complaint filed by the Securities and Exchange Commission came
after a last-minute decision by Mr. Musk and his lawyers to
fight the case rather than settle the charges.
filing by the SEC in federal court in Manhattan threatens to
deal a severe blow to the Palo Alto, Calif., electric car
maker. Its brand and Mr. Musk are closely intertwined, and
analysts have said the company’s roughly $50 billion market
value is driven by Wall Street’s appreciation for Mr. Musk’s
vision and skill as an innovator.
wasn’t named in the suit as a defendant, but the SEC is
seeking to bar Mr. Musk, Tesla’s largest shareholder and its
top executive, from serving as an officer or director of any
U.S. public company. Tesla shares, which have been under
intense pressure amid questions about the firm’s financial
strength and Mr. Musk’s behavior, tumbled 9.9% to $277 in
after-hours trading Thursday on Nasdaq.
unjustified action by the SEC leaves me deeply saddened and
disappointed,” Mr. 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.”
SEC had crafted a settlement with Mr. Musk—approved by the
agency’s commissioners—that it was preparing to file Thursday
morning when Mr. Musk’s lawyers called to tell the SEC lawyers
in San Francisco that they were no longer interested in
proceeding with the agreement, according to people familiar
with the matter. After the phone call, the SEC rushed to pull
together the complaint that it subsequently filed, the people
case ranks as one of the highest-profile civil
securities-fraud cases in years. Its filing less than two
months after the Aug. 7 tweets by Mr. Musk also marks an
unusually rapid turnaround by an agency that has been under
fire for its perceived failure to promptly bring significant
cases in the financial crisis and other episodes. “It means
there was not that much investigation they needed to do to get
comfortable that it was a case they should bring, but also a
case they can win,” said Michael Liftik, a former SEC
enforcement lawyer now at Quinn, Emanuel, Urquhart &
SEC said that contrary to the statements he made in several
Twitter messages on Aug. 7, Mr. Musk “knew that he had never
discussed a going-private transaction at $420 per share with
any potential funding source.” The agency said the statements
and omissions of fact caused disruption to the market for
Tesla shares—which rose more than 10% the day of the
tweets—and harm to investors.
an easy case,” said Charles Elson, director of the John L.
Weinberg Center for Corporate Governance at the University of
Delaware. “He said in the tweet he had financing, and
apparently he didn’t. … It’s about as straightforward as you
claims against Mr. Musk cap a year of turmoil for the auto
maker, whose market value rivals that of much-larger General
Motors Co. despite the fact that Tesla hasn’t turned an annual
Musk's market-moving tweet about possibly taking Tesla
private is just the latest erratic move in a tumultuous
year for the CEO. Photo illustration: Heather Seidel/The
Wall Street Journal
Tesla has struggled since starting production of its
mass-market Model 3 sedan in July of last year, its limited
cash supply has taken a hit, placing the company under
increased scrutiny about whether Mr. Musk would need to raise
has said Tesla won’t need to do so and has promised that he
can keep the rate of Model 3 production at a pace that will
help the company become cash-flow positive this quarter and
his assurance, many analysts say Tesla will need to raise more
money, in part because the company has debt coming due next
year and because much of the growth projected by the auto
maker would require large investments.
Tesla without Mr. Musk could have a tougher time raising
funds, according to David Whiston, an analyst for Morningstar
Research Services. “Without Musk, Tesla is just an auto maker
burning too much cash and holding too much debt,” Mr. Whiston
those pressures, Mr. Musk has fought a war against short
sellers, investors betting on Tesla’s failure.
Musk jolted shareholders Aug. 7 when he tweeted that he
planned to take the company private in a deal that would have
been worth $72 billion.
SEC alleged in its lawsuit that Mr. Musk first informed
Tesla’s board of directors, chief financial officer and
general counsel on Aug. 2 that he wanted to take the company
private at $420 a share.
Musk told the SEC that he had met with representatives of a
sovereign-wealth fund on July 31, according to the lawsuit.
The fund’s lead representative, according to Mr. Musk,
“expressed interest in taking Tesla private,” the lawsuit
Musk said in a blog post on Aug. 13 that Saudi Arabia’s
sovereign-wealth fund had approached him several times over
nearly two years about providing financial support to take
Mr. Musk’s discussion with the sovereign-wealth fund didn’t
include any financial details about such a transaction, the
SEC alleged. The parties didn’t, for instance, discuss how
much of a premium over Tesla’s current trading price would be
offered to shareholders. The lawsuit says Mr. Musk chose $420
by estimating he would need to offer a 20% premium—which would
amount to $419—and then rounding up by $1.
SEC said in its complaint that “Musk stated that he rounded up
the price 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,’” the SEC’s complaint says. The
number “420” is sometimes associated with marijuana.
days after the tweets, Mr. Musk announced he decided against
5.3% notes due 2025 were trading late Thursday at around 85
cents on the dollar, down from 87.129 cents just before the
news, according to MarketAxess. The bonds had recently
rebounded from the low of 81.75 cents reached on Sept. 7.
to concern about the suit is Mr. Musk’s reputation for being a
difficult leader. Tesla has seen an exodus of executives over
the past two years, including its top sales officer and
engineering chief, leaving a clear line of succession unclear.
The company’s board has faced scrutiny for its oversight of
Tesla’s top executive.
Musk may be the most prominent company executive the SEC has
moved against since Angelo Mozilo, the former CEO of
Countrywide Financial, who paid $67.5 million in 2010 to
settle allegations that he misled investors about
Countrywide’s subprime mortgages. Mr. Mozilo didn’t admit or
deny the SEC’s charges.
SEC has faced public criticism recently for a seeming slowdown
in its enforcement activity. Total fines ordered through SEC
enforcement activity fell 7.2% in fiscal 2017 to their lowest
level since 2013, according to agency figures. Numbers aren’t
yet available for the current fiscal year, which ends Sept.
30, but Stephanie Avakian, the SEC’s co-director of
enforcement, suggested in a speech last week that they might
fall again, partly because of Supreme Court decisions curbing
the SEC’s ability to recoup funds for investors.
she said “numbers do not tell the story,” and maintained it
has been “a strong year” for the commission’s enforcement
to Dave Michaels at firstname.lastname@example.org,
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Tim Higgins at Tim.Higgins@WSJ.com and
Michael Rapoport at Michael.Rapoport@wsj.com