Elon Musk, Tesla settle with SEC, Musk to step down as chairman

Elon Musk, Tesla settle with SEC, Musk to step down as chairman

SEC lawsuit had sought to oust Musk as chairman and CEO following his failed attempt to take the company private, telling investors that he had "funding secured."

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October 1, 2018
By Robert Schoenberger

Editor’s note: This story has been updated to reflect Elon Musk’s settlement with the U.S. Securities and Exchange Commission, reached Saturday. The original version of the story follows the settlement information.

Cleveland, Ohio – Shortly after filing a lawsuit against Tesla Chairman and Chief Executive Officer Elon Musk, accusing him of market manipulation, the U.S. Securities and Exchange Commission settled with Musk and his company for $40 million, Musk’s ouster as chairman of the company, and agreements to put people in place to monitor the CEO’s communications with investors.

The SEC had sought to remove Musk as chairman and CEO in its suit, saying he misled markets when he announced he had “funding secured” to take Tesla private in August. That deal fell apart weeks later, and the funding turned out to have been an unofficial verbal deal with Saudi Arabia’s sovereign wealth fund.

In a detailed filing (details below), SEC investigators spelled out how quickly Musk jumped from a meeting with the Saudi fund to his go-private announcement. The commission sought unspecified financial penalties and a ban from Musk serving as an officer in any publicly traded company – effectively banning him from serving as Tesla’s chairman or CEO.

In the settlement, Musk agreed to resign as chairman and be replaced with an independent chairman. Another two independent directors will also join the board, and a committee of independent directors will develop controls and procedures to oversee Musk’s communications.

Musk and Tesla will each pay $20 million, $40 million total, in fines – Musk for violating communications standards and Tesla for not having adequate protections in place to prevent him from doing so. SEC officials will distribute the funds to investors who lost money while Tesla’s stock fluctuated in the days following the go-private announcement.

“Tesla’s board will adopt important reforms – including an obligation to oversee Musk’s communications with investors – and both will pay financial penalties,” said Steven Peikin, co-director of the SEC’s Enforcement Division. “The resolution is intended to prevent further market disruption and harm to Tesla’s shareholders.”

While the SEC complaint is the first criminal charge facing Musk for his Twitter communications, it’s not the first time he has gotten in trouble for the use of social media. He is also facing a civil lawsuit from a British diver after Musk, on Twitter, accused him of being a pedophile.

Original story below:

The U.S. Securities and Exchange Commission (SEC) sued Tesla CEO Elon Musk for making misleading statements to investors, seeking to dislodge him from his leadership role at the electric car company.

The charges stem from Tesla’s wild August ride following a Musk tweet that he was considering taking the automaker private at $420 per share and that he had “funding secured.”

In the weeks that followed, company stock shot up and plummeted, based on the likelihood of such a deal. By the end of August, Tesla had abandoned go-private talks after it became clear that funding was tentative and that going private was going to be extremely complicated.

Musk says he acted in the interests of shareholders and says he will fight the SEC suit. Tesla’s board of directors released a statement supporting the CEO.

In August, Musk eventually disclosed that his funding was to come from Saudi Arabia’s sovereign wealth fund, but regulators paint a picture of how shaky that funding source was.

In late July, fund officials met with Musk and discussed taking Tesla private and establishing a Tesla plant in Saudi Arabia. But Musk never discussed exact terms such as how much money the fund would be willing to provide, what percentage of the company it would own, regulatory processes, board approvals, or whether to Saudi plant was a condition of the deal or just a suggestion.

Nothing was put on paper, agreed to, or finalized beyond a discussion of intent.

The SEC’s suit says Musk then informed the board of the potential to go private, and board members expressed concern about what such a deal would mean for existing investors. The board gave Musk permission to discuss the potential deal with large investors in Aug. 3. He told regulators that at the time, considered the likelihood of completing such as deal to be 50-50.

On Aug. 7, without having any substantive discussions with the board, investor, or the Saudi fund, Musk sent out his “funding secured” tweet. He did not speak to representatives with the Saudi fund again until Aug. 10.

Even the potential price for the Tesla go-private deal caught regulators eyes. As the SEC suit says:

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. 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.”

About a week after the tweet, news reports emerged that the Saudi fund wasn’t fully committed to the deal, leading to a blog post from Musk a day later saying he was still working on the deal’s financing – a far cry from the initial “funding secured” tweet.

As the SEC suit states:

Musk’s statements that funding was “secured” and investor support was “confirmed” were false and misleading because, in reality, Musk had no “secured” or “confirmed” commitment from any source to provide any amount of funding. In addition, he had never even discussed taking Tesla private at a price of $420 per share with the Fund or any other potential investor.

The suit further states:

Musk’s statements were premised on a long series of baseless assumptions and were contrary to facts that Musk knew. Between the July 31 meeting with representatives of the Fund and his August 7 misstatements, Musk knew that he (1) had not agreed upon any terms for a going-private transaction with the Fund or any other funding source; (2) had no further substantive communications with representatives of the Fund beyond their 30 to 45 minute meeting on July 31; (3) had never discussed a going-private transaction at a share price of $420 with any potential funding source; (4) had not contacted any additional potential strategic investors to assess their interest in participating in a going-private transaction; (5) had not contacted existing Tesla shareholders to assess their interest in remaining invested in Tesla as a private company; (6) had not formally retained any legal or financial advisors to assist with a going-private transaction; (7) had not determined whether retail investors could remain invested in Tesla as a private company; (8) had not determined whether there were restrictions on illiquid holdings by Tesla’s institutional investors; and (9) had not determined what regulatory approvals would be required or whether they could be satisfied.

The suit seeks to fine Musk and to bar he from serving as an officer in any publicly traded a company, a standard SEC punishment that would effectively bar the founder from serving as Tesla’s CEO.

About the author: Robert Schoenberger is the editor of Today's Motor Vehicles and a contributor to Today's Medical Developments and Aerospace Manufacturing and Design. He has written about the automotive industry for more than 18 years at The Plain Dealer in Cleveland, Ohio; The Courier-Journal in Louisville, Kentucky; and The Clarion-Ledger in Jackson, Mississippi.

rschoenberger@gie.net