Weird Money: The details of Musk's shareholder lawsuit are hysterical

Welcome to Weird Money, a column written by me, Jack Raines, where I discuss the most interesting and, more importantly, weirdest stories I've seen in business and markets.

Everything about Tesla’s shareholder lawsuit is hysterical

In two days, Elon Musk will find out if he’s $50 billion richer, pending the results of Tesla’s shareholder vote to reinstate his 304 million share compensation package. The reason for this vote is that in 2018, an investor named Richard Tornetta sued Musk and Tesla’s board over the lucrative pay package, claiming, among other things, that it was a breach of Musk’s fiduciary duty. What I somehow missed, until yesterday, was the size of Richard Tornetta’s Tesla position when he sued Musk. From Reuters:

“An investor named Richard Tornetta sued Musk and several Tesla directors in 2018, claiming Musk's pay package was unfair. While Tornetta held just nine Tesla shares, the deal had also been criticized by major pension fund California State Teachers’ Retirement System (CalSTRS) and proxy advisory firms, who viewed the deal as too large.”

Tornetta, who was the sole plaintiff listed on the lawsuit, held a Tesla position worth ~$2,700 (adjusted for splits) when he sued to challenge a $50 billion pay package in 2018, and the judge ultimately ruled in his favor. Most instances of shareholder activism stem from fund managers, like Bill Ackman or Carl Icahn, with millions (or billions) of dollars at stake in the company. Tornetta, on the other hand, is a drummer and marketer who held a four-figure position in the stock. An investor with a $2,700 stake winning an eventual $50 billion lawsuit has to be the largest outcome-per-dollar-invested ever, right? However, this isn’t the best part of the story. Check out how Tornetta’s attorneys are looking to be paid. From Bloomberg:

“Tesla Inc. urged a Delaware judge to reject an unusual proposal by the lawyers who defeated Elon Musk’s $56 billion compensation package and now want their legal fees paid with about $5.6 billion of stock in the electric-car maker.

Instead, Tesla argued in a court filing late Friday that the lawyers should be entitled to just $13.6 million after successfully challenging the company’s decision to award Musk what would have been the largest executive payout ever.”

I love this. Richard Tornetta’s lawyers successfully argued, in 2019, that there was a breach of fiduciary duty by Musk and Tesla’s board due to the excessive “fair value” of Musk’s compensation, which led a Delaware judge to deny Musk’s motion to dismiss the lawsuit. From the 2019 judge’s opinion, 

“Plaintiff alleges the Award has a potential value that is orders of magnitude higher than what other highly paid CEOs earn. According to Plaintiff, the “fair value estimate of the Plan” is either $2.6 billion or $3.7 billion, dwarfing the compensation of “the world’s most successful technology executives.

Five years ago, before Tesla went on its meteoric run, the estimated value of Musk’s potential $50 billion pay package was around $3 billion, and Tornetta’s lawyers convinced a judge that this was too high. Now, those same attorneys are asking for $5.6 billion in stock compensation:

“Lawyers for shareholder Richard Tornetta, who brought the lawsuit, argued that they should receive more than 29 million Tesla shares as compensation from the company rather than cash. They argued that the unique plan would link their award directly to the benefit created in challenging the Musk stock award without taking money off Tesla’s balance sheet.”

I love the argument that 29 million Tesla shares (as opposed to $13.6 million in cash) will save shareholders money because it won’t remove money from Tesla’s balance sheet. I mean, on one hand, they did stop a 300 million share dilution, and 29 million shares is only 10% of that, so I guess the logic is: “As a fee for preventing a really big dilution event, we’re taking a much smaller one.” However, asking for $5.6 billion in legal fees after arguing that $3 billion in CEO compensation was too high is hilarious. But who knows! The answer is always “no” until you ask.

Costco is a car company

I have previously written about how the slowdown of the EV adoption curve in the US has left GM and Ford, which invested billions into EV development, in a tough spot, and now the big automakers are testing out novel methods to sell more cars. What is GM’s hot new idea? Sell them at the grocery store. From CNBC:

“General Motors has a not-so-secret weapon when it comes to getting U.S. consumers into its new all-electric vehicles: Costco Wholesale. The Detroit automaker said it’s increasingly using the retail giant’s Costco Auto Program for EVs as it expands its portfolio from niche vehicles to mass-market segments with vehicles such as the Chevrolet Equinox and Chevrolet Blazer EVs….

Costco Auto has facilitated more than 500,000 vehicle sales annually over the past five years on average, according to Jay Maxwell, Costco Auto Program general manager responsible for strategic partnerships.

That volume, like that of many of Costco’s products, is a lot. It amounts to at least 3% of all vehicles sold in the U.S. each year and more than the annual sales of large publicly traded dealer groups such as Lithia Motors and AutoNation…”

Maybe I’m behind on this, but Costco sells half a million cars each year, outselling AutoNation, a $7 billion publicly traded automotive retailer? That’s insane. Apparently, their auto business is a hit with Costco members. Costco prearranges competitive prices, it only works with approved dealers who are obligated to honor the Costco price, and now, GM is offering $1,000 discounts, on top of Costco’s prices, for several of its EVs through July.

I don’t know how much of its $35 billion investment GM will recoup from selling discounted EVs through Costco, but if you’re a consumer, paying $60 for a Costco membership to save thousands on an auto purchase feels like a wild deal, no?

India is speedrunning America’s stock market prosperity

As poorer countries grow more prosperous, they begin to mirror their wealthier peers. A few examples of this are transportation infrastructure expansion, sanitation improvement, poverty reduction, cleaner energy development, and the emergence of stable, liquid financial markets. By this last metric, India may now be the most important economy on the planet. From The Financial Times:

“Trading volumes of options on Indian equities have eclipsed those on Wall Street stocks, as retail investors pile into short-term bets on the country’s surging benchmark index. The notional value of options on India’s Nifty 50 index has grown to an average of about $1.64tn a day this year compared with average volumes on the S&P 500 index of $1.44tn, according to Bank of America data…

Armed with cheap trading apps and encouraged by online influencers, millions of young, increasingly affluent Indians now play the stock market in search of outsized gains. Zero-day options have become by far the most popular type of derivative among the retail investor community since they were first made available in 2021. The recent bull market has only boosted these derivatives’ appeal.”

When the pandemic started, many of my American friends and I, armed with our fresh stimmy checks, threw thousands of dollars at weekly and monthly SPY puts, betting on the market crashing. It’s only natural that India, the fastest growing economy in the world, is now following suit, with Indian stock market gurus selling stock picks to their paid WhatsApp communities. And, of course, 90% of retail options traders are losing money.

You can, unironically, make the argument that retail participation in speculative options trading is an excellent measurement of the economic status of a country. If young people can afford to throw their money at zero-day options that will probably expire worthless, it shows that 1) your country has liquid capital markets, and 2) consumers have the cash to put in the market in the first place. I’m not saying that options speculation causes economic prosperity, but it may indicate it.

Bill Gross: stamp connoisseur 

One of my favorite things to do is learning what billionaires do with their money. Jeff Bezos decided to invest in a space company, Bill Gates is working to eradicate polio, and Bill Gross collected stamps. From The Financial Times:

“Gross, who built the most complete collection of US stamps in history, is putting it for sale piece by piece on Friday and Saturday at the Robert A Siegel auction house. Presale estimates suggest the sale could bring $15mn to $20mn and set a record for a US stamp collection.

His interest in stamps comes from his mother, who bought stamps in the 1930s and 1940s hoping they would eventually pay for his college education. But when Gross tried to sell them, he was offered a small fraction of what she had paid. That got him interested in identifying and buying stamps that would be a better investment. “My mom had a good idea, but she didn’t buy the right stamps,” he said. So Gross set out to prove that stamps, like fine wine and art, could be an investment as well as a hobby.

He hired a philatelic adviser, Charles Shreve, and would scan auction catalogues while watching American football games. He liked the ritual of pasting his purchases into books late at night. “Collecting by my definition is to create order out of disorder. It appealed to my personality,” Gross said. In recent years, Gross has sold more than $50mn worth of stamps, including a record-breaking collection of rare UK printings.”

I imagine that, if your wealth came from building a tech company, you might invest in art or wine as a passion project, with little concern for the ROI of your investments. But if you made your billions as a bond trader who exploited market inefficiencies in the 80s, you would naturally want to make money on your luxury alternative asset investments as well, hence Gross’s decision to hire a “philatelic” adviser to help evaluate his investments.

While Gross underperformed in the bond market in the late 2010s, retiring from active fund management in 2019, it’s worth considering that maybe his lackluster performance had less to do with a changing interest rate environment and more to do with Gross shifting his focus from US treasuries to US stamps, because he’s been crushing it in the latter.