Washington D.C., USA : The Securities and Exchange Commission (SEC) today charged Elon Musk, CEO and Chairman of Silicon Valley-based Tesla Inc., with securities fraud for a series of false and misleading tweets about a potential transaction to take Tesla private.
On August 7, 2018, Musk tweeted to his 22 million Twitter followers that he could take Tesla private at $420 per share (a substantial premium to its trading price at the time), that funding for the transaction had been secured, and that the only remaining uncertainty was a shareholder vote.
The SEC’s complaint alleges that, in truth, Musk had not discussed specific deal terms with any potential financing partners, and he allegedly knew that the potential transaction was uncertain and subject to numerous contingencies. According to the SEC’s complaint, Musk’s tweets caused Tesla’s stock price to jump by over six percent on August 7, and led to significant market disruption.
“Corporate officers hold positions of trust in our markets and have important responsibilities to shareholders,” said Steven Peikin, Co-Director of the SEC’s Enforcement Division. “An officer’s celebrity status or reputation as a technological innovator does not give license to take those responsibilities lightly.”
“Taking care to provide truthful and accurate information is among a CEO’s most critical obligations,” added Stephanie Avakian, Co-Director of the SEC’s Enforcement Division. “That standard applies with equal force when the communications are made via social media or another non-traditional form.”
The SEC’s complaint, filed in federal district court in the Southern District of New York, alleges that Musk violated antifraud provisions of the federal securities laws, and seeks a permanent injunction, disgorgement, civil penalties, and a bar prohibiting Musk from serving as an officer or director of a public company.
Musk, 47, is one of the highest-profile tech executives to be accused of fraud by the Securities and Exchange Commission. Losing its public face and guiding force would be a big blow for money-losing Tesla, which has a market value of more than $50 billion, chiefly because of investors’ belief in Musk’s leadership.
Shares of Tesla tanked more than 10% in after-hours trading after the SEC sued Elon Musk for allegedly making “false and misleading statements.”
The decline sent Musk’s net worth down nearly $1.1B
Whatever the state of mind Elon Musk was in when he announced he had “funding secured”, it could end up costing almost everything he holds dear. It would be nobody’s fault but his own.
Wall Street veterans – and indeed, anyone with a modicum of knowledge of how the financial markets work – predicted this very scenario the moment those tweets were posted.
Mr Musk is famously an unconventional chief executive, but when it comes to the financial markets, you can’t flout the rules without serious consequences.
It’s clear, from emails contained in the SEC’s filing, that staff at Tesla were caught completely off guard. His head of investor relations asked if the tweets were “legit”. The Nasdaq, confused, halted trading. It all makes Mr Musk unfit to run a public company, the SEC says.
All this because of a tweet sent because Mr Musk thought his girlfriend “would find it funny”.
Mr Musk, who co-founded Tesla and has served as chief executive since 2008, is a divisive figure in the business world, who has inspired passionate fans and critics.
Supporters credit Mr Musk, also the head of the rocket company SpaceX, with pushing the car industry to produce electric cars.
But his critics – including many who have made investments predicting the firm’s stock will fall – argue that Tesla has consistently lost money and struggled to increase its output, repeatedly missing its own targets.
The financial pressure facing Tesla has mounted this year, as it boosts spending to increase production of its newest car.
In recent months, Mr Musk’s own behaviour has also been in the spotlight.
In July, he drew widespread criticism after accusing a British cave diver involved in the rescue of Thai teenagers from a flooded cage of being a child abuser.
The diver later filed a defamation suit.
He also drew attention after an emotional interview with the New York Times, in which he said he worked “120-hour weeks” and took sedatives.
And earlier this month, he smoked marijuana live on the web during a podcast with comedian Joe Rogan.
“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 Kelley Blue Book. “I don’t know how you spin an SEC lawsuit that seeks to remove you from leadership of your own company.”
Musk said he had done nothing wrong. “This unjustified action by the SEC leaves me deeply saddened and disappointed,” he said in a statement. “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 move to bar Musk as an officer of any public company was a rare move for the SEC against the CEO of a well-known firm. Earlier this year it barred blood-testing company Theranos CEO Elizabeth Holmes after she and the company settled fraud charges with the SEC.
She and former Chief Operating Officer Sunny Balwani were subsequently criminally charged by the San Francisco U.S. attorney’s office for fraud.
“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. “This is an outlier. Very few CEOs have ever or would ever engage in this kind of action… That’s why the SEC reacted, to make sure it never becomes a trend.”
Musk has long used Twitter to criticize 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.
Thursday’s lawsuit also seeks to impose a civil fine and other remedies. The SEC does not have criminal enforcement power. It said Musk would remain as Tesla’s CEO until the matter was settled legally.
The lawsuit does not preclude action by the Department of Justice, according to one person with knowledge of the SEC’s thinking. Tesla disclosed earlier this month that it was answering questions from the Justice Department.
“This sucks,” said Ross Gerber, president and CEO at Gerber Kawasaki Inc, which owns 41,000 Tesla shares. “Don’t think this has ever happened to a CEO before. Have no idea where this will go.”