One Expensive Tweet: SEC Sues Musk for Securities Fraud

Tesla CEO Elon Musk in better days.

Our age of Unicorn valuations, swashbuckling Silicon Valley CEOs and ethos of gravity doesn’t apply when you’re bold enough and on enough magazine covers appears to have claimed another victim.

No, not Elon Musk. I’m talking about his employees.

Yes, this latest news is about as bad as it gets for Tesla’s CEO. Already awash in issues related to his electric car company from technology glitches to productivity problems, he can now add a civil securities fraud suit from the Securities and Exchange Commission to his list of woes, one that could result in his being banned from running a public company.

In court documents filed after the close on Thursday, the SEC alleges that when Musk tweeted on August 7 “Am considering taking Tesla private at $420. Funding secured.” the statement was “false and misleading”, as were a series of additional “materially false and misleading statements via Twitter.”

That first Tweet, to his 22 million followers, resulted in a 6% jump in Tesla’s stock, as well as a large volume increase in trading.

“Musk knew or was reckless in not knowing that each of these statements was false and/or misleading because he did not have an adequate basis in fact for his assertions,” the SEC alleges in its suit. “When he made these statements, Musk knew that he had never discussed a going-private transaction at $420 per share with any potential funding source, had done nothing to investigate whether it would be possible for all current investors to remain with Tesla as a private company via a ‘special purpose fund,’ and had not confirmed support of Tesla’s investors for a potential going private transaction.” You can read the full document below.

By doing so, the SEC says Musk committed securities fraud and it is pushing for a range of penalties, including repayment of gains from the stock’s jump with interest.

More worrying for Musk and Tesla’s board is that the SEC could push for Musk to be barred as an officer and director of any publicly traded company. Ouch.

“This unjustified action by the SEC leaves me deeply saddened and disappointed,” Musk said in a statement to CNBC. “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.”

As I’ve written before, there’s a lot of blame to go around when it comes to Musk’s leadership, beyond Musk himself. The board, packed with pals and insiders, including his brother, has proven to be a terrible backstop for his personal proclivities, offering little useful guidance—and virtually no guardrails—for his tenure as CEO.

True-believing investors, many of them large institutions, have proven themselves to be ineffective advocates for their clients when it comes to leveraging their relationship to temper Musk. At this point most of them know what they’re involved in, and have had ample opportunities to challenge Musk and the board, and will pay a stiff financial penalty as their shares drop on the news.

But it’s the other key CEO constituency, the one that’s almost always overlooked amid these media feeding frenzies that’s going to bear the biggest brunt of this debacle: his employees. And that’s what could do the most damage to Tesla.

From what I’ve gathered, they’ve worked about as hard as anyone can to realize Musk’s vision—and a wonderful vision it is—producing some of the world’s most innovative automobiles under some of the most adverse, pressured, upside-down manufacturing conditions that anyone who covers the auto industry has ever heard about. Suppliers, too, have been jerked around, but have stayed true, working hard and staying flexible to help The Man and His Dream.

Now they can add a federal investigation to the company’s woes at exactly the wrong time because the guy who was supposed to be in charge couldn’t control his temper (or something). In an era of 3.9% unemployment, where all we hear about is how precious top talent is, an SEC suit is hardly a recruiting advantage. And talent is the lifeblood of this company, which has already seen its share of high-profile departures.

On page 24 of Tesla’s 2017 Annual Report, you’ll find a single sentence that says it all about this company, and why it’s now in the fight of its life.

No, not the part about how Tesla is “highly dependent on the services of Elon Musk, our Chief Executive Officer, Chairman of our Board of Directors and largest stockholder.”

I’m talking with about the sentence right above that: “If we are unable to attract and/or retain key employees and hire qualified personnel,” it reads, “our ability to compete could be harmed.”

Yup.

Read the full SEC Document Here:

United States Securities an… by on Scribd

Dan Bigman
Dan Bigman is Editor and Chief Content Officer of Chief Executive Group, publishers of Chief Executive, Corporate Board Member, ChiefExecutive.net and Boardmember.com. Previously he was Managing Editor at Forbes and the founding business editor of NYTimes.com.