Elon Musk was charged with fraud and sued by the SEC, the U.S. Securities and Exchange Commission, on suspicion of manipulating Tesla’s stock price. According to the complaint, he lied when he tweeted that he had “guaranteed funding” to get the company off the stock exchange. The CEO says that this is an “unjustified action”.
The SEC wants Musk to be fined, without specifying a value; and wants to prohibit you from acting as director or CEO of a publicly traded company (that is, on the stock exchange). Tesla shares are down 12% on Friday (28).
Musk’s tweet is “false and misleading”, says SEC
On August 7, Musk published a tweet saying that he intended to withdraw Tesla from the stock exchange, and that he had secured financing to buy TSLA shares for $ 420 each.
The SEC says that he lied. “Musk had not even discussed, let alone confirmed, the main terms of the agreement, including price, with any potential source of financing,” prosecutors write in the complaint.
Worse, “Musk knew he had never discussed a private transaction at $ 420 per share with any potential source of funding.” Therefore, the SEC says that the tweet saying “guaranteed financing” is “false and misleading”.
Am considering taking Tesla private at $ 420. Funding secured.
– Elon Musk (@elonmusk) August 7, 2018
Days later, Musk explained that a Saudi Arabian sovereign wealth fund would be involved in the share buyback. Then, he dropped the idea on August 24, claiming that money was no problem; however, the transition would take too long, and shareholders indicated that they did not want Tesla to go public.
The CEO calculated the price of $ 419 by adding a 20% premium to the quote for the day, and decided to round it up to $ 420 to make a reference to marijuana. He “thought his girlfriend [a cantora Grimes] would find it funny, which admittedly is not a great reason to choose a price, ”writes the SEC.
Musk may have manipulated stock price
The suspicion is that Musk wanted to manipulate the stock price to hurt short sellers, that is, investors who bet against a company. The SEC notes that $ 13 billion in Tesla shares are in a “short” position. The CEO has criticized these investors on Twitter.
An email to Tesla’s board reinforces the idea that Musk is manipulating the stock price. He wrote on August 2 that having publicly traded “subject Tesla to constant defamatory attacks by the short selling community, resulting in great damage to our valuable brand.”
On August 7, when Musk announced “guaranteed financing”, Tesla’s shares went from $ 341 to $ 380. This increase creates a loss for short sellers, who only make money when the stock falls. The SEC says Musk’s misleading tweets led to a “significant market disruption” and ended up hurting its shareholders – the price is currently at $ 270.
SEC tried to make a deal, but Musk refused
According to the Wall Street Journal, the SEC wanted to make an out-of-court settlement and publicly announce it last Thursday. However, the CEO’s lawyers called the agency at the last minute saying “they were no longer interested in pursuing the deal” because that “would not be sincere” for Musk, a source tells CNBC.
In a statement, Musk says that “this unjustified action by the SEC makes me deeply sad and disappointed … integrity is the most important value in my life, and the facts show that I have never compromised this in any way.”
Tesla’s board of directors also defended the CEO, saying he trusts “Elon, his integrity and his leadership, which has resulted in the most successful US auto company in more than a century.”
The SEC has previously prevented other executives from serving as a director or CEO in publicly traded companies: this is the case with Elizabeth Holmes, founder of Theranos, also accused of fraud (but for other reasons).
If that punishment were really applied, it would be a problem for Tesla and other companies, like SpaceX and Boring Company: they could only debut on the stock exchange without Musk as CEO. He remains in office for the time being: it will be up to the federal court in New York to decide whether the SEC’s charges are really valid.