The highly unusual lawsuit is potentially aimed at gaining leverage so as to force Tesla Inc’s CEO Elon Musk to settle. According to Teresa Goody, CEO of law firm Goody Counsel, who is also a former SEC attorney, most such SEC lawsuits are usually settled without going to a jury trial. Settlements can take some time to reach if the defendant is unwilling to budge on the SEC’s key demands. For investors and Tesla’s board, Elon Musk is Tesla and Tesla is Elon.
In a potential milestone moment for Tesla, the U.S. Securities and Exchange Commission has accused Tesla Inc’s CEO, Elon Musk, of fraud and has sought his removal from his role of the company. The SEC said, Musk had made a series of “false and misleading” tweets about potentially taking Tesla private in August 2018.
Musk, 47, is the public face of Tesla. His removal as CEO of the company would be a devastating blow to the luxury car maker which has a market capitalization of more than $50 billion, chiefly because investors believe in his leadership.
In the lawsuit, the SEC stated, Musk had surprised investors and members of his own team with a series of tweets, which started on August 7, clothing his thoughts which said, he was thinking of taking Tesla private. 20 minutes after this tweet, Tesla’s head of investor relations texted Musk’s chief of staff to clarify whether Musk’s announcement was “legit”.
“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 of Kelley Blue Book, a car research firm.
Musk responded to SEC’s lawsuit saying, he had done nothing wrong.
“This unjustified action by the SEC leaves me deeply saddened and disappointed,” said Musk in a statement. “Integrity is the most important value in my life and the facts will show I never compromised this in any way.”
Tesla’s board has fully backed Musk saying they are “fully confident” in his leadership abilities.
According to a report from the Wall Street Journal, the SEC filed the lawsuit after a proposed settlement with Musk fell apart.
As part of the lawsuit, the SEC said, Musk’s stuck to $420 price per share because it was based on a 20% premium over that day’s closing share price and, this is where it becomes sensitive, because of the number’s slang reference to marijuana. To drive home the point, the SEC has cited emails and text messages between Musk and Tesla’s executives, and has quoted Musk as saying he thought his girlfriend “would find it funny, which admittedly is not a great reason to pick a price”.
The SEC said, Musk had not discussed the $420 figure with any potential funding source before he broached the subject to Tesla’s board in his August 2 email.
The SEC’s investigation into Tesla is ongoing.
According to Teresa Goody, CEO of law firm Goody Counsel, who is also a former SEC attorney, most such SEC lawsuits are usually settled without going to a jury trial. Settlements can take some time to reach if the defendant is unwilling to budge on the SEC’s key demands.
Significantly, the move to remove Musk as CEO of a well-known firm is a rare move by the SEC,
“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.
Privatization move was aimed at short sellers?
This is not the first time that Musk has used Twitter to take pot-shots against short-sellers who were betting against his Tesla.
According to the SEC, since Musk had not discussed taking Tesla private with any funding source, he “knew or was reckless in not knowing” that his tweets of taking Tesla private at $420 a share were false and misleading.
As per the lawsuit, on July 31 Musk had met three representatives from Saudi Arabia’s Public Investment Fund for less than an hour at Tesla’s Fremont plant in California. During this meeting, the lead representative expressed interest in taking Tesla private if the terms were “reasonable,”.
Musk has acknowledged that the meeting lacked discussion of “even the most fundamental terms” of the deal and nothing was set in writing. A week later, Musk tweeted his plan without having discussed the matter either with the fund or with Tesla’s board or looked at the logistics of going private, said the SEC.
Later in that day following Musk’s first tweet, when the head of investor relations was asked whether there was a verbal or written commitment of funding, he replied, “I actually don’t know, but I would assume that given we went full-on public with this, the offer is as firm as it gets,”.
As per the lawsuit, Musk did not communicate with Saudi Arabia’s PIF until three days after his tweets.