A securities class action filed against Elon Musk and Tesla by dogecoin investors may have been thought, by a federal judge in Manhattan, to be over and done with when it got tossed out this past August. Yet this litigation has taken a new and unexpected turn, with both sides now threatening each other with sanctions and filing their threat cards in court.
Musk and Tesla maintain that the series of complaints against them, which could best be described as “whack-a-mole” in nature, were filed by Dogecoin plaintiffs' attorney Evan Spencer in an attempt to extract a settlement from Musk and Tesla. They allege that Spencer offered to drop the appeal in exchange for a cool $5 million. After we discuss what this conversation between the parties means, we then shift to what this means for Musk and Tesla in the upcoming trial. Spencer on his part contends that he and his law firm filed the complaints in good faith and with the support of “numerous scientific studies.” He also contends that Musk and Tesla's lawyers should be disqualified from representing their clients because, as Spencer sees it, these pleadings are a result of highly improper and unethical representation of Musk and Tesla. Spencer also believes that these complaints embody the very nature of defamation.
In this case, which has garnered significant media attention, both sides had previously sought sanctions. U.S. District Judge Alvin Hellerstein ruled in December that the plaintiffs—who are investors—had good reasons to bring the case and that it was not frivolous. He also ruled that the defendant, Spencer, had not backed up his claim that the plaintiffs' law firm had leaked information about the case to the media, which is the kind of thing that often happens when one side is trying to make the case and the other side is trying to prevent the case from being made. Both sides had asked for sanctions. They got none. Instead, they got a ruling that was good for them, but not too good for them.
Both sides ...
In a statement sent via email, Spencer expressed his assertion that "defendants' motion for sanctions will be denied." The attorneys representing Musk could not be reached for comment. The litigation is tied to the cryptocurrency dogecoin. Investors in that digital currency have accused Musk and Tesla of engaging in a scheme to inflate the value of dogecoin.
For more than two years, Musk and Tesla have maintained, during litigation, that there’s no proof they owned two cryptocurrency wallets that purportedly engaged in suspicious trading of Dogecoin. They also asserted that there’s no proof either Musk or Tesla sold Dogecoin. Judge Hellerstein allowed the class of Dogecoin investors to refine their theories in four amended complaints. He dismissed the case with prejudice on August 29. In his two-page dismissal ruling, Judge Hellerstein said that allegedly deceptive comments made by Musk couldn’t be understood as anything more than puffery that no reasonable investor would rely on. He also characterized the allegations of a pump-and-dump scheme as "not possible to understand." On September 19, the lawyer for the plaintiffs, Spencer, filed a notice of appeal.
A few days later, on September 25, per an exhibit attached to Musk's sanctions motion, Spencer sent an email to the Quinn Emanuel firm. In the email, Spencer said that "multiple top class action firms" were interested in taking over the case if the 2nd U.S. Circuit Court of Appeals revived it. Spencer said his clients—about 130 individuals who invested in dogecoin—had lost around $5 million. But if what Spencer claimed in his case was true, dogecoin investors had lost around $5 billion. Spencer's appeal, then, could "turn a $5 million case into a $5 billion case."
The Sept. 27 motion for sanctions filed by Quinn Emanuel said that the firm considered Spencer's email an attempt "to extort a quick handout" in the wake of an extensive campaign of "harassment." The defense attorneys contended that under the Private Securities Litigation Reform Act, Spencer is liable for bringing a baseless lawsuit for the improper purpose of forcing a quick settlement. Quinn Emanuel asked Judge Hellerstein to hit Spencer with a $750,000 sanction, which would equal the law firm's fees for defending the allegedly frivolous case.
On October 10, Spencer filed an opposition that pointed out Hellerstein's conclusion that the investors' claims were brought in good faith; this was not new, and Hellerstein had already stated as much in his December order when he refused the defendants' previous motion for sanctions. Yet Spencer's brief hardly could have been expected to say anything different. After all, it is Spencer's law firm that now has the task of cleaning up the mess left behind by Musk.
Spencer's brief conceded that the "pleadings may have been imperfect." However, it went on to describe the four complaints that have been lodged against Musk as "definitely well-founded" and largely supported by what it termed "dogecoin trading studies."
The same day that Spencer opposed Quinn's motion for sanctions, he presented a countervailing sanctions motion of his own. Spencer accused the law firm of Quinn Emanuel of improperly disclosing his confidential settlement offer in a bid to pressure him and his clients into abandoning their appeal. In a really over-the-top part of his argument, Spencer even accused Musk's lawyers of having "fraudulently inflated their legal bills" as part of the same pressure campaign. Spencer's motion asked Judge Hellerstein to disqualify the Quinn Emanuel firm, to seal the confidential settlement offer, and to order him and his clients $375,000 in damages.
Quinn Emanuel filed a letter with Judge Hellerstein on Monday requesting that he temporarily seal the Spencer email that the firm had attached to its sanctions motion. The firm claimed that Spencer had not marked the email's contents as private or confidential and that the nature of Quinn's use of the email in the attached exhibit presented a concern. Hellerstein had not acted on the request by Tuesday afternoon. On Tuesday, too, Quinn asked for an extension until Oct. 25 to respond to Spencer's sanctions motion. So, Hellerstein won't be seeing the end of this case anytime soon.
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