Billionaire Elon Musk's boasts on Twitter that he had “funding secured” to take his electric vehicle company Tesla private—made after believing himself the target of unfair practices by short-selling traders—has landed him in hot water with federal regulators and it could lead to his departure from top positions at any of his publicly traded companies.
In a suit filed in the U.S. District Court for the Southern District of New York on Thursday, the Securities and Exchange Commission said Musk should have known that his Aug. 7 tweets about potentially taking the company public were reckless, since he didn't “have an adequate basis in fact for his assertions.”
“When he made these statements, Musk knew that he had never discussed a going-private transaction at $420 per share with any potential funding source, had done nothing to investigate whether it would be possible for all current investors to remain with Tesla as a private company via a ‘special purpose fund,' and had not confirmed support of Tesla's investors for a potential going-private transaction,” regulators claim in their complaint.
In a statement, Musk pushed back against the allegations.
“This unjustified action by the SEC leaves me deeply saddened and disappointed,” he said. “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.”
As regulators noted, “investors reacted” to Musk's statements. By the close of trading on Aug. 7, Tesla's stock price was up nearly 11 percent from the previous day. Yet the reality was that Musk “had not even discussed, much less confirmed, key deal terms, including price, with any potential funding source.”
The decision set off a chain reaction of uncertainty, questions and confusion. According to the SEC, Tesla's head of investor relations sent Musk a text message 12 minutes after the tweet to ask, “Was this text legit?”
According to federal regulators, Musk's choice of a price suggested that perhaps it was not. His initial calculation of a per-share price with a 20 percent premium came to $419. According to regulators, “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.'”
Shortly after 2 p.m. that day, Nasdaq, which requires a 10-minute heads-up on public statements about corporate events like going private, halted the trading of all Tesla shares.
In the hours after the tweet, Musk appeared to attempt to contain the fallout over his public statement, offering up other pieces of information through tweets, and responding on the social media platform. In a companywide email, he defended the move, while detailing a possible process for investors, while noting that the proposal was only possible “through a vote of our shareholders.”
It was later revealed that no actual details had been presented to the board. By Aug. 24, Musk announced the company was staying public, noting that “the majority of shareholders” had told him not to proceed.
“This was the first time that Musk publicly disclosed the obstacles to allowing current Tesla investors to remain invested if Tesla went private and thus corrected his multiple previous misstatements that any going-private transaction would allow all current shareholders to remain invested,” the SEC claimed.
On the next trading day, Tesla stock prices ultimately fell to a point 15 percent below where they closed the day of Musk's initial tweet.
In a statement, Steven Peikin, co-director of the SEC's Enforcement Division, said the celebrity status or reputation as a “technological innovator” doesn't give a corporate officer “license to take those responsibilities lightly.”
“Corporate officers hold positions of trust in our markets and have important responsibilities to shareholders,” Peikin said.
On top of possible civil penalties and disgorgement, federal regulators are seeking that Musk be barred as an officer or director of a publicly traded company, opening the potential for his removal from Tesla and other companies.