There’s spectacular irony in the lawsuit the Securities and Exchange Commission filed against Tesla CEO Elon Musk on September 27.
Musk has raged against short sellers betting that Tesla’s (TSLA) stock price will plunge, repeatedly predicting they’ll lose their shirts. But short sellers are likely to cash in as Tesla’a stock falls on news of the SEC suit. It could fall a lot farther if the SEC succeeds in forcing Musk from the company he founded. And the entire downfall is Musk’s own doing.
Musk incited the SEC on August 7, when he published a tweet saying he had a plan to take the company private, at $420 a share. The stock price at the time was around $342. “Funding secured,” Musk tweeted, essentially saying he had lined up buyers with the capital to do the deal at the advertised priced.
“In truth and in fact,” the SEC claims in its complaint, “Musk had not even discussed, much less confirmed, key deal terms, including price, with any potential funding source.” On August 24, Musk published a blog post on Tesla’s website saying the plan to take Tesla private was off.
In the meantime, the stock price had yoyoed, first rising to a peak of nearly $380 on the day of Musk’s tweet — an 11% gain for the day. But it fell back the next day, then fell further as scrutiny of the idea revealed it to be hollow. The day Musk called off the “deal,” Tesla’s stock closed at $323, about 6% lower than its price before the fateful August 7 tweet. It fell some more, as news of an SEC investigation surfaced, hitting a low of $263 on September 7. The stock recovered somewhat, but now seems poised to test that low point and possibly fall further.
Tesla CEO Elon Musk is feeling the heat for a tweet he posted last month. The U.S. Securities and Exchange Commission filed a suit against him Thursday in U.S. District Court in the Southern District of New York for securities fraud.
The tweet that led to all this was Musk mulling buying out his publicly traded electric car company. He said he had “funding secured.”
Am considering taking Tesla private at $420. Funding secured.
— Elon Musk (@elonmusk) August 7, 2018
The tweet set off the stock — which wasn’t at $420 yet — and sent shareholders, Tesla owners, the company, and the media into a tizzy. Musk seemed to be serious about taking Tesla private with a company-wide email and public posts about his plan, but then in late August he called it all off.
In the SEC complaint, the SEC alleges that Musk’s “funding secured” tweet was “false and misleading,” as were his following tweets later that same day.
The complaint goes on that Musk’s tweets caused “significant confusion and disruption in the market for Tesla’s stock and resulting harm to investors.”
At a Thursday press conference SEC officials said many investors took the tweet — which many thought was a joke because of the marijuana reference with the $420 stock price — “at face value.”
Musk said in an email statement after the SEC press conference he was “saddened and disappointed.”
He wrote, “This unjustified action by the SEC leaves me deeply saddened and disappointed. 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.”
The SEC wants to prohibit Musk from serving as an officer or director of a public company.
Separately, Tesla could face criminal charges for the tweet. Tesla said the U.S. Department of Justice had requested documents for the same “funding secured” tweet.
The SEC lawsuit comes after the British cave diver that Musk insulted over Twitter sued the billionaire.
Short sellers make money when a stock falls in value. Had Tesla stock stayed up after Musk’s Aug. 7 tweet, shorts might have gotten burned, as Musk has long desired. But with the stock down sharply, shorts are now in the money. Research firm S3 Partners estimates Tesla short sellers have gained about $2.3 billion in paper profits since August 7. They’ll earn more if the stock falls further.
The astonishing thing about Tesla’s predicament is that it is entirely the CEO’s doing. As founder of the company, Musk is its chief visionary, primary strategist and top salesperson. CEOs are supposed to protect and cultivate their firms. Musk has certainly done that, creating a $50 billion company from nothing. But since August, he has been singularly responsible for destroying $6 billion in shareholder value, with a bigger wipeout likely.
The SEC, among other things, wants Musk to pay an unspecified amount in civil penalties, and more alarming for Tesla, it wants to ban him from “acting as an officer or director” of a publicly-owned company. The government is trying to force Musk out of the company he founded. While that would free Tesla from the erratic behavior of its leader, it would also leave a huge hole in a company that is uniquely dependent on the CEO’s vision.
A final settlement might allow Musk to stay at Tesla, if he pays a meaty fine and makes other reparations. But he could also end up convicted of violating federal securities law. It’s hard to think of a better way to make your company vulnerable to short sellers and those who wish it harm.
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Rick Newman is the author of four books, including “Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman