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Here's what the DOJ would have to prove in a case over Elon Musk's tweet

Erin Fuchs
Deputy Managing Editor

A Tesla spokesperson confirmed to Yahoo Finance on Wednesday that the Justice Department has asked the electric carmaker for “documents,” following reports that it’s facing a criminal probe over CEO Elon Musk’s statement about taking the company private.

The Justice Department’s criminal probe comes after the Securities and Exchange Commission launched a civil probe last month into Musk’s Aug. 7 tweet stating: “Am considering taking Tesla private at $420. Funding secured.”  

The electric carmaker’s stock shot up after the tweet, and the SEC probe is reportedly focusing on whether Musk was telling the truth when he said he’d secured funding to go private. Prior to Musk’s tweet, the SEC had also been probing Tesla’s statements about manufacturing goals and sales targets.

The stakes for a criminal probe could be much higher than the SEC investigation. While Bloomberg reported that Tesla itself is facing a criminal investigation, two business-law professors told Yahoo Finance that prosecutors are also likely gathering information that could potentially be used in a criminal case against Musk.

“They’ve got to be investigating him,” said Adam Pritchard, who teaches corporate and securities law at Michigan Law, noting that it was Musk himself who sent out the tweet regarding the buyout. Pritchard added in an email message that “indictment would be fatal” for Tesla because “it would be impossible to raise money if Musk is under indictment.”

What would the DOJ have to prove against Musk?

It’s not uncommon for the Justice Department and the SEC to pursue parallel criminal and civil actions against a company or its executives. These agencies have different burdens of proof, with criminal actions requiring proof “beyond a reasonable doubt” for a guilty verdict and civil cases necessitating only a “preponderance of evidence” to find a defendant liable.

In a fraud case over Musk’s tweet, the SEC would only have to show that Musk was “reckless” when he tweeted about going private. The Justice Department, meanwhile, would have to prove “willfulness” — meaning that he tweeted about going private with a particular intent rather than “recklessly” dashing it off.

How could the Justice Department prove Musk’s intent? It would, for example, be particularly damning if prosecutors uncovered evidence that Musk was deliberately trying to move Tesla’s stock in order to hurt short-sellers, according to Peter J. Henning, a professor of law at Wayne State University and the author of the “White Collar Watch” column for The New York Times.

“That’s a market manipulation case, and that’s not a good thing to be involved in,” Henning said. However, he added, it could be difficult for criminal prosecutors to prove Musk’s intentions when he sent out that tweet. “I get the feeling this is more likely to be an SEC case if there is one,” he said.

If there were a criminal case, it’s much more likely prosecutors would bring it against Musk rather than Tesla, according to Pritchard. “It would be very surprising to me if there were any consideration of a criminal case against Tesla the company,” he noted. “From what we know about the exchanges between the Tesla board and Musk about the potential buyout, it seems they were very surprised by his tweet that he had financing secured.”

That could be good news for Tesla, as the consequences of criminal cases are more severe than civil actions. Obviously, corporations can’t face prison time. However, cases brought by the Justice Department rather than the SEC can come with stiffer sentences and more of a stigma if a company is convicted of a crime instead of a civil offense, according to Charles Elsondirector of the John L. Weinberg Center for Corporate Governance at the University of Delaware.  “A criminal action is a civil action on steroids,” he said.

Founder and CEO of Tesla Motors Elon Musk speaks during a media tour of the Tesla Gigafactory, which will produce batteries for the electric carmaker, in Sparks, Nevada, U.S. July 26, 2016. REUTERS/James Glover II/File Photo

Both investigations could last for months, but a Tesla spokesperson says the company believes it will put this matter behind it soon. “Last month, following Elon’s announcement that he was considering taking the company private, Tesla received a voluntary request for documents from the DOJ and has been cooperative in responding to it,” the spokesperson said.

The spokesperson added: “We have not received a subpoena, a request for testimony, or any other formal process. We respect the DOJ’s desire to get information about this and believe that the matter should be quickly resolved as they review the information they have received.”

Erin Fuchs is deputy managing editor at Yahoo Finance.

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