Musk Settles Fraud Suit With SEC, Steps Down as Tesla Chairman



After Tesla CEO Elon Musk tweeted which funding has been secured for a $70 billion go-private attempt, it appeared he might have only pulled off a massive coup — or could be facing an SEC investigation.  

It was be the latter.

Musk chose to repay with the Securities Exchange Commission on Saturday, based on reports.

He'll also pay a $20 million fine and resign as chairman for 3 years. Tesla will pay a $20 million good, get some fresh government rules and the addition of two separate directors. Musk will stay on as CEO and also maintain a seat on the board.

Musk's decision comes two days after announcing that he would not settle with the SEC — though he paid the price using a slightly harsher punishment, based on The New York Times. As per the settlement Musk”neither admitted nor denied misleading investors under the civil fraud charge,” which suggests he can't refuse wrongdoing in a later time.

The majority of SEC civil activities lead to settlement and even regulatory ousters are rare. 

Tesla stock has dropped 13% because the SEC lawsuit.   

The 420″funding secured” tweet 

This was a civil fraud charge that concentrated entirely on Musk's”funding secured” go-private tweet from past month and whether it succeeds shareholders.  

The SEC suit showed no formal deal at any particular price was ever made to Musk or the board.

According to Musk in the SEC document, the 420 price is based on a 20 percent premium on that day’s final share price (which would be $419), round upwards to $420 since Musk”had recently learned about the number’s significance in marijuana culture.”  According to the SEC document, Musk thought his girlfriend could discover the 420 figure”funny, which admittedly is not a great reason to pick a price. ”

It's that amateur level of criminality that allowed the SEC to get this narrowly focused fraud claim filed in a relatively quick two months. It was a straight-forward case.

Board supports Musk

Tesla's board of directors issued a statement on Thursday evening supporting Musk: “Tesla and the board of directors are fully confident in Elon, his integrity, and his leadership of the company, which has resulted in the most successful U.S. auto company in over a century. Our focus remains on the continued ramp of Model 3 production and delivering for our customers, shareholders and employees. ”

A board of directors' foremost fiduciary responsibility is to act in the best interest of its shareholders. Tesla's board members are Brad Buss, Robyn Denholm, Ira Ehrenpreis, Antonio Gracias, James Rupert Murdoch, the CEO of Twenty-First Century Fox, and Linda Johnson Rice, Chairman and CEO of Johnson Publishing Company.

The company was not charged with fraud.

The officer and director bar (sounds better than it is)

The SEC suit sought relief against Musk in the form of”orders of disgorgement, along with prejudgment interest, civil penalties, and also an officer and director bar against Musk.”

The standard for an O&D bar is when an officer or director of any publicly held firm exhibits “unfitness” to serve. 

Typically, the SEC seeks permanent O&D bars or five-year durations and has expanded the punishment to include outside directors”with considerably less involvement in the business ’therefore daily surgeries.” In other words, board members can be barred for ignoring red flags in governance.   

Luis Aguilar, a commissioner at the SEC, noted in a 2012 speech,”I've seen how difficult defendants struggle to avoid officer and director bars. It is but one of those sanctions they fear the most, which is exactly what exactly makes it one of the most effective sanctions out there.” 

What now? 

Expect fewer tweets from Musk.

This suit was a civil claim and leaves open the possibility that the SEC is launching other investigations on more complicated issues or that the Department of Justice will get involved. Other Musk activities the SEC might possibly investigate include the SolarCity acquisition, solar roof tiles and Model 3 run rates.    

Tesla is going to need capital to grow. SEC investigations inhibit the ability to raise capital in public markets.

Robert Mueller, back when he was director of the FBI in 2012, stated that securities fraud”presents a fantastic challenge, since our free market economy and, indeed, our whole way of life, are built on trust — trust in the markets, and even trust in our fellow citizens. Fiscal fraud warrants that confidence, with serious impacts: impacts such as squandered taxpayer dollars, high insurance premiums, and increased industry costs — to say nothing of the injury to the sufferers themselves.”   


Read a list of the SEC charges against Musk here.

Read a glimpse of Tesla's privatization saga here.


Buy Tickets for every event – Sports, Concerts, Festivals and more

Discover more from Teslas Only

Subscribe now to keep reading and get access to the full archive.

Continue reading