Elon Musk sued by SEC
On Thursday Sept. 27, the Securities and Exchange Commission (SEC) slammed Tesla CEO Elon Musk with a lawsuit for making “false and misleading” statements to the company’s investors. The suit is based on a controversial tweet from Musk on Aug. 7 about taking the company private at $420 per share, which he ended with “funding secured.”
Days later, Musk shared details about his plan in a blog post on Tesla’s website, claiming that the Saudi Arabian sovereign wealth fund had approached him repeatedly about taking the company private and that there was “no question that a deal with [the Saudis] could be closed.” While others on Wall Street were puzzled by a potential move that could cost $72 billion, Musk said he was being advised by investment firm Silver Lake and notable investment bank Goldman Sachs.
According to the SEC, however, the funding was never secured. In the lawsuit, the agency alleges that “Musk had not even discussed, much less confirmed, key deal terms, including price, with any potential funding source.” During a news conference, SEC co-director of enforcement Steven Peikin accused Musk of arriving “at the price of $420 by assuming a 20 percent premium of what Tesla's then existing share price (was), and then rounding up to $420 because of the significance of that number in marijuana culture, and his belief that his girlfriend would be amused by it.”
The allegations against Musk are extremely serious. The lawsuit invokes Rule 10b-5 of the Exchange Act, the same rule used by the SEC in complaints against insider trading and market manipulation. Most importantly, the agency is demanding an undisclosed amount in monetary fines from Tesla and is asking a federal judge to prevent Musk from serving as an officer or director of a public company in the future.
John Coffee, a professor at Columbia Law School, thinks Musk could end up with a lifetime ban. “This is a nuclear threat to force him to settle,” he told CNN. “The penalty really falls on Tesla shareholders.”
Indeed, Tesla stocks dropped more than 11 percent in after-hours trading on Thursday, and were trading at $269 per share early on Friday. The price target was $305 before the SEC announced their lawsuit.
The reaction from Wall Street has been swift. Financial services company RBC Capital Markets said the accusations against Musk add “further uncertainty to the Tesla story.” “In our view, this adds more drama to an already volatile stock,” RBC analyst Joseph Spak wrote to Business Insider. Similarly, JPMorgan analyst Ryan Brinkman said, “Beyond this ‘key man risk’ concern (which we believe is of vital importance) we also see a number of other risks, including the potential for decreased confidence in the company on the part of investors, consumers, and suppliers.”
Despite the criticism, Tesla’s board of directors remains positive with Musk, declaring that they “are fully confident in Elon, his integrity, and his leadership of the company.” In a separate statement, Musk called the SEC lawsuit “unjustified,” adding that he felt “deeply saddened and disappointed.” He continued, “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.”
However, two days later, Musk relented, agreeing to step down as Tesla's board chairman within 45 days. Although he will remain CEO, Musk will be barred from seeking reelection for three years and must pay a $20 million fine to the SEC. The company will pay an additional $20 million for failing to control Musk's voice online.
In a press release, the SEC said that "the $40 million in penalties will be distributed to harmed investors under a court-approved process." While Musk and Tesla declined to comment, the settlement will allow the company to temporarily escape government scrutiny as they focus on improving their production capacity for the upcoming Model 3 rollout.