The SEC's decision to sue Elon Musk and seek his ouster as chairman of Tesla came after Musk pulled out of settlement talks at the last minute, reports CNBC. Under the deal, Musk would have paid a fine but admitted no wrongdoing in regard to his infamous tweet in August about having secured funding to take Tesla private. However, Musk would have been barred from acting as chairman for two years, and CNBC's David Faber reports that Musk couldn't live with that "blemish" on his record. Instead, he will fight what he sees as an "unjustified" action. Related developments:
- Investors rattled: Tesla shares were down 13% Friday morning, reports Business Insider. It notes that Musk's August tweet suggested going private at $420 a share, but it's possible the stock could close around $250 on Friday.
- Real danger: A Wall Street Journal story suggests the news poses a threat to the very survival of the company. For one thing, Tesla has no succession plan in place. If investors lose confidence amid the chaos, the company might not be able to raise money it needs to operate. And if customers lose confidence, Tesla could face a rash of devastating cancellations. More so than a lot of companies, "Tesla requires positive news flow around the future of the company," as one financial analyst puts it.
- Criminal case? The SEC complaint is a "road map to criminal charges," says New York Times reporter Jim Stewart in a CNBC interview. The complaint, he says, "talks about the [short sellers] and the implied motive that he wanted to punish the shorts, which would be a manipulation." Also, the feds could ban Musk from acting as CEO not just of Tesla but of any public company, notes the Times, calling it "one of the most serious remedies the SEC can impose against a corporate executive."
- No upside: Citigroup downgraded Tesla stock from neutral to sell, with a note worrying about a no-win situation. "There's little question that Mr. Musk's departure would likely cause harm to Tesla's brand, stakeholder confidence, and fundraising," it reads, per CNBC. But "if Mr. Musk ends up staying on, the reputational harm from this might still prevent the stock from immediately returning to 'normal.'"
- A voice, regardless: If Musk's worst-case scenario arrives and he's ousted as chairman or barred from an officer position, the Journal notes that he still owns 20% of Tesla and will continue to have a big say in the company's vision.
- The charges: The SEC accuses Musk of lying to investors when he boasted about having funding lined up to go private. "This statement was false and misleading. Over the next three hours, Musk made a series of additional materially false and misleading statements via Twitter." Read the lawsuit in full here. For the record, Musk is charged under Rule 10b-5 of the Exchange Act, used to go after "inside traders and market manipulators," per CNN.
- Now what? Cases like these are typically resolved via settlement, though Musk's rejection of the initial offer makes things murky. It could take weeks, even months, to play out if no deal is reached.
- Harsh view: "The bottom line is that Musk, one of America's most visionary corporate leaders, didn't just make an unforced error," writes Dan Primack at Axios. "He compounded it both at the time, by not simply retracting his initial tweet, and then yesterday by throwing his racket at the umpires."
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