Tesla short sellers erased their year-to-date losses Friday as the market reacted to news that the U.S. Securities and Exchange Commission is suing the electric carmaker’s CEO, Elon Musk.
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Short sellers are up $1.27 billion on the day, according to data from S3 Analytics, a financial technology and analytics firm. The shorts are up $643 million for the year, after being in negative territory before the lawsuit was announced.
Short selling entails making a bet that a security will decline in value. If it does the investor earns a profit; if it does not the investor
Tesla shares were trading 12 percent lower as of Friday afternoon.
The SEC is suing Musk for allegedly misleading investors when he wrote in an Aug. 7 tweet that he had “funding secured” to take Tesla private at $420 per share. Short sellers lost $1.3 billion in trading the day after Musk posted the tweet.
Tesla is the most-shorted stock in U.S. equities, with more than $10 billion tied up in short positions.
Musk posted the “funding secured” tweet amid a war of words with Tesla short sellers. The tech executive warned last June that Tesla shorts had “about three weeks before their short position explodes.”
The SEC launched its probe in part to ascertain if Musk tweeted about taking the company private in order to hurt investors with short positions in the company’s shares.
Musk rejected a settlement with the SEC that would have allowed him to pay a fine and remain Tesla’s CEO if he agreed to certain stipulations. On Friday, he tapped Chris Clark, a U.S. attorney who successfully defended Mark Cuban from insider-trading charges, to head up his defense.
Musk could face a lifetime ban from running a publicly traded company.