On August 7, 2018, Elon Musk, the CEO of Tesla, tweeted to his 22 million Twitter followers that he could take Tesla private at $420 per share. There turned out to be little to no truth behind that public announcement. Regardless, Tesla’s stock price rose 6% on increased volume.
It took only a month and half for the SEC to bring its case against him. The SEC announced the filing of an enforcement action against Musk because:
Musk’s false and misleading public statements and omissions caused significant confusion and disruption in the market for Tesla’s stock and resulting harm to investors.
The SEC’s complaint alleges that Musk hadn’t discussed specific deal terms with any potential financing partners. He did have some discussions, but none about price.
“Taking care to provide truthful and accurate information is among a CEO’s most critical obligations.” – Stephanie Avakian, Co-Director of the SEC’s Enforcement Division.
It seems clear that Musk screwed up. It’s not clear that he did so for his own financial gain. If he had sold a bunch of stock right after the Tweet, it’s likely the Department of Justice would be involved and bringing criminal charges. The SEC complaint does ask for disgorgement and civil penalties. Elon has cash, so he can find the likely penalty in his couch cushions.
But the big claim for relief is to bar Musk 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 means no more CEO of Tesla.
There are few CEOs who are more closely identified with their companies that Musk and Tesla. We had Gates and Microsoft, and Jobs and Apple. I suppose Buffett and Berkshire-Hathaway are there.
I don’t know much about Tesla and don’t know if there is a bench of talent to fill in. The market doesn’t think so. The stock went down sharply after the charges were filed. It dropped 13% losing over $7 billion in shareholder value.
Just as quickly, Musk decided to settle with the SEC rather spend his time distracted by a lengthy battle. After all, there was no allegation of profit-making or conspiracy to manipulate. It was just a stupid off-the-cuff statement. Rumor has it that Musk was close to settling last week, but pulled out and decided to fight. The market’s reaction over the weekend must have made him reconsider.
The SEC settled for Musk relinquishing his Chairman role, but he can stay on as CEO. The Chairman must be independent and the board must add two additional independent directors. That seems like some better corporate governance.
The SEC required a new committee of independent directors to put in place a additional controls and procedures to oversee Musk’s communications. On November 5, 2013, Tesla filed a Form 8-K disclosing that Musk’s Twitter account would be used to disseminate material information about the company.
To sum things up, the SEC imposed better governance on Tesla and pulled Musk’s Twitter privileges. That’s a good thing. The CEO should not have unfettered communication privileges with the public. You need accuracy and truth in corporate communication. Musk’s Twitter account was labeled as official corporate communication.
Sources:
- SEC Compliant Against Elon Musk
- Settlement Agreement
- Elon Musk Charged with Securities Fraud for Misleading Tweets
- Elon Musk Settles SEC Fraud Charges; Tesla Charged With and Resolves Securities Law Charge
- Tesla’s Biggest Dive Since 2013 Sends Musk an Urgent Message by Matt Robinson and Benjamin Bain
- The SEC/Musk/Tesla Settlement: The Dawning of a New Era of SEC Internet Enforcement by John Reed Stark
- Elon Musk to pay $20 million, step down as Tesla chair in SEC settlement
