The SEC has officially had it with Elon Musk’s behavior. The Securities and Exchange Commission has announced a lawsuit against Musk based on statements the CEO made on Twitter on August 7. In an infamous pair of tweets, Musk first teased the idea of taking Tesla private at a significantly higher stock price before following that missive with “Funding secured.”
As the SEC notes, Musk followed that tweet up with a series of additional statements, including one that expressed hope that all current investors would stick with Tesla and a statement that shareholders could either sell at $420 or go private. He then tweeted:
Investor support is confirmed. Only reason why this is not certain is that it’s contingent on a shareholder vote. https://t.co/bIH4Td5fED
— Elon Musk (@elonmusk) August 7, 2018
It is illegal for a CEO to knowingly make material statements that misrepresent aspects of a company’s business or its current state of affairs. Musk’s initial tweet claiming “Funding secured” and his follow-up message to that effect created a material misperception of the state of affairs at Tesla. As the SEC writes:
When he made these statements, Musk knew that he had never discussed a going private transaction at $420 per share with any potential funding source, had done nothing to investigate whether it would be possible for all current investors to remain with Tesla as a private company via a “special purpose fund,” and had not confirmed support of Tesla’s investors for a potential going private transaction. He also knew that he had not satisfied numerous additional contingencies, the resolution of which was highly uncertain, when he unequivocally declared, “Only reason why this is not certain is that it’s contingent on a shareholder vote.” Musk’s public statements and omissions created the misleading impression that taking Tesla private was subject only to Musk choosing to do so and a shareholder vote.
Musk’s tweets had a demonstrated impact on the stock price, which rose by more than 6 percent and closed up 10.98 percent compared with the previous day. The SEC seeks to bar Musk from serving as an officer of the company or remaining on its board.
According to the SEC, Musk’s conversations with the representatives of a sovereign wealth investment fund were so rudimentary as to barely qualify as discussion. While there was a literal expression of interest on the part of the investors in taking Tesla private and a meeting on July 31, there was no discussion of terms, conditions, target stock prices, ownership percentages, acquisition premiums, available liquid capital, regulatory hurdles, or Tesla’s board approval process. According to Elon, this July 31 meeting was the most specific discussion he had with his potential investors. At the end of the meeting, the representatives of the sovereign wealth investment fund (the Fund) told Musk his organization would agree to “reasonable” terms. The lawsuit notes:
Musk acknowledged that no specific deal terms had been established at the meeting and that there was no discussion of what would or would not be considered reasonable. Nothing was exchanged in writing, and there was no discussion of confidentiality. Musk did not communicate with representatives of the Fund again about a going-private transaction until August 10, three days after his August 7 statements.
Musk discussed the topic with his own board on Aug. 3 but took none of the typical steps he would’ve been expected to take before the Aug. 7 announcement. He didn’t communicate with the Fund to confirm the $420 share price would be acceptable, didn’t discuss the $420 target with any additional sources of funding, didn’t communicate a more specific plan to the BoD, didn’t retain any advisors to assist with the evaluation, didn’t investigate whether his small shareholders could remain investors if Tesla was private, and didn’t investigate whether there were regulatory hurdles standing in Tesla’s way or if they could be satisfied. Apart from a short conversation with a private equity fund partner on August 6, Musk didn’t push ahead to seriously investigate the possibility. Not, at least, until he launched his tweets on August 7.
The SEC’s case is straightforward: Musk made statements on Twitter that were materially false and misleading. None of the work he implied had been done to secure funding for taking Tesla private had even been started. The lawsuit steps through additional statements by Musk that it alleges were either known to be false or that Musk was reckless in not knowing his statements were false. Many of these are related to various statements Musk made about how small investors would be treated; Musk has acknowledged that he was completely wrong in his assumption that there was a way to retain small investors.
According to The Wall Street Journal, the SEC originally intended to settle the issue with Tesla. Tesla’s lawyers called the SEC last Thursday morning to tell the organization it was no longer interested in settling the case, leading to the formal complaint.
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