sued Musk and Tesla over the announcement. Musk had a cursory conversation with Saudi Arabia’s Public Investment Fund, but that was it.

Before that truth came out, though, JPMorgan saw the resulting volatility in Tesla’s stock price and decided to amend the strike price of its warrants. It lowered the price to $424.66 and notified Tesla. Tesla agreed to a conference call scheduled for August 24th, but backed out at the last minute, according to the lawsuit.

That same day, Tesla and Musk announced that they were abandoning the attempt to take Tesla private.

So JPMorgan once again decided to adjust the strike price of the warrants. It made new calculations based on the response to the decision by Tesla and Musk to do an about-face, and settled on a strike price of $484.35.

This time, Tesla “protested that no adjustment should be necessary at all because it had so quickly abandoned its going-private plans,” JPMorgan writes in its lawsuit. The bank gave Tesla its calculations and “held several conference calls” to explain them, and says Tesla “did not provide any specific objection” to those explanations. After that, JPMorgan says Tesla stopped talking to the bank for six months.

Tesla’s lawyers eventually sent a letter to JPMorgan in February 2019 claiming that the bank’s adjustments were “unreasonably swift and represented an opportunistic attempt to take advantage of changes in volatility in Tesla’s stock.” JPMorgan wrote back, “rejecting all of [Tesla’s] allegations,” but then the two sides didn’t talk for two years. JPMorgan made another adjustment down to $96.87 in August 2020 to account for Tesla’s stock split, and says Tesla never responded to that either.

By the time the expiration dates came around this year, Tesla’s stock was already on an incredible run and JPMorgan’s warrants were “‘in the money’ by a substantial amount,” according to the suit. When the bank contacted Tesla to cash out, Tesla “renewed its objections to the Adjustments.” Tesla did settle some shares with JPMorgan — the bank did not say how many — but “refused to settle in full,” the bank claims, so it triggered an “early termination” clause.

JPMorgan says Tesla still owed 228,775 shares when it terminated the deal, and that those shares are worth $162,216,628.81 based on Tesla’s stock price at the time. (Potentially worse for JPMorgan, it had hedged its warrant agreement with Tesla by maintaining a short position against Tesla’s stock. When Tesla didn’t settle the remaining shares, the bank had to buy the same amount on the open market to cover that hedged bet.)

Shortly after the suit was filed on Monday, Musk was still actively tweeting in a thread he started Sunday in response to a Senator Bernie Sanders (I-VT) tweet about taxes. “I like to dig my grave real deep,” Musk wrote.