Musk charged with securities fraud over 'funding secured' Tesla privatisation tweets

Musk's tweets intended to impress girlfriend Grimes, SEC claims

Elon Musk was last night charged with securities fraud by the SEC, who claimed that his August tweets over taking electric car maker Tesla private were "false and misleading tweets" and had caused "significant market disruption".

The tweets implied that Musk was planning to take the company private at a price of $420 per share, significantly higher than the company's stock price at the time. He also added that he had "funding secured".

However, it later became clear that such a proposal was a long way from being concluded and, indeed, days later Musk vigorously backtracked, claiming that he had underestimated the amount of work such a move would require.

The SEC launched an investigation into what many claimed was a clumsy attempt at share price manipulation at a time when the company's stock was under attack from short sellers.

"On August 7, 2018, Musk tweeted to his 22 million Twitter followers that he could take Tesla private at $420 per share (a substantial premium to its trading price at the time), that funding for the transaction had been secured, and that the only remaining uncertainty was a shareholder vote," the SEC claimed in a statement.

It continues: "The SEC's complaint alleges that, in truth, Musk had not discussed specific deal terms with any potential financing partners, and he allegedly knew that the potential transaction was uncertain and subject to numerous contingencies."

The SEC claims that the Tweets caused Tesla's stock price to jump by more than six per cent on the day they sent. However, the company's stock price subsequently fell, bottoming out at £261.29 on 7 September.

Before markets open in the US today, the company's stock price officially stands at $307.44, but in after-hours trading yesterday evening - an indication of where it's headed today - it dropped by almost 12 per cent to $270.89.

[Musk] thought his girlfriend 'would find it funny, which admittedly is not a great reason to pick a price'

"Taking care to provide truthful and accurate information is among a CEO's most critical obligations," said Stephanie Avakian, co-director of the SEC's Enforcement Division. "That standard applies with equal force when the communications are made via social media or another non-traditional form."

So far, neither Musk nor Tesla has commented. The SEC, however, went on to claim that Musk sent the tweets in order to impress his girlfriend, rapper Grimes, with the $420 number (apparently) significant in marijuana culture.

"According to Musk, he calculated the $420 price per share based on a 20 per cent premium over that day's closing share price because he thought 20 per cent was a 'standard premium' in going-private transaction," the SEC suit claims.

It continues: "This calculation resulted in a price of $419, and Musk stated that he rounded the price up to $420 because he had recently learned about the number's significance in marijuana culture and thought his girlfriend 'would find it funny, which admittedly is not a great reason to pick a price'."

Elon Musk and Tesla also face a class-action lawsuit over his ill-advised tweets, both by short-sellers who were burned by Musk's tweets, as well as investors disgruntled at the continuing decline in Tesla's stock price, which they also attribute to Musk's recklessness.

I believe the [Tesla] equity will become nearly worthless

Gabe Hoffman, general partner of Accipiter Capital Management, speaking to CNBC, suggested that the affair could result in Tesla's bankruptcy. "Elon Musk will be out as CEO of Tesla. At that point, Tesla is no longer a cult stock of Elon Musk's hopes, dreams and lies - you have to value Tesla as a business.
"I believe the financials show you that Tesla is a very troubled business on the precipice of financial collapse," Hoffman said.

Hoffman's investment firm has ‘shorted' Tesla. That is to say, bet that the company's stock price will go down, by borrowing stock from an investor and selling it in the expectation that he can buy it back later at a lower price before the loan period expires. He therefore has a financial interest in seeing the company's stock price going down.

However, he points to the value of the company's bonds as indicative of the company's true value.

A set of bonds due for repayment in 2025 are currently trading at 86 cents in the dollar, indicating a high degree of scepticism over the company's long-term future, according to Hoffman - and that was before news of Tesla's prosecution was released.

"The bond market is always smarter than the stock market", added Hoffman. "I believe the [Tesla] equity will become nearly worthless," he concluded.

There's a new wave of automation hitting big business and the public sector, and organisations that fail to prepare or implement properly will, literally, be left for dead. Hear from end users and other organisations about how you can effectively automate the enterprise. To reserve your FREE place for the event on Wednesday 7 November, check out the dedicate IT Leaders' Forum website