The Securities and Exchange Commission charged Elon Musk with fraud on Thursday, alleging that the Tesla chief executive's tweets about taking the electric-car company private at $420 a share were “false and misleading.” It asked a federal court to force Musk out of Tesla’s leadership and ban him from running any public company.
The action applies yet more pressure to Tesla’s board of directors, long criticized as timid and personally too close to Musk. The company faces an array of challenges, including a botched rollout of its Model 3 sedan, an increasingly severe shortage of cash, and the erratic behavior of its CEO, who this month appeared on a comedian’s podcast and smoked a marijuana joint. Scores of executives have bolted from Tesla for other companies in recent months.
On Thursday evening the board defended 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.”
The board did not state its metric for auto company success.
Musk already faces a lawsuit for lobbing unsubstantiated accusations of pedophilia and child rape at a critic on Twitter, and Tesla has been hit with lawsuits by shareholders stung by its stock-price gyrations.
But on Thursday it was clearer than ever that Musk’s high-wire act could come crashing down.
“Elon Musk and Tesla have a history of skirting traditional operational standards and spinning negative press. But there’s no spinning this one,” said Karl Brauer, a market analyst with Kelley Blue Book.
The SEC suit was filed Thursday after stock markets closed. Tesla shares then dived nearly 14% in after-hours trading, to about $265.
At the least, the board now must decide what happens to Tesla without Musk should he be found guilty of the charges. The U.S. Justice Department has also opened a criminal investigation of Tesla and Musk, according to Bloomberg.
In its complaint, filed in federal court in Manhattan, the SEC asks the court to prohibit Musk “from acting as an officer or director” of a publicly traded company. It also asks the court to force Musk to pay back “any ill-gotten gains” received as the result of his slew of Aug. 7 tweets.
Musk’s statements — including the assertion that he had “funding secured” to take Tesla private — “were premised on a long series of baseless assumptions and were contrary to facts that Musk knew,” the suit alleges. It warned that “unless restrained and enjoined,” Musk “will violate again.”
The Tesla CEO and chairman rejected that idea. “This unjustified action by the SEC leaves me deeply saddened and disappointed,” Musk said in a statement. “I have always taken action in the best interests of truth, transparency and investors. Integrity is the most important value in my life, and the facts will show I never compromised this in any way.”
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,” according to the suit.
On Aug. 7 before the tweet, Tesla stock opened at $343.83 a share. It soared nearly 13% after Musk’s go-private tweet, then settled down, closing that day at $379.57 with a gain of 11%.
The stock fell in the coming days as it became clear that Musk did not have a deal to finance taking Tesla private. No committed investors were ever identified. The shares slid to $263.24 by Sept. 7 before rising again, some analysts say, in anticipation of possible profits and positive cash flow in the third quarter.
In a news conference Thursday, Stephanie Avakian, co-director of the SEC enforcement division, said that as chairman and CEO of a public company Musk must be "scrupulous with the truth" and that his celebrity does not exempt him from federal securities law. The commission made clear that Twitter, in Musk’s case anyway, can be considered a direct channel of communications to investors. Its complaint noted that the company said in a 2013 filing it intended to use Musk’s Twitter account “as a means of announcing material information to the public about Tesla” and encouraged investors to follow the account. Musk had 22 million Twitter followers the day he tweeted that funding was secured.
The SEC also filled in some blanks for Musk followers. For instance, it confirmed speculation as to how Musk chose the $420 target price to go private.
“According to Musk, he calculated the $420 price per share based on a 20% premium over that day’s closing share price because he thought 20% was a ‘standard premium’ in going-private transactions,” the suit says. “This calculation resulted in a price of $419, and Musk stated that he rounded the price up to $420 because he had recently learned about the number’s significance in marijuana culture and thought his girlfriend ‘would find it funny, which admittedly is not a great reason to pick a price.’”
To file a lawsuit just two months after Musk’s go-private tweet is a remarkably fast timeline for the SEC, an agency that often brings cases years after alleged fraud took place. Last month, for instance, the agency filed fraud charges against SeaWorld and its former CEO relating to statements and filings from 2013 and 2014. Earlier this year, the agency filed fraud charges against now-defunct blood testing company Theranos and founder Elizabeth Holmes, alleging fraudulent statements made years ago.
The Wall Street Journal reported that the SEC had reached a settlement of the charges with Musk, but his lawyers called Thursday morning to back out.
The lawsuit disappointed Tesla backers and confirmed the suspicions of its critics.
Ross Gerber, CEO of the Gerber Kawasaki wealth management firm in Santa Monica and a longtime Tesla investor and Musk champion, said Musk “certainly brought it on himself” in an email. “We are saddened that at this crucial time for Tesla that this distraction will affect the company,” he said. “It is clear the board needs to step up and find a [chief operating officer] immediately.”
Bob Lutz, a former General Motors vice chairman and a longtime critic of Tesla, declared Musk is “toast.”
He “is running out of cash, and he CAN NOT raise capital while under investigation,” Lutz said in an email. “He is being hounded by suppliers for being in arrears. He has major debt payments coming due.”
Even before the SEC filing, Tesla’s Wall Street bulls, such as Morgan Stanley analyst Adam Jonas, were beginning to sour on the company. In a note to investors Thursday morning, Jonas wrote: “Tesla has not proven it can sustainably fund its ambitious plans without continued access to outside capital. And for a variety of reasons, the stock market is beginning to seriously question whether the fountain of outside capital will keep flowing.”
Indeed, Tesla has relatively low levels of cash and working capital, and more than $1 billion in debt coming due by March. Capital expenditures have been trimmed back to preserve cash, leading some stock analysts to wonder where the money will come from for ambitious projects such as a planned crossover vehicle and semi-truck. The company has not raised new equity or long-term debt since last year.
Tesla originally said it would turn out about 7,700 Model 3 electric sedans a week in 2018. In fact, significant production of the vehicle did not begin until July, and Bloomberg’s production tracker says the company is barely building 4,000 a week.
Meanwhile, customers are complaining about delivery delays and a wide range of quality problems, including mismatched paint, body panels, dead batteries and cars that have to be repeatedly rebooted to get them running, like an old-fashioned Windows computer.
The company is set to announce quarterly production and sales figures next week and financial results a month later. Musk has said Tesla will post a rare profit for the current quarter and become “cash flow positive.”
If Musk is forced to leave Tesla, he would be far from the only prominent chief executive to recently exit under a cloud from the company he is synonymous with.
Earlier this year, John Schnatter quit as chief executive and chairman of the Papa John’s pizza chain after making several inflammatory remarks about NFL protests and in company-imposed sensitivity training. And Travis Kalanick resigned as chief executive of Uber Technologies last year after complaints about sexual harassment, sexism and other kinds of unacceptable behavior at the ride-hailing company.
Those two companies, at least, have been able to survive the departures — so far.
Times staff writer James Rufus Koren contributed to this report.