Tesla, Elon Musk Each Pay $20M SEC Fines, To Step Down As Chairman

by Ike Obudulu Posted on September 29th, 2018

Washington D.C., USA : The Securities and Exchange Commission (SEC) announced today that Elon Musk, CEO and Chairman of Silicon Valley-based Tesla, Inc., has agreed to settle the securities fraud charge brought by the SEC against him last week. The SEC also today charged Tesla with failing to have required disclosure controls and procedures relating to Musk’s tweets, a charge that Tesla has agreed to settle. The settlements, which are subject to court approval, will result in comprehensive corporate governance and other reforms at Tesla—including Musk’s removal as Chairman of the Tesla board—and the payment by Musk and Tesla of financial penalties.

According to the SEC’s complaint against him, Musk tweeted on August 7, 2018 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 alleged that, in truth, Musk knew that the potential transaction was uncertain and subject to numerous contingencies. Musk had not discussed specific deal terms, including price, with any potential financing partners, and his statements about the possible transaction lacked an adequate basis in fact. According to the SEC’s complaint, Musk’s misleading tweets caused Tesla’s stock price to jump by over six percent on August 7, and led to significant market disruption.

According to the SEC’s complaint against Tesla, despite notifying the market in 2013 that it intended to use Musk’s Twitter account as a means of announcing material information about Tesla and encouraging investors to review Musk’s tweets, Tesla had no disclosure controls or procedures in place to determine whether Musk’s tweets contained information required to be disclosed in Tesla’s SEC filings. Nor did it have sufficient processes in place to that Musk’s tweets were accurate or complete.

Musk and Tesla have agreed to settle the charges against them without admitting or denying the SEC’s allegations. Among other relief, the settlements require that:

  • Musk will step down as Tesla’s Chairman and be replaced by an independent Chairman. Musk will be ineligible to be re-elected Chairman for three years;
  • Tesla will appoint a total of two new independent directors to its board;
  • Tesla will establish a new committee of independent directors and put in place additional controls and procedures to oversee Musk’s communications;
  • Musk and Tesla will each pay a separate $20 million penalty. The $40 million in penalties will be distributed to harmed investors under a court-approved process.

“The total package of remedies and relief announced today are specifically designed to address the misconduct at issue by strengthening Tesla’s corporate governance and oversight in order to protect investors,” said Stephanie Avakian, Co-Director of the SEC’s Enforcement Division.

“As a result of the settlement, Elon Musk will no longer be Chairman of Tesla, Tesla’s board will adopt important reforms —including an obligation to oversee Musk’s communications with investors—and both will pay financial penalties,” added Steven Peikin, Co-Director of the SEC’s Enforcement Division. “The resolution is intended to prevent further market disruption and harm to Tesla’s shareholders.”

The SEC’s investigation was conducted by Walker Newell, Brent Smyth, and Barrett Atwood and supervised by Steven Buchholz, Erin Schneider, and Jina Choi in the San Francisco Regional Office and Cheryl Crumpton in the SEC’s Home Office.

Statement Regarding Agreed Settlements with Elon Musk and Tesla By SEC Chairman Jay Clayton

Today, the Commission announced agreed settlements with Elon Musk and Tesla. Mr. Musk is the Chairman and CEO of Tesla and is the company’s largest stockholder, owning approximately 22% of its outstanding shares. The details of the agreed settlements, which remain subject to court approval, are available here. This matter has been widely followed by our Main Street investors and I believe comment[1] on several matters is appropriate:

This past Thursday, after the completion of a thorough investigation and following dialogue with representatives of Mr. Musk and Tesla, the Commission filed an action against Mr. Musk in federal district court. I fully supported the filing of the action.

I also fully support the settlements agreed today and believe that the prompt resolution of this matter on the agreed terms, including the addition of two independent directors to the Tesla board and the other governance enhancements at Tesla, is in the best interests of our markets and our investors, including the shareholders of Tesla.

This matter reaffirms an important principle embodied in our disclosure-based federal securities laws. Specifically, when companies and corporate insiders make statements, they must act responsibly, including endeavoring to ensure the statements are not false or misleading and do not omit information a reasonable investor would consider important in making an investment decision.

Speaking more broadly about the SEC’s enforcement efforts that involve the misconduct of officers, directors and companies, it often is the case that the interests of ordinary shareholders — who had no involvement in the misconduct — are intertwined with the interests of offending officials and the company. For example, corporate fines often are financed with funds that could otherwise benefit shareholders, and the skills and support of certain individuals may be important to the future success of a company. At the Commission, the interests of ordinary investors are at the front of our minds and, in matters involving misconduct, we seek to serve those interests to the extent practicable while also ensuring that we remediate and deter misconduct. In addition, holding individuals accountable is important and an effective means of deterrence. I believe the settlements agreed today reflect these multiple interests and considerations.

In closing, I commend the Division of Enforcement for their prompt, professional and thorough work on this matter, and I thank the staff in the Division of Corporation Finance and the many other members of the Commission, including my fellow Commissioners, who devoted substantial time and attention to this matter.

[1] This statement is my own and does not necessarily reflect the views of any other Commissioner or the Commission.

EARLIER : Tesla CEO Elon Musk Charged With Securities Fraud

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.”


Ike Obudulu

Ike Obudulu

Versatile Certified Fraud Examiner, Chartered Accountant, Certified Internal Auditor with an MBA in Finance And Investments who has both worked for and consulted with some of the world's largest companies on main street and wall street in over 20 countries, Ike brings his extensive reporting and investigations experience to bear on his role as Chief Editor.

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