Elon Musk’s erratic behavior landed him in hot water with the Securities and Exchange Commission (SEC), but a quick deal made on Saturday caused both positive and negative consequences for the automaker.
As a result of a lawsuit, which initially wanted Musk out of the company and banned from sitting on a publicly traded company board, the carmaker head and the government regulator came to an agreement within two days of being served.
In exchange for keeping his CEO job, Musk will resign as Tesla’s board chair, and has agreed to pay the SEC a $20 million fine. Tesla will match that payment, citing its failure to police its head’s August behavior, which caused the dilemma.
Tesla’s stock has been volatile in 2018, plummeting further on Friday (to $267.67 from Thursday’s $307.52), a day after the SEC announced its filing. Brian Johnson, an analyst at Barclays, told CNBC that the automaker’s shares could sink to as low as $130 if Musk had exited the company.
However, Musk’s speedy settlement has done quite the opposite, as Tesla opened at $306 per share on Monday.
Last week, the government agency charged the Tesla head with fraud for a series of false and misleading August tweets about taking the company private for what was at the time a premium share price of $420 each. He claimed that the transaction’s funding had been secured, leaving the privatization to a shareholder vote. He also said public shareholders would retain their holdings under this new deal.
This caused the automaker’s stock to rocket more than 6% on August 7 (to $379.57 from the previous day’s $341.99), the day of the tweets, causing a market disruption. Days later, Musk, who owns roughly 20% of the company, admitted that none of the financing was secured, and that there was not only no real investor support, but also retail shareholders could not keep their stakes once Tesla went private. The plan was scrapped three weeks after the Twitter announcements, and the company’s stock declined soon after.
The SEC, however, argued that Musk knew the carmaker’s privatization was never going to happen, and it alleged that his actions vis-a-vis his 22 million Twitter followers were meant to manipulate the market. In doing so, the agency said, Musk mislead shareholders into thinking their stock’s value would rise to $420 per share, thus committing securities fraud.
Stephanie Avakian, co-director of the SEC’s enforcement division, said providing accurate information is “among a CEO’s most critical obligations,” adding that the standard “applies with equal force” regardless of how communication is conducted.
The agency said Musk violated antifraud provisions of federal securities laws and asked that he be exiled from the company and be barred from sitting on any public board.
Steven Peikin, another co-director of the enforcement division, contended that CEOs hold “positions of trust in our markets” and hold significant shareholder responsibilities. “An officer’s celebrity status or reputation as a technological innovator does not give license to take those responsibilities lightly,” Peikin said.
Musk, who denied any wrongdoing, had the backing of Tesla’s board, as a Thursday statement read that it wanted to keep him as its chief. The Tesla kingpin initially said he would fight the charges rather than settle with the commission, contending that a representative from Saudi Arabia’s Public Investment Fund expressed interest in the privatization.
Musk cannot seek board reelection for three years. Two new members will be independently appointed to take his place.
The Department of Justice is also investigating Musk’s tweets, and could press criminal charges should it prove Musk intentionally bamboozled Tesla shareowners for personal gain.