Musk’s Money Mystery Intrigues SEC

(Bloomberg Opinion) -- Tesla Funding Watch 2018.

Yesterday we talked about a bunch of questions raised by Elon Musk’s announcement that he plans to take Tesla Inc. private at $420 a share, but right now one question is far more urgent than any of the others, and it is: Where’s the money? Musk tweeted “funding secured” for his bid, and Tesla’s board announced—rather more circumspectly—that its discussion with Musk “addressed the funding for this to occur.” But no one is saying who’s putting up the $60 billion or so that will be required to take Tesla private.

Reporters are naturally curious about this, and they have gone around asking all the obvious possibilities—banks, private equity firms, tech mega-caps, SoftBank—and come up empty. (I joked yesterday that “Surely the SoftBank Vision Fund would kick in $10 billion just for the entertainment value,” and in fact Musk did meet last year with Masayoshi Son of SoftBank Group Corp. and discussed taking Tesla private, but Son didn’t bite.) I guess it can’t hurt to throw this out there: If you are the source of Musk’s financing for his bid to take Tesla private, please shoot me an email and let me know.

But do you know who else is curious about Musk’s financing commitments? And who has more tools to find out than the average reporter? Yes that’s right it’s the Securities and Exchange Commission!

U.S. regulators are asking Tesla Inc. whether Chief Executive Elon Musk was truthful when he tweeted that he had secured funding for what would be the largest-ever corporate buyout, people familiar with the matter said.

Officials at the Securities and Exchange Commission want to know whether Mr. Musk had a factual basis for tweeting Tuesday that the going-private transaction was all but certain, with only a shareholder vote needed to pull it off, the people said.

The SEC’s inquiries, which originated from the agency’s San Francisco office, suggest Tesla could come under an enforcement investigation if regulators suspect that Mr. Musk’s statement was misleading or false.

Yeah, look. I bet that all work at the SEC’s San Francisco office stopped yesterday as they conducted an office-wide arm-wrestling tournament to select the person who got to make that call. You work your whole life at the SEC just for the remote chance that one day you might get to be the one to call up Tesla, hold up a hand to quiet the hoots of your colleagues who are listening in, take a deep breath to suppress your own giggles, and say into the phone: “So … how’s that financing?” Of course the SEC is looking into this. I can’t think of a thing that the SEC would look into more. If Warren Buffett was giving insider tips about accounting fraud at the Fed to Lloyd Blankfein so that he could help Donald Trump and the pope insider trade against the Illuminati, the SEC team investigating that would be scheming to get transferred to the Elon Musk team. The Elon Musk team is already shopping for the commemorative flamethrowers they’ll get when they finish. 

I don’t know. It would be utterly insane—like, federal prison insane!—for Musk to publicly announce that he had secured financing for an $80-plus billion buyout if he hadn’t secured the financing:

“To put that out unless he absolutely has financing secured and is ready to make the bid that could be market manipulation,” said Keith Higgins, a Ropes & Gray partner who formerly led the SEC’s corporation finance unit. “He could be in big trouble if that turns out not to have been true.”

But the other possibility, that he has locked down tens of billions of dollars of committed financing for this proposed deal, and that neither he nor the board nor the financing sources have breathed a word about who they are, is also … not completely sane, you know? That is a lot of financing to keep so secret. It feels like the solution to the puzzle is going to end up being something weird and tiresome, like Musk will tweet that when he said “funding secured” he meant that he has drafted the white paper for the PrivateTeslaCoin initial coin offering, or bought a lot of scratch-off lottery tickets, or minted a platinum coin with “$1 trillion” stamped on it, or that the real financing is the friends we made along the way. I guess we’ll find out! But you know who will find out first? The SEC! I cannot tell you how envious I am.

You know who I do not envy? The investment bankers who cover Tesla:

A day after Elon Musk declared that he might try to convert Tesla into a private company, Wall Street banks raced to figure out how such a transaction might work and how they might get a piece of the action. …

Some senior executives at top Wall Street banks, including JPMorgan Chase and Citigroup, did not hear about Mr. Musk’s idea until his tweet sent Tesla shares soaring shortly after noon on Tuesday, according to people close to the banks. Some bankers grumbled on Wednesday that they had not even been able to get Tesla executives to return their phone calls, much less explain the company’s plans.

Good lord. If you’re the coverage banker on Tesla, a lot of very senior people are calling you and asking you very basic questions—are we in this deal? what is this deal? are you talking to the decision-makers?—that, I suspect, you are very ill-equipped to answer. The correct answer to any question about this deal is to just sigh and shrug and say “I dunno it’s Elon Musk man”—that is the answer that I have tried to convey in my columns, certainly—but it is not, I suspect, an acceptable answer for Tesla coverage bankers. I cannot imagine what an acceptable answer would be. I guess if I were in their shoes I’d try something like “Our place in the deal is secured. Gotta go.” I mean, it works for Musk.

Elsewhere in Tesla, Bloomberg’s Molly Smith notes that Musk’s tweet pushed Tesla’s stock price above the conversion price of its convertible bonds, which could save it some cash if they end up converting into stock instead of being paid back in cash at maturity. As a converts guy I find this theory interesting but not ultimately convincing. For one thing, some of Tesla’s converts have to be net-share settled, meaning that even if they “convert” they pay off par in cash and the excess conversion value in stock or more cash. (The converts due in 2019 can be fully share settled at Tesla’s option, though, so Tesla could save cash if they convert.) More importantly, though, convertible bonds do not generally convert early, and the earliest maturity is in March 2019. If there is still no deal seven months from now, Musk’s tweets from this week are not going to have a continuing positive effect on the stock price.

Here is some speculation about how Tesla might “go private” while still offering public shareholders a chance to keep their shares, as Musk has said he wants to do:

In this situation, Tesla could buy out many but not all of its shareholders to reduce the total number of investors who hold Tesla stock. One way to make that math work would be to persuade as many small shareholders as possible to sell their holdings. …

Tesla’s shares would no longer be listed on the Nasdaq, but investors could buy or sell them on loosely regulated, over-the-counter markets that are typically the domain of small companies. Because shares on these exchanges are generally traded less heavily than those on larger public markets, it would likely be harder for investors to bet against, or short, Tesla’s stock, which is one of the rationales Mr. Musk outlined on Tuesday for taking the company private.

That’s a fairly spivvy approach—“Going-dark transactions traditionally have been the province of tiny companies”—but it’s not like there’s a straightforward above-board way to go private while keeping all your public shareholders. And here are Alexandra Scaggs and Jamie Powell on the change-of-control puts in Tesla’s bonds, which raise interesting questions: If Tesla really does manage to go private while keeping many of its same shareholders, that might not trigger the puts.

And here, via Kipp Rogers, here is the section of the Nasdaq rulebook that requires companies to notify the exchange at least 10 minutes before publicly disclosing certain material information, including, of course, mergers. I am not sure that a vague proposal by the CEO to take a company private counts, but in any case, I assume the next edition of this rule will have a subsection that says “unless you are Elon Musk in which case just tweet what you want, we can’t stop you.”

Oh Chris Collins.

If it weren’t for the fact that he is a prominent pro-Trump congressman, the civil and criminal insider trading cases brought by the SEC and federal prosecutors yesterday against Representative Chris Collins, his son, and his son’s girlfriend’s father, would be pretty run-of-the-mill. Collins was a director of a publicly traded Australian (but also U.S.-traded) biotech company called Innate Immunotherapeutics Ltd., and the company’s CEO emailed him bad news about the results of clinical trials. Collins didn’t trade himself after getting this bad news, and lost money when it was announced and the stock went down. But he did allegedly tip his son, who was also a shareholder, and who sold stock after the alleged tip but before the results of the trials were announced. The son also allegedly tipped a bunch of other people laid out on a handy flow chart, including his girlfriend and various of her family members.

But Collins is a prominent pro-Trump congressman, and one who pitched a bunch of his congressional colleagues on Innate, so every aspect of this is just a little dumber and more brazen than you’d expect in an ordinary insider trading case. For instance, from the criminal case:

At the time CHRISTOPHER COLLINS received this email [reporting the drug trial results], he was attending the Congressional Picnic at the White House.  At 7:10 p.m., CHRISTOPHER COLLINS replied to the email, stating, in part, “Wow.  Makes no sense.  How are these results even possible???”  After responding to the Innate CEO’s email, CHRISTOPHER COLLINS called his son, CAMERON COLLINS.  They traded six missed calls between 7:11 p.m. and 7:15 p.m..  At 7:16 p.m., CHRISTOPHER COLLINS and CAMERON COLLINS spoke for more than six minutes.  During that six-minute phone call, CHRISTOPHER COLLINS told CAMERON COLLINS, in sum and substance, that MIS416 had failed the Drug Trial.

CHRISTOPHER COLLINS did not trade himself, and his Innate stock ultimately declined by millions of dollars in value when the Drug Trial results were made public on June 26, 2017.  As CHRISTOPHER COLLINS well knew, however, he was virtually precluded from trading his own shares for practical and technical reasons.  For example, CHRISTOPHER COLLINS was already under investigation by the Office of Congressional Ethics (“OCE”) in connection with his holdings in, and promotion of, Innate.  Indeed, he had been interviewed by OCE personnel on or about June 5, 2017, just 17 days earlier.  Accordingly, he did not trade his own stock and instead tipped CAMERON COLLINS.

Ehh. Do we need a Ninth Law of Insider Trading, “if you’re already under a federal ethics investigation for promoting a stock, don’t insider trade that stock”? It seems pretty niche. On the other hand, we are not even two years into the Trump Administration, and it does kind of seem like it could come up again. Really you can sort of think of the Wilbur Ross situation as a variant on this rule. So, sure, yes:

The Ninth Law of Insider Trading is that if you are already under a federal ethics investigation about your ownership or promotion of a stock, don’t insider trade that stock.

There you go. Especially not at a congressional picnic! As always, the Laws of Insider Trading are not legal advice.

Here’s the point in the SEC complaint—well before the alleged insider trading—where I had to stop reading:

The year before, Cameron Collins’s girlfriend’s parents also invested in Innate after she told her mother by text message in August 2016, “I think we all need to consider investing in innate therapeutics. I might put in $15k and that has a greater than 50% chance of going up to $250k…….that is actually unheard of and cams dad almost guarantees it within the next 1 to 2 years. . . .” The next day she added, “And we’ll always keep in touch with cams dad who I’m guessing would know how things are looking as we get closer to the end of the trial.” A few days later, she told her mother, “I’ll make sure cams dad keeps us in the loop.”

Honestly I want to put them all in jail just for those texts. Never mind the insider-trading part, just the “greater than 50% chance of going up” 1,500 percent, the “almost guarantees it,” it’s all so gross and scammy. This is how people talk in boiler rooms and my vague imagination of the 1920s; it is not what you want to hear from public-company directors, or their sons’ girlfriends.

The whole case has this sort of throwback vibe. “Did Chris Collins Forget the Martha Stewart Trial?,” asks my Bloomberg Opinion colleague Joe Nocera, and indeed the alleged facts here look a lot like the facts there. More than that, though, the whole sensibility of absolute entitlement—the idea that if you are a corporate director then part of your compensation, as it were, is that you get to tip off all your buddies and family members with inside information—feels like a throwback to the days before securities regulation.

This might be how corporate directors operated in the 1920s, but in high finance—and certainly among most directors of most public companies—it mostly went out of fashion with the stepped-up insider-trading enforcement over the past few decades. (Obviously there are exceptions!) The press and politicians love to talk about the culture of impunity in finance, the idea that powerful bankers and executives think that the law does not apply to them and that they can get away with anything. But for the most part that does not seem to be how those bankers and executives experience it. Sure there is a culture of legal creativity and aggressiveness; you hire the best lawyers to make sure that you can get away with as much as possible. But that is sort of the opposite of thinking that the law does not apply to you: Aggressively pushing the boundaries of the law requires knowing what the law is, believing that it applies to you, taking it seriously, engaging with it. Just ignoring the law because laws are for little people does not work especially well, and is not typically what your high-priced lawyers would advise.

But I suspect that, among politicians, the sense of entitlement and impunity might be a bit more robust. “You begin to realize there is a whole class of people in Washington who literally don’t think there are any laws that apply to them,” tweeted Josh Brown about these charges. It makes a kind of sense. Much of the financial industry is about taking the law as a fundamental text, one that must be treated with reverence but also interpreted with creativity and boldness. Much of politics is the grubby work of turning lobbying and compromise into law. Perhaps that would incline you to take it less seriously.

Pivots.

Yes, this is good, more of this:

After struggling for years to make decent money as a straight musical act, the foursome had a revelation last year: People don’t seem very interested in rock music, but everyone seems obsessed with tech startups. “So what if,” Huntington says of the band’s thinking, “we started creating music that was for companies themselves?”

Since launch, the musicians have performed at several conferences, such as Culture Amp’s this June, and for a handful of companies, including industry darling Slack. They’ve taken to wearing shirts and ties for gigs (despite the fact that such attire is generally spurned in Silicon Valley) and have started building an oeuvre of songs inspired by things like inboxes, operating systems and the Microsoft Office Suite.

The band, or app, or platform, or whatever, is called Music for Business. Should it be called Songwriting-as-a-Service? Should I commission a Money Stuff theme song? Music for Money Stuff? The hit song in my household right now is “Baby Shark,” and it would work perfectly if you swapped “Money Stuff” into the lyrics. I have had “Money Stuff doo doo di doo di doo, Money Stuff doo doo di doo di doo, Money Stuff doo doo di doo di doo, Money Stuff” stuck in my head for the last 12 hours and honestly it is fine, it is good, I’m enjoying it.

I guess I am kidding about that, but I am not really kidding that there should be more of this. This is a good pivot! There are so many songs about breakups, and so few about interoffice email, but at this point the latter is as central an aspect of human existence as the former, and we need an art that reflects and celebrates and interrogates and recombines it. More of the art under capitalism should be art about capitalism. I want to put some smooth hedge-fund jazz on the stereo, look at my collection of Sarah Meyohas and James Gubb stock-price paintings, and contemplate the Gesamtkunstwerk that is modern financial capitalism.

Things happen.

Rite Aid, Albertsons Call Off Merger Amid Investor Opposition. Tribune Pulls Out of Sinclair Deal Under Fire From Regulator. Goldman Sachs in Talks to Buy a Tanker of Liquefied Natural Gas. An illusion of choice: the conflicts that mire the audit world. Slack Is Looking to Raise $400 Million or More. Judge Expresses ‘Great Skepticism’ About Sumner Redstone’s Condition. “We determine that there is a strong time-series momentum effect and that proxies for investor attention strongly forecast cryptocurrency returns.” AQR has a podcast. Cows Help Sanford Cops Corral Car Theft Suspects

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Matt Levine is a Bloomberg Opinion columnist covering finance. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz, and a clerk for the U.S. Court of Appeals for the 3rd Circuit.

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