Musk’s Mess
Tweet opens door to legal — & stock — woes
ELON Musk, the creator and CEO of Tesla, is brilliant. But he may have just run afoul of securities laws in a fairly unbrilliant — but increasingly common — way: an ill-advised tweet.
The question now is whether it’s any more advised for the Securities and Exchange Commission, known as Wall Street’s top cop, to bring a serious case against a corporate executive that would almost certainly cause massive stock-market losses and could severely impair Tesla’s business prospects if Musk faces serious charges.
On the other hand, if the SEC blinks and ignores relevant information to avoid a corporate takedown of the electric-car giant, the pain will be greater down the road for all investors.
The notion among his many admirers that Musk is a Wall Street darling and visionary in the mode of Steve Jobs can’t be understated. Musk got away
with a lot, from errant tweeting to production forecasts that didn’t pan out to a massive stock-market valuation, precisely because of that mystique.
But the Musk mystique might be evaporating. A growing number of sophisticated market players have begun betting that he’s in way over his head, and the company’s stock price will fall as the reality of its business (the company isn’t profitable and it’s unclear when it will be) is fully digested and belched out into a massive selling spree.
Musk isn’t a guy who takes criticism lightly; the investors who have taken issue with Telsa — short sellers who make money when stocks dive — have been the target of his angry comments and tweets for months. CEOs generally shy away from such imbroglios (and, of course, Twitter wars) for the simple reason that anything they say (or tweet) can move the stock and they can be held responsible for whether it’s true or false by prosecutors and, of course, the SEC.
Musk apparently didn’t get the memo. Last week, he tweeted: “Am considering taking Tesla
private at $420. Funding secured.”
Shares of Tesla rose sharply and the shorts were being squeezed, having to cover their positions at big losses. Musk had seemingly outwitted his foes once again.
Then reality set in. The plans announced on Twitter to go private surprised at least some members of the company’s board. (Musk later said he held private conversations with the Saudi sovereign fund.) Worse, the “funding secured” statement — which normally means papers are drawn up between Tesla and its funding sources, like the Saudis’ — didn’t seem to comport with reality.
Statements like these are generally presented in formal filings filled with legalese and wiggle room. But a far bigger worry for Musk and Tesla’s board of directors is whether his funding was secured when he said it was.
It doesn’t look like it. A couple of days later, Musk tried to clarify his statement, which only dug himself a deeper hole — and shares began to sink. He said in a blog post that after his conversations with the Saudi’s “I left ... with no question that a deal with the Saudi sovereign fund could be closed, and that it was just a matter of getting the process moving.”
The Saudis own a 5 percent stake in Telsa, so it’s not unusual for them to be interested in a privatization plan. And company
sources tell me the “process of going private” is now taking place, which would include funding the deal.
But that doesn’t mean his statement was true at the time he tweeted it.
Shares took another hit on Wednesday after I reported the SEC is ramping up its investigation into all of this, issuing subpoenas. An informal inquiry has suddenly turned into a formal one. That means Tesla and Musk can face anything from fines to a ban from securities business for the offending party — which is why shareholders are selling the stock.
Musk maintains he didn’t break the law. And I’m told the SEC will be loath to hammer Tesla and its shareholders by charging Musk with a severe violation of securities laws, possibly upending any deal that would benefit the markets and employees. That doesn’t mean the commission won’t follow the evidence, but it does mean it might find a way to let Musk slide even if the evidence points to him making a false statement. For example: a small personal fine and/or a consent decree stopping Musk from posting on Twitter.
The SEC might not want to take a wrecking ball to a company or the market, but neither does it want to look as if its very existence is pointless.