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Tesla’s board backed embattled chief executive officer Elon Musk after the Securities and Exchange Commission (SEC) sued the billionaire for his explosive August tweet about a buyout of the electric-car company he founded.
The SEC is seeking unspecified monetary penalties and, more importantly, will ask a judge to bar Musk from serving as an officer or director of a public company, the agency said in a lawsuit filed in New York.
Musk misled investors by claiming falsely that he had lined up funding for the transaction, the suit alleged.
Tesla and its board “are fully confident in Elon, his integrity, and his leadership of the company,” they said in a joint statement on Thursday.
“Our focus remains on the continued ramp of Model 3 production and delivering for our customers, shareholders and employees.”
The prospect of Musk losing control of Tesla unnerved investors already worried about the company’s ability to produce cars fast enough to start generating profits. They dumped the stock, driving it down 10% in pre-market trading and deepening a selloff that began as the go-private gambit quickly unravelled in August.
“Musk’s statements were false and misleading,” Stephanie Avakian, co-director of the SEC’s enforcement division, said at a press conference in Washington. “They lacked any basis in fact.”
In the lawsuit and at the news conference, the SEC officers went to great lengths to spell out the Tesla CEO’s carelessness and his erratic behaviour - from threatening to “burn” short-sellers who targeted Tesla stock to seeking to amuse his girlfriend, the pop singer Grimes, by weaving in a “marijuana culture” reference to his go-private bid.
(He set a buyout price of $420, a number he landed on in part because it’s code for marijuana consumption.)
Musk, a serial entrepreneur whose name is synonymous with Tesla, called the lawsuit “unjustified” and said it left him “deeply saddened and disappointed”.
“I have always taken action in the best interests of truth, transparency and investors,” he said in a statement. “Integrity is the most important value in my life and the facts will show I never compromised this in any way.”
Tesla, based in Palo Alto, California, wasn’t named in the SEC suit.
The SEC had crafted a settlement with Musk that it was preparing to file on Thursday morning, the Wall Street Journal reported, citing unidentified people familiar with the matter. Musk’s lawyers called SEC lawyers to say they were no longer interested in proceeding with the agreement, it said.
The controversy began when Musk shot off a tweet on August 7 saying he was considering taking the company private and had secured funding for a deal. Tesla shares soared immediately afterward. “In truth and in fact, Musk had not even discussed, much less confirmed, key deal terms, including price, with any potential funding source,” the SEC said in the complaint.
Even before the go-private tweet, the SEC was investigating issues at Tesla including its car sales projections. In addition to the SEC suit, the Justice Department is also looking into whether Musk misled investors, Bloomberg News has reported.
Timeline
On July 31, the SEC said in its complaint, Musk met with three members of a “sovereign wealth fund” at Tesla’s factory in Fremont, California, for approximately 30 to 45 minutes. In that meeting, a member of the fund expressed interest in taking Tesla private. Musk took that to mean he was proposing a “standard” going-private transaction, but the terms were not discussed.
Musk has previously said he was talking to Saudi investors about a plan to take the company private.
On August 2, Musk sent an email to the company’s board of directors, chief financial officer and general counsel with a subject line of “Offer to Take Tesla Private at $420”.
In the email, Musk explained he wanted to sidestep the “constant defamatory attacks by the short-selling community, resulting in great harm to our valuable brand”.
On August 6, Musk discussed a potential takeover with an unnamed private equity executive who has experience with such transactions. That executive told Musk that such a deal was “unprecedented” in his experience.
The next day, Musk tweeted from his mobile phone: “Am considering taking Tesla private at $420. Funding secured.” Shares rose 11% and trading volume spiked. About 12 minutes later, Tesla’s head of investor relations sent a text to Musk’s chief of staff asking, “Was this text legit?”
‘Rationale and structure’
About 20 minutes later, the company’s chief financial officer texted Musk: “Elon, am sure you have thought about a broader communication on your rationale and structure to employees and potential investors. Would it help if [Tesla’s head of communications], [Tesla’s General Counsel], and I draft a blog post or employee email for you?”
Musk responded, “Yeah, that would be great.”
Tesla’s chief financial officer then replied, “Working on it. Will send you shortly.”
Musk didn’t clarify his statement until an August 13 blog post in which he tried to walk back the tweet. On August 24, the company announced that it would not be pursuing a buyout.
“Musk made his false and misleading public statements about taking Tesla private using his mobile phone in the middle of the active trading day,” the SEC said.
“He did not discuss the content of the statements with anyone else prior to publishing them to his over 22 million Twitter followers and anyone else with access to the Internet. He also did not inform Nasdaq that he intended to make this public announcement, as Nasdaq rules required.”
"Musk’s false and misleading statements and omissions caused significant confusion and disruption in the market for Tesla’s stock and resulting harm to investors," the SEC went on to say.
Am considering taking Tesla private at $420. Funding secured.
— Elon Musk (@elonmusk) August 7, 2018
While the filing of the lawsuit wasn’t necessarily surprising, the speed with which it was pulled together shocked many long-time watchers of the SEC, an agency known for being much more deliberate in its actions. Steve Peikin, the SEC’s other co-enforcement director, said the agency felt that the impact would be greatest if the case was brought soon after the alleged misconduct.
“We conducted a swift investigation here,” Peikin said at the news conference. “The investigation was complete and it was time to make a charging decision and we made one."
The request to bar Musk from serving as a corporate officer - which would apply to all publicly traded companies - could force him to try to reach a settlement quickly. Otherwise, he risks leaving investors wondering about the fate of a company whose image has become intertwined with that of its maverick CEO.
Tesla fell 10% to $277 at 5 am New York time in trading before US exchanges opened.
“It’s unusual for a case of this significance to move this quickly, in particular when you’ve got a high-profile individual,” said Robert Long, a former SEC enforcement attorney now in private practice at Bell Nunnally in Dallas. Still, because the investigation was narrowly focused on several tweets, he said the agency “could have conducted its investigation quickly.”
