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Musk’s taking-private-Tesla-tweet saga ends in 40-million-dollar SEC settlement

November 3, 2018 24 2 No Comments

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Tesla’s CEO and founder Elon Musk settled with the Securities and Exchange Commission (SEC) on Saturday after the agency sued him for investor fraud. Musk agreed to step down as chairman for at least three years and pay a fine of 20 million dollars. Tesla, too, will pay a 20 million dollar fine, appoint a committee of independent directors, and put additional controls on Musk’s communications.

The dispute surrounded Musk’s now infamous tweet from early August, in which he announced that he would be taking the company private at 420 dollars a share. Saudi Arabia’s Public Investment Fund was assumed to be the major backer behind the 72-billion-dollar potential move, but Musk’s tweet – which said that Tesla had “funding secured” for the move – either preempted discussions or entirely misrepresented the situation. After initial concerns over Musk’s seemingly impromptu announcement and the company’s failure to issue a comprehensive public statement in a timely manner, federal investigations heated up with Musk’s announcement that he and the company were reneging on their decision and staying public.

“As a result of the settlement, Elon Musk will no longer be Chairman of Tesla, 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.”

The terms of the settlement prevent Musk from denying that he misled his company’s investors with the tweet. Stock prices rose some 11 percent the day of the tweet, after Musk announced the high price of 420 dollars-per-share for the buyout. Since then, company stocks have tanked: on Friday alone, after the SEC announced the lawsuit, Tesla’s stock sank 14 percent.

According to the New York Times, Musk initially refused to accept the terms of the settlement proposed to him on Thursday, in part because it was an “admit nor deny” settlement. Sources for the Times said that Thursday’s deal was much more lenient and would have involved a 10-million-dollar payment and two years of ineligibility for the chairman position. Musk’s lawyers reportedly asked the agency for more time with the original offer in order to convince Musk to accept its terms. The agency rejected the request and sued Musk, who promptly renewed settlement negotiations after conversations with company investors and friends including the entrepreneur Mark Cuban. Cuban himself won a case against the SEC in 2013, when the agency sued him for insider trading.

Those two days cost Musk an extra 10 million dollars and another year barred from being chairman. In avoiding a lawsuit, however, Musk freed himself from the risk of being removed as CEO, which could have been among the penalties had he lost in court.

Musk continued to display optimism over the weekend regarding his company’s precarious position. Tesla, one of the country’s largest car companies, has yet to turn a profit on its fully electric cars, and reported its largest-ever loss in the last quarter. “Ignore all distractions,” Musk said in an email to his employees on Friday anticipating the third quarter’s close on Sunday night. “One more hardcore weekend and we will be victorious.” He said that the company was “very close to achieving profitability and proving naysayers wrong,” hearkening to the Tesla short-sellers who he has publicly feuded with this year.

“This matter reaffirms an important principle embodied in our disclosure-based federal securities laws,” said SEC Chairman Jay Clapton in a statement. “Specifically, when companies and corporate insiders make statements, they must…ensure the statements are not false or misleading and do not omit information a reasonable investor would consider important in making an investment decision.”

To some, the settlement with Musk represents a larger push at the SEC to go after individuals themselves in addition to prosecuting corporations. Last week alone, the agency issued charges against eight corporate officials from six separate companies. These include the former CFO and CEO of Walgreens Boots Alliance, Gregory Wasson and Wade Miquelton. Clayton himself called the strategy of pursuing individuals an “effective means of deterrence.”

Minor Myers, a professor at Brooklyn Law School, pointed to the increased risks involved in such a strategy. “There is a terrible deterrent effect if you lose because it lets people know you can just fight off the regulators,” she said. “That’s a bad message to the markets.”

Successful suits and settlements against individuals like Musk are a victory for regulators and help to push the boundaries of what is possible in holding corporate officials accountable. In practical terms, however, a 20 million dollar settlement for a corporate officer worth some 20 billion dollars hardly registers as a dent.

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