Elon Musk is Sued by SEC Over Securities Fraud

The Securities and Exchange Commission has sued Tesla CEO Elon Musk for securities fraud after his aborted attempt to take the company private earlier this summer. Moving with unusual speed, the SEC said in a lawsuit filed in New York that Musk misled investors by claiming falsely that he had lined up funding for the transaction. Musk later claimed that Saudi Arabia’s sovereign wealth fund was in talks with Tesla to potentially fund the effort, but eventually abandoned the idea on August 24th. The SEC subpoenaed Tesla just one week after Musk’s original tweet. The SEC said it’s seeking unspecified monetary penalties and, more importantly, will request that a judge bar Musk from serving as an officer or director of a public company. “In truth and in fact, Musk had not even discussed, much less confirmed, key deal terms, including price, with any potential funding source,” prosecutors write in the complaint. Specifically, they say Musk’s “funding secured” tweet was “false and misleading.” Prosecutors say that Musk’s subsequent statements were false and misleading, too. In the lawsuit and at the news conference, the SEC officers went to great lengths to spell out the Tesla CEO’s carelessness and his erratic behavior -- from threatening to “burn” short-sellers who targeted Tesla stock to seeking to amuse his girlfriend, the pop singer Grimes, by weaving in a “marijuana culture” reference to his go-private bid. (He set a buyout price of $420, a number he landed on in part because it’s code for marijuana consumption.) Musk called the lawsuit “unjustified” and said it left him “deeply saddened and disappointed.” “I have always taken action in the best interests of truth, transparency and investors,” he said in a statement. “Integrity is the most important value in my life and the facts will show I never compromised this in any way.” In a statement released late Thursday, Tesla and the Palo Alto, California-based company’s board said they are fully confident in Musk, his integrity and leadership. Tesla wasn’t named in the SEC suit.

Prosecutors note that Musk’s tweets on August 7th sent Tesla’s stock price up, creating immediate value for investors, but that the resulting chaos in the following weeks ultimately did those shareholders harm.

“We believe our actions have the most impact when they’re brought most closely in time to the events that bring them forth,” said Steven Peikin, co-director of the SEC’s enforcement division, in a press conference today.

“His actions were, for a public company CEO, way out of line,” Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware, tells The Verge. “Everything in the last couple months has been very disturbing for investors. The rules didn’t seem to apply, and the SEC believes they did, or should.”

Musk has been battling short sellers — traders who bet Tesla stock will decline —on his Twitter account for a while, and this is part of the basis for the SEC’s complaint. By August 18th, the SEC notes, more than $13 billion shares of Tesla were shorted. And Musk hates shorts. The SEC cites just two of his anti-short tweets (“Oh and uh short burn of the century comin soon. Flamethrowers should arrive just in time,” from May; “They have about three weeks before their short position explodes” from June), though there are plentyof other taunts to choose from.

Pressure from the shorts was cited by Musk as a reason to take Tesla private, the SEC notes in its complaint. On August 2nd, Musk emailed Tesla’s board of directors, head of finance, and general counsel to explain his reasoning for taking Tesla private. In the email, Musk wrote that being public “[s]ubjects Tesla to constant defamatory attacks by the short-selling community, resulting in great harm to our valuable brand,” the SEC complaint says.

“This reinforces the idea that maybe he was trying to manipulate the price,” says Chester Spatt, a former chief economist for the SEC who is now a distinguished senior fellow at MIT’s Sloan School of Management. According to both Spatt and Elson, the SEC moved unusually quickly in filing its suit. “The issues in some respects may have been relatively plain vanilla,” Spatt says. “Basically, a lot of it related to his tweets.”

Cases like this usually take a long time, according to Elson, and a likely outcome is that Musk reaches a settlement with the SEC that involves payment of a fine. “But who knows? Maybe he’ll fight it all the way through,” he says. The Wall Street Journal reported that in fact the SEC and Musk did reach a settlement — but Musk pulled out this morning. After that, the SEC filed as quickly as it could.

Tesla’s board should be nervous, both Spatt and Elson say. According to Elson, Tesla board members should expect to be deposed. Spatt says that the board should begin planning for succession. “They need to recognize that they can’t simply rely on Musk,” Spatt says.

There may be consequences for Musk’s other companies too. If the SEC does bar Musk from being an officer of a publicly traded company, that may mean that SpaceX, Boring Company, and NeuraLink can’t go public with Musk there. And at least some of the premium in Tesla’s stock has been related to Musk’s position as CEO — so if he must step down, that is potentially trouble for Tesla, too.

The SEC is a civil agency, and typically doles out fines to companies and executives who are involved in rule violations. But the commission can remove a person’s ability to serve as director or officer of publicly-traded companies, a route it recently took with Theranos CEO Elizabeth Holmes. The Justice Department has reportedly also opened a criminal investigation into Musk’s tweets about the attempt to take Tesla private.

Source: The Verge, Bloomberg. You Might Also Like: WhatsApp Cofounder Says: I Sold My Users’ Privacy to Facebook.