September 28, 2018

Wow! SEC Brings Charges Against Tesla’s Elon Musk for Tweets!

That was fast. Yesterday, the SEC announced the filing of an enforcement action against Tesla CEO Elon Musk arising out of his ill-considered tweetstorm & subsequent comments about a potential “going private” transaction during the first two weeks of August. The SEC’s complaint makes it clear that Enforcement isn’t messing around – this is a Rule 10b-5 securities fraud case, unaccompanied by any non-scienter based allegations.  Here’s an excerpt from the SEC’s press release:

On August 7, 2018, Musk tweeted to his 22 million Twitter followers that he could take Tesla private at $420 per share (a substantial premium to its trading price at the time), that funding for the transaction had been secured, and that the only remaining uncertainty was a shareholder vote.

The SEC’s complaint alleges that, in truth, Musk had not discussed specific deal terms with any potential financing partners, and he allegedly knew that the potential transaction was uncertain and subject to numerous contingencies. According to the SEC’s complaint, Musk’s tweets caused Tesla’s stock price to jump by over six percent on August 7, and led to significant market disruption.

Co-Director of Enforcement Stephanie Avakian added that taking care to provide truthful & accurate information is one of a CEO’s “most critical obligations” – and one that applies equally when communications are made via social media instead of through traditional media. Speaking of issues surrounding the use of social media – be sure to check out our new “Social Media Handbook.”

Musk’s predicament calls to mind another automotive industry visionary with whom he’s been compared – Preston Tucker. Check out this article for an overview of Tucker’s innovative “Tucker Torpedo” & the fallout from the SEC’s 1948 investigation into his company. Of course, let’s not get carried away – Tucker’s story had elements of tragedy to it, but Musk’s is pure farce.

Upping the Ante: SEC Seeks a D&O Bar Against Musk!

Elon Musk is one of the world’s wealthiest people, so financial penalties that might prove ruinous to anyone else may not provide that much of a sting. However, the potential raised by this portion of the SEC’s prayer for relief would definitely leave a mark:

Ordering that Defendant be prohibited from acting as an officer or director of any issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act or that is required to file reports pursuant to Section 15(d) of the Exchange Act.

That’s a D&O bar, and it’s not unusual for the SEC to seek one –  in fact, this ’Compliance & Enforcement’ blog says that they are sought in more than 70% of cases involving individual defendants.

But let’s face it, Elon Musk isn’t Joe Bagadonuts – we’re talking about a guy who figured out how to land a rocket standing up. There are few CEOs more closely identified with their companies than Elon Musk, and some question whether Tesla could survive without him.  That means the SEC’s decision to pursue a bar raises the stakes for Musk, Tesla, and Tesla’s investors.

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John Jenkins