Elon Musk Walks Away From Deal With SEC At The Last Minute

Fredrick Soto
September 30, 2018

The USA's Securities and Exchange Commission has filed a lawsuit against Elon Musk, alleging a tweet in which he claimed he'd secured funding for a buyout of Tesla at $420 per share was "false and misleading". The shorts are up $643 million for the year, after being in negative territory before the lawsuit was announced.

Meanwhile, Tesla shares continued to plummet in after-hours trading, falling over 15 percent from its daily high of $312 to its lowest denomination of $265.

Musk's role at Tesla is uncertain now that the SEC is seeking to bar him from serving as an officer and director of a public company, following his August tweet about having "funding secured" to take Tesla private at $420 a share.

Tesla's balance sheet also is an issue, with the company carrying $9 billion of net debt.

Aside from the drama surrounding Musk's tweet saying Tesla may go private - and his decision less than three weeks later to stay public - the company has been grappling with the departure of several top executives, most recently its vice presidents of global supply chain management and worldwide finance.

The suit alleges that Musk lied to investors when he announced on social media on August 7, he tweeted, "Am considering taking Tesla private at $420".

But Gorman said the Saudi fund's reported interest in a take-private deal was enough to make Musk's statements legal, if ill-advised. On Friday, he tapped Chris Clark, a US attorney who successfully defended Mark Cuban from insider-trading charges, to head up his defense.

The fraud case comes amid a squall of disquieting tweets and other troubling disclosures that have raised questions about whether Musk should remain at the helm of Tesla, a company valued at $46 billion. That's putting intense pressure on Musk and the board to stop the bleeding. That's potentially crucial progress for a company that has been vague about when it'll be capable of building that many complete Model 3s, the first electric vehicle it's tried to mass-manufacture. "This unjustified action by the SEC leaves me deeply saddened and disappointed", Musk said in a statement to CNBC. Stock prices rose almost nine percent following Musk's announcement of securing privatization funding, resulting in the SEC opening an investigation to ensure that the CEO was in accordance with his legally required fiduciary duties.

Thomas Gorman, a partner at the law firm Dorsey & Whitney and former SEC senior counsel, said Musk's statements, which he made on Twitter, weren't smart from a business perspective, but that doesn't necessarily mean Musk committed fraud.

Tesla's shareholders have to assess what will happen to the company if Mr. Musk is not the CEO.

Under the terms of the deal, Musk and Tesla would have had to pay a nominal fine, and he would not have had to admit any guilt.

"Despite this, we think the company will survive", he said.

All of this suggests that investors may want to steer clear of Tesla shares.

Tesla has racked up a massive debt load as it's poured money into mass production of the Model 3, the company's first auto intended for a mainstream market. "The problem for investors is that an investment in Tesla is an investment in Elon Musk", he said.

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