Media Matters Makes The Case That Judge Should Recuse Over Tesla Stock Ownership

Does Elon Musk control all of his companies as if they’re a single entity where he can shift resources between them with no restrictions? Certainly, there has been a lot of reporting to that effect over the years, and now that might have some legal consequences, though perhaps not the ones you’d expect.

Media Matters is now taking steps that appear designed to try to force Judge Reed O’Connor off of Elon Musk’s lawsuit against them in Texas, on the basis of his ownership of a large amount of Tesla stock. Tesla is not a party to the case, but given the vast interconnection and porous borders of each of Elon’s companies, Media Matters is making moves in that direction.

It seems unlikely to work, but it’s an interesting strategic move.

Judge Reed O’Connor is one of the preferred judges for culture warriors in Texas. Along with Matthew Kacsmaryk, O’Connor is one of a small number of widely known judges who are reliably partisan enough that they will ignore precedent, reason, and the law to use their power to win culture wars. O’Connor’s reputation as an extreme partisan judge is well-documented.

So, when Elon filed his ridiculous SLAPP suit against Media Matters for accurately describing how Media Matters was able to find ads of big brands next to literal neo-Nazis, people realized that it probably wasn’t going to go as smoothly as it should.

There are many reasons why the case should have been dismissed quickly. But Judge O’Connor seems poised to keep it going as long as he can.

The case had no business being in Texas, first of all, since literally none of the parties are in Texas. Twitter is a Nevada corporation, headquartered in California. Media Matters is based in DC, and the writer who was sued, Eric Hananoki, lives in Maryland. Texas is clearly the inappropriate venue.

Furthermore, the complaint admits that Media Matters told the truth. Elon is angry about the fact that people interpreted the story to mean that it was easy to find ads next to neo-Nazi content, which is not actually what Media Matters said. The complaint itself flat out says that Media Matters did, in fact, see what it reported. But Elon has no legal right to go after Media Matters because some people may have interpreted the piece to say something it never actually says.

Thus, it seems clear that this case should have been easily dismissed quickly, like Elon’s similar lawsuit against the Center for Countering Digital Hate. However, Judge O’Connor has allowed the case to move forward with some level of discovery, greatly increasing the cost to Media Matters. It’s also ridiculous as this case should be dismissed on venue grounds pretty quickly, let alone any of the other reasons to dismiss it.

Perhaps sensing that they’re in for a terrible time with Judge O’Connor, Media Matters filed a motion to compel the plaintiffs in the case, ExTwitter, to note that Tesla is an “interested party” in the case. The argument is pretty clear. The motion points out that Elon has “total” control over ExTwitter and “extraordinary personal control” over Tesla.

And, importantly, that he has repeatedly blurred the lines between his companies:

As Tesla’s “Technoking,” Musk often blurs the lines between Tesla and his other endeavors—particularly, according to recent revelations, between Tesla and X. The Tornetta court highlighted one such instance: “Musk regularly uses Tesla resources to address projects at other companies he owns. For example, after Musk acquired Twitter, he asked approximately 50 Tesla engineers to ‘volunteer’ to help him evaluate Twitter’s engineering team.” Tornetta, 310 A.3d at 506. Those “volunteers” were not just rank-and-file coders: they included, among other high-profile Tesla employees, Tesla’s director of software development; its director of Autopilot engineering (i.e., self-driving technology); and its senior director of software engineering. Musk also reassigned at least one senior finance employee from Tesla to Twitter on a permanent basis. The companies are also sharing office space—at least two X employees whom Defendants have identified as potential custodians, Lead Client Partners Matt Madrazo and Jonathan Phelps, are reported to be “[w]orking occasionally out of Tesla’s D.C. offices.” Musk has even mulled placing X and Tesla under a common holding company.

Commercial lines, too, have blurred at Musk’s direction. X is spending millions of dollars on goods or services purchased from Tesla, although “Tesla hasn’t said what, exactly, Twitter is buying from the company.” After Musk launched his latest endeavor—xAI—he announced that its artificial intelligence products would “use Twitter data for training” and would then be deployed in Tesla vehicles. X CEO Linda Yaccarino has confirmed this blending is purposeful, telling X staff they are part of a broader “constellation” of companies.

Also, they note that Tesla’s stock price seems to rise and fall, in part, based on whatever nonsense Elon is up to on ExTwitter:

Tesla’s stock price has responded to Musk’s Twitter (and now X) involvement from the start. In particular, in November 2022, Musk was forced to sell nearly $4 billion in Tesla stock to finance his acquisition of Twitter. That sale, which represented a substantial proportion of all Tesla stock, contributed to a 52 percent decline in the stock’s value. Widespread concern among investors about whether Musk could steward Twitter and Tesla at the same time compounded the slump. Similarly, over the six months from April to November 2022, during which Musk was litigating whether he would be required to complete his purchase of Twitter, Tesla stock reacted time and again to news about Musk’s on-again–off-again Twitter deal. In November 2022, Bloomberg published a chart illustrating the remarkably tight correlation between developments related to that deal—particularly Musk’s sale of Tesla stock to finance the acquisition—and Tesla’s stock price

From there, they note that Judge O’Connor has a sizable investment in Tesla stock.

The Court’s most recent publicly available annual financial disclosure is for the 2022 calendar year and was prepared on August 11, 2023. See Ex. A, Financial Disclosure Report for Calendar Year 2022. It reports that the Court purchased stock in Tesla in November and December 2022, and held between $15,001 and $50,000 in such stock, marked to market, at the close of the 2022 calendar year

They’re not asking Judge O’Connor to recuse himself just yet, but they are arguing that Elon should publicly clarify that Tesla is an interested party in order to ask the judge to consider recusal:

This Court’s Local Rules require a plaintiff’s complete and accurate disclosure of interested persons to ensure that judges can make informed recusal decisions. See L.R. 3.1(c), 3.2(e); see also Nieves, 2014 WL 2587577, at 2 & n.5. Federal Rule of Civil Procedure 7.1 imposes a similar, but narrower, disclosure requirement. Recusal decisions, of course, “are matters of utmost public concern.” Steel Erectors, Inc. v. AIM Steel Int’l, Inc., 312 F.R.D. 673, 675 n.3 (S.D. Ga. 2016). As a result, this Court demands strict compliance with L.R. 3.1(c). See, e.g., Cleary v. Am. Airlines, Inc., No. 4:21-CV-135-P, 2021 WL 3721457, at 1–2 (N.D. Tex. Feb. 18, 2021) (dismissing a case as a penalty for the plaintiff’s failure to comply with L.R. 3.1(c)). Here, Defendants seek an order compelling Plaintiff to file an accurate and complete certificate that discloses the interest of Tesla and its shareholders. Overwhelming evidence establishes the existence and substantial nature of that interest. And X’s failure to disclose Tesla’s financial interest in this case has undermined this Court’s ability to evaluate potential conflicts for purposes of determining whether recusal is necessary, particularly given that the Court’s most recent disclosures indicate that it owns Tesla stock.

As the motion notes, Judge O’Connor would appear to have a very real financial conflict of interest, given that ExTwitter’s success seems to boost Tesla stock.

First, Tesla stands to gain if X prevails at trial—and to lose if X does not. Musk has consistently blurred the boundaries between his personal brand, X, and Tesla to such a degree that harms and benefits to X and Musk are often imputed to Tesla by the investing public, as reflected by the reactions of the market. In particular, any damages awarded, and any boost to X’s enterprise value resulting from a favorable verdict, would increase Musk’s bottom line, bolster investor confidence in him and his companies, and decrease Musk’s need to sell off Tesla stock to sustain X. Defeat, in contrast, may cause yet more advertisers to leave X, undermine investor confidence in Musk’s management, and increase the likelihood that X will continue to rely on Musk and Tesla to cover the gaps in its own cashflow

Also, if the case progresses, Media Matters expects that Elon will need to disclose things that could impact Tesla’s stock value:

Second, Musk’s testimony about matters of concern to Tesla’s shareholders—including for example, the extent to which his time and attention are devoted to X at the expense of Tesla—will be central to this case. Public markets are notoriously responsive to everything Musk says or does. His testimony about such matters is sure to affect Tesla’s share price. The Court’s decisions about disputes related to Musk’s testimony—including whether to allow it at all—will thus directly and materially affect Tesla’s public standing and valuation.

Finally, they note that Media Matters intends to make the argument that any advertisers fleeing ExTwitter are doing so because of Elon’s own business incompetence, which could similarly harm Tesla’s value.

Third, Defendants intend as part of their defense to establish that Musk’s behavior and business decisions caused advertisers’ flight from the X platform. Defendants’ evidence to that effect will impeach Musk’s business judgment with respect to all his businesses, including Tesla. As with Musk’s testimony, the Court’s decisions about the limits of that defense and supporting evidence will have plain implications for the value of Musk’s most recognizable brand.

Again, this all seems like a long shot. O’Connor can and likely will reject the request and won’t consider recusal. And while this could tee things up for an appeal, that appeal will go to the 5th Circuit, which seems unlikely to care.

Still, it remains a noteworthy move in at least trying to get the case out from an obviously problematic and biased judge who has already allowed the case to get further than any such case should have gotten.