Musk’s fans just took a big hit as Tesla shares tank on news
For investors, the Securities and Exchange Commission’s lawsuit against Elon Musk, CEO of Tesla, was a warning.
It takes a swipe at the market’s embrace of charismatic CEOS. As investors absorbed the gravity of the case, shares of Tesla dropped by more than 12 percent in trading Friday.
The suit centers on Musk’s statements — via Twitter — in August about taking Tesla private, a transaction that did not take place. “As a result of Musk’s false and misleading statements and material omissions, investors who purchased Tesla stock in the period after the false and misleading statements but before accurate information was made known to the market were harmed,” said the suit, which was filed Thursday.
The commission is trying to show that Musk never got a firm or detailed offer to take the company private.
In a statement distributed by Tesla, Musk said: “This unjustified action by the SEC leaves me deeply saddened and disappointed. I have always taken action in the best interests of truth, transparency and investors.” It’s possible that Musk fights and wins this case.
There are three takeaways for investors from the commission’s action.
President’s stock market cops mean business
The commission’s suit is harsher than some legal experts had expected. Some worried that financial regulators put in place by President Donald Trump would take a softer line enforcing the laws that apply to U.S. corporations. But in this case, the commission is not only demanding that Musk give up any ill-gotten gains and pay penalties; it also wants to bar him from being an officer or director of a public company.
The action was also brought with surprising speed. The commission decided to go ahead with it after Musk refused to negotiate a settlement, according to a person familiar with his thinking.
The regulators may have moved ahead after Musk backed out because they concluded they have strong evidence in this particular case. As a result, the action may not signify too much about the overall stance of the commission under Trump.
Still, pursuing this case against a CEO with a big fan base and a reputation for groundbreaking entrepreneurship carries significant risks for the agency. A victory for Musk would be a major defeat for the commission.
Après Musk, le déluge?
Tesla’s shareholders have to assess what will happen to the company if Musk is not the CEO. Sometimes the departure of the boss at a troubled company means the emergence of other problems as the new guard tries to clean house. Changes in corporate leadership in the past have often been followed by bruising financial hits and disruptive moves to overhaul the company that don’t always pay off.
Tesla shareholders may hope that the company ends up like Uber, whose co-founder, Travis Kalanick, left last summer. Like Musk, Kalanick defined his company but was also accused of bringing it turmoil. But Uber was under less financial pressure than Tesla. And as a private company, Uber can try to heal itself outside the glare that comes from being on the public markets.
Beware the superstar CEO
Tesla, worth roughly $50 billion on the stock market, is hemorrhaging cash. General Motors, with more or less the same market value, brought in $17 billion of cash last year. True, the stock market’s bears, short-sellers, have placed big bets on a collapse of Tesla’s stock. But they have not had much success. Musk has convinced many investors that Tesla has an amazing future.
After Friday’s drop to $267, Tesla’s shares are still changing hands at nearly 100 times the earnings Wall Street analysts expect the company to make next year, a valuation that exceeds that of many successful, fast-growing technology companies.
Musk’s legal problems may now complicate Tesla’s efforts to alleviate a potential cash crunch. The company may need to find over $1 billion to repay convertible debts that come due in the next few months. Analysts have expected Tesla to raise fresh money by selling new shares. But the legal cloud over the company could make it harder to quickly raise capital in the market.
The commission’s suit may go down as a famous reminder to investors that wildly bullish statements from CEOS should be treated with skepticism. But Tesla’s run reveals that investors’ willingness to believe in a good story can still grip the U.S. stock markets.