SEC Sends Elon Musk the Bill for Tesla’s ‘Secured’ Funding
(Bloomberg Opinion) -- It took just 51 days for the Securities and Exchange Commission to sue Elon Musk about his Aug. 7 tweet storm. And even here, in the dry pages of a complaint filed in the Southern District of New York late on Thursday, there are flashes of humor.
The take-private price of $420 a share that Tesla Inc.’s CEO and chairman seemingly plucked from the ether was — as many suspected — plucked from a smoke-filled ether, the SEC alleges. Even better, it seems like it was also an attempt to make his girlfriend laugh:
According to Musk, he calculated the $420 price per share based on a 20% premium over that day’s closing share price because he thought 20% was a “standard premium” in going-private transactions. 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.”
So much for mirth. The SEC accuses Musk of knowingly making false statements to the public about the prospects of a buyout deal for Tesla. It’s quite something to read the SEC describing a July 31 meeting between Musk and a representative of a sovereign wealth fund at the center of the whole narrative as lacking “discussion of even the most fundamental terms of a proposed going-private transaction” — and then, later in the same paragraph, saying:
Musk has acknowledged that the July 31 meeting was the most specific discussion of a transaction to take Tesla private between him and representatives of the Fund.
In the complaint, the SEC calls for Musk to pay civil penalties and be barred from being an officer or director of a public company. It is the latter that would really spook Tesla bulls, given how intertwined he is with the company’s identity. The stock fell about 12 percent in after hours trading and the risk premium on the company’s bonds due in 2025 rose back above 500 basis points.
It’s possible the SEC is going in hard ahead of a negotiated settlement. In any case, the SEC’s action raises again the question of why Musk kicked off this bizarre, and legally problematic, episode in the first place. And it serves as yet another reminder of the apparent lack of any real check on him (for the millionth time: Where was Tesla’s board?).
One nugget buried in Thursday’s complaint captures this problem perfectly. It is in a section where the SEC is describing its understanding of the timeline on Aug. 7, just after Musk tweeted his bombshell that sent the stock soaring:
At approximately 1:23 PM EDT, about 35 minutes after Musk’s initial tweet about taking Tesla private, Tesla’s Chief Financial Officer sent a text message to Musk, “Elon, am sure you have thought about a broader communication on your rationale and structure to employees and potential investors. Would it help if [Tesla’s head of communications], [Tesla’s General Counsel], and I draft a blog post or employee email for you?” Musk responded, “Yeah, that would be great.” Tesla’s Chief Financial Officer then replied, “Working on it. Will send you shortly.”
Look, I get it. If the boss says something’s happening, your first instinct is to get with the program — maybe even if the program involves essentially drafting an explanation for the boss’s antics after the fact. The blog post appeared later that afternoon, though notably lacking any detail on the supposedly secured funding. Meanwhile, the SEC alleges, the head of investor relations was telling bewildered analysts that there was indeed a “firm offer” for the company.
For his part, Musk issued a statement Thursday evening calling the SEC’s action “unjustified” and saying that the facts would show he never compromised his “integrity.” We shall see. In any case, despite the latest drop in the stock, it is still trading at 95 times estimated non-GAAP earnings in 2019. Tesla’s bulls are still paying for disruption, even if they increasingly just get chaos.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.
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