What You Need to Know About the SEC’s Case Against Elon Musk

(Bloomberg) -- Way back in August, when Elon Musk tweeted an audacious plan to take Tesla private (“funding secured”), a few things were apparent to those of us who’d followed Musk for a long time:

1) Musk’s understanding of “secured” almost certainly differs from the standard English definition. (Musk has always been, as he has put it, “aspirational,” about his predictions.)

2) The chaotic nature of the offer—made during market hours—seemed to suggest that Musk hadn’t really thought through the implications. (Over the past few months, Musk hadn’t slept much, and had been in a mad dash to solve Tesla’s production problems.)

3) Musk’s proposed buyout price, $420 per share, was probably, in part, a marijuana joke. (Musk has a juvenile sense of humor.)

Unfortunately, while doing these things may be totally normal by Elon Musk standards—and indeed, this kind of thing is part of what has made Musk beloved as a risk-taking entrepreneur—they might be tantamount to securities fraud if you happen to be the CEO of a public company proposing what would be the largest buyout in corporate history.

And so, yesterday, while much of the U.S. was held rapt by congressional hearings, the Securities and Exchange Commission dropped a doozy of a lawsuit. Among other things, the suit alleges that Musk had only the faintest outlines of the buyout when he went a-tweeting. Though he’d met with a sovereign wealth fund about a potential deal—the fund’s identity was not disclosed, but we know from other reporting it was Saudi Arabia’s Public Investment Fund—he and the Saudis hadn’t even discussed a price when Musk went public with the idea.

Oh, and the price. According to the SEC, Musk came up with $420 “because he had recently learned about the number’s significance in marijuana culture.” The complaint quotes Musk saying that he figured his girlfriend at the time, the musician Grimes, “would find it funny, which admittedly is not a great reason to pick a price.” (Hey, give this to Elon: Cannabis is pretty hot right now.) In a statement, Musk said he’d been working in good faith and that he was “deeply saddened and disappointed” by the SEC’s lawsuit.

Things were already sort of a mess at Tesla, which is both in the middle of a breakout year in terms of production of its new Model 3 sedan and, also, has been stuck in a never-ending wheel of crises. Now things seem to be getting worse. The SEC seeks to ban him from serving as an officer or director of a publicly traded company. If that happens, it might calm the news cycle, but Musk’s departure from the company would likely be seen as a disaster by many Tesla investors who are betting on Musk as much as they’re betting on the company’s electric motors.

It also could create problems for SpaceX, Musk’s rocket company. Though it isn’t public and probably won’t be any time soon, the Department of Justice is looking into a possible criminal case against Musk, which could complicate the company’s ability to win contracts.

The strangest thing about all of this is that business-wise things have actually been pretty good for Musk. Model 3 production has been growing quickly; Tesla’s bottom line has been improving; SpaceX looks like it’ll beat Boeing in the race to be the first private company to take astronauts into orbit.

That may be why Musk is still tweeting as if nothing is wrong. And maybe he’s right. He’s proven the skeptics wrong time and again. But he’s never been in such a perilous position before. The reality distortion field has never felt so weak.

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