Tesla without Musk at the wheel? It’s what the SEC now wants

Tesla without Elon Musk at the wheel? To many of the electric car maker’s customers and investors that would be unthinkable. But that’s what government securities regulators now want to see.

The Securities and Exchange Commission has asked a federal court to oust Musk as Tesla’s chairman and CEO, alleging he committed securities fraud with false statements about plans to take the company private.

The agency says in a complaint filed on Thursday that Musk falsely claimed in an August 7 statement on Twitter that funding had been secured for Tesla Inc. to go private at $420 per share, a substantial premium over the stock price at the time.

An SEC press release says the agency asked the US District Court in Manhattan for a “bar prohibiting Musk from serving as an officer or director of a public company.” It also is asking for an order enjoining Musk from making false and misleading statements along with repayment of any gains as well as civil penalties.

Ousting Musk, who has a huge celebrity status with more than 22 million Twitter followers, would be difficult and could damage the company. He’s viewed by many shareholders as the leader and brains behind Tesla’s electric car and solar panel operations.

The stock market shuddered at the prospect. Shares of Tesla plunged nearly 12 per cent in extended trading Thursday.

Elon values integrity the most

“Corporate officers hold positions of trust in our markets and have important responsibilities to shareholders,” Steven Peikin, co-director of the SEC’s Enforcement Division, said in a statement. “An officer’s celebrity status or reputation as a technological innovator does not give licence to take those responsibilities lightly.” Musk, in a statement issued by Tesla, called the SEC action unjustified.

“I have always taken action in the best interests of truth, transparency and investors. Integrity is the most important value in my life and the facts will show I never compromised this in any way,” the statement said.

The complaint alleges that Musk’s tweet harmed investors who bought Tesla stock after the tweet but before accurate information about the funding was made public.

Peter Henning, a law professor at Wayne State University and a former SEC lawyer, said it’s the first fraud case involving use of social media by the CEO of a public company. Musk and Tesla didn’t fully disclose details of the plan in the August 7 tweet or in later communications that day as required, he noted.

“You can’t make full disclosure in 280 characters,” he said, referring to the length limit of a tweet.

Joseph Grundfest, a professor at Stanford Law School and former SEC commissioner, said Musk will likely want to settle before trial so that he could conceivably stay on as CEO, with some constraints such as prohibiting him from making public statements without supervision. But Musk also could agree to step down as CEO and instead take another title, such as chief production officer.

The Wall Street Journal, citing people familiar with the matter, reported that Musk had been close to settling with the SEC but that he and his lawyers decided at the last minute to fight the case. Tesla did not respond to a request for comment on the report.

Grundfest also said that the challenge for the SEC is to “appropriately discipline Musk while not harming Telsa’s shareholders.” According to the complaint, Musk met with representatives of a sovereign investment fund for 30 to 45 minutes on July 31 at Tesla’s Fremont, California, factory. Tesla has identified the fund as Saudi Arabia’s Public Investment Fund, which owns almost 5 per cent of the company.

Fund representatives expressed interest in taking Tesla private and asked about building a factory in the Middle East, Musk told the SEC. But at the meeting, there was no discussion of a dollar amount or ownership stake for the fund, nor was there discussion of a premium to be paid to Tesla shareholders, the complaint said.

Musk told the SEC that the lead representative of the fund told him he would be fine with reasonable terms for a go-private deal.

“Musk acknowledged that no specific deal terms had been established at the meeting and there was no discussion of what would or would not be considered reasonable. Nothing was exchanged in writing,” the complaint stated.

The SEC alleged in the 23-page complaint that Musk made the statements using his mobile phone in the middle of a trading day. That day, Tesla shares closed up 11 percent from the previous day. Musk has said that he posted the go-private tweet while driving to the airport and that no one reviewed it.

The statements, the complaint said “were premised on a long series of baseless assumptions and were contrary to facts that Musk knew.” Later in the month, Tesla announced that the go-private plan had been scrapped.

In its complaint, the SEC said that Musk’s statements hurt short sellers, investors who borrow a company’s stock betting that it will fall. Then they buy the shares back at a lower price and return them to the lenders, pocketing the profit.

In August, more than USD 13 billion worth of Tesla shares were being “shorted” by investors, the complaint said, as the stock was under pressure due to questions about Tesla’s finances and Musk’s erratic behaviour.

Elon is Tesla, Tesla is Elon

Musk, 47, is the public face of Tesla and losing him would be a big blow for the money-losing car maker which has a market value of more than $50 billion, chiefly because of investors' belief in Musk's leadership.

“Elon is Tesla and Tesla is Elon and that's great when Elon is scoring touchdowns and grand slams but not so great when there are negative things tied to him,” said Karl Brauer, executive publisher at car research firm Kelley Blue Book.

The SEC's lawsuit, filed in Manhattan federal court, caps a tumultuous two months set in motion on Aug. 7 when Musk told his more than 22 million Twitter followers that he might take Tesla private at $420 per share, with “funding secured.”

On Aug. 24, after news of the SEC probe had become known, Musk blogged that Tesla would remain public, citing investor resistance. The Wall Street Journal reported on Thursday that the SEC filed the lawsuit after a proposed settlement with Musk fell apart. The SEC did not immediately respond to a request for comment late on Thursday.

In its lawsuit, the SEC said Musk calculated the $420 price per share based on a 20 per cent premium over that days closing share price and because of the number's slang reference to marijuana. The lawsuit, which cites emails and text messages between Musk and Tesla executives, quoted Musk as saying he thought his girlfriend “would find it funny, which admittedly is not a great reason to pick a price.”

After sending the initial tweet, his chief financial officer asked Musk if he wanted a blog post or employee email drafted to explain his tweet, to which Musk responded, “Yeah, that would be great.”

Musk had not discussed the $420 figure with any potential funding source before he broached the subject to Tesla's board in an Aug. 2 email, the SEC said. The SEC said its investigation into Tesla is ongoing. The move to bar Musk as an officer of any public company was a rare move for the SEC against the CEO of such a well-known firm.

The lesson for CEOs is that the rules apply to everyone including highly successful visionaries, said Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware. Teresa Goody, CEO of law firm Goody Counsel and a former SEC attorney, said the SEC had acted quickly but that most such SEC lawsuits are usually settled without going to a jury trial. Settlements can take some time to reach if the defendant is unwilling to budge on the SECs key demands.

Recklessness?

The SEC lawsuit comes as Tesla has been struggling to deliver its new Model 3 sedan, which is key to the company's future profitability, after a long series of production issues and delays. Musk has long used Twitter to criticise short-sellers betting against his company, and already faced several investor lawsuits over the Aug. 7 tweets, which caused Tesla's share price to gyrate.

According to the SEC, Musk “knew or was reckless in not knowing” that his tweets about taking Tesla private at $420 a share were false and misleading, given that he had never discussed such a transaction with any funding source.

The SEC said Musk met for less than an hour with three representatives of Public Investment Fund, at the company's Fremont, California, plant on July 31 during which the lead representative for the Saudi Arabian sovereign wealth fund expressed interest in taking Tesla private if the terms were ”reasonable,” according to the lawsuit.

Musk acknowledged the meeting lacked discussion of “even the most fundamental terms” of the deal and nothing was set in writing, according to the lawsuit. He did not communicate with the fund representatives again until three days after his tweets.

Besides creating “significant confusion and disruption in the market for Tesla's stock and resulting harm to investors,” the SEC said that Musk did not consult with Tesla's board, other employees or outside advisors about the tweets before sending them. Even the company's head of investor relations was blindsided by the tweets, whom the SEC said had to text Musk's chief of staff to ask whether they were “legit.”

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