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Tesla Inc CEO Elon Musk walks on stage during a ceremony in Shanghai on Jan. 7, 2020.

Aly Song/Reuters

A federal judge said Tesla Inc and Chief Executive Elon Musk must face a lawsuit claiming they misled shareholders when Musk tweeted that he had secured funding to take his electric car company private in a $72 billion transaction.

U.S. District Judge Edward Chen ruled on Wednesday that shareholders could try to prove Musk intended to defraud them with his Aug. 7, 2018 tweet and follow-up messages about plans for his Palo Alto, California-based company.

The judge said shareholders could also try to prove Musk’s tweet was the “proximate cause” of volatility in Tesla’s stock price that caused billions of dollars of losses.

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Tesla did not immediately respond to requests for comment.

The lawsuit arose after Musk stunned investors on Aug. 7, 2018 by announcing on Twitter: “Am considering taking Tesla private at $420. Funding secured.”

Musk’s tweet helped push Tesla’s stock price more than 13% above the prior day’s close. But it soon gave those gains back, and by Aug. 17, 2018 had fallen 11% below where it was before the original tweet.

Some investors called the tweet a ploy to squeeze short-sellers, long an irritant for Musk, who were betting Tesla’s stock would fall.

Musk tweeted on Aug. 24, 2018 that Tesla would remain public.

A month later, he agreed to pay a $20 million civil fine to settle fraud charges by the U.S. Securities and Exchange Commission.

The SEC also required Musk to step down as chairman, and Tesla lawyers to vet some of his tweets in advance. Tesla reached a separate $20 million settlement with the regulator.

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Tesla’s stock price has since roughly doubled, and Musk is worth $37.6 billion according to Forbes magazine.

In letting the shareholder case, which combined nine lawsuits, go forward, Chen said reasonable investors could have viewed Musk’s Aug. 7 tweet as signaling he had unconditionally obtained enough financing to take Tesla private.

“So read, the statement is not true,” Chen wrote.

The judge rejected Tesla’s and Musk’s argument that the tweet was not false or misleading because Tesla’s directors would have still had to approve the transaction.

The proposed class action covers shareholders who bought and sold Tesla stock from Aug. 7 to Aug. 17, 2018. Their lawyers did not immediately respond to requests for comment.

Tesla shares closed up $19.94 at $729.83 on Wednesday.

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The case is In re Tesla Inc Securities Litigation, U.S. District Court, Northern District of California, No. 18-04865.

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