secured” does not sound particularly ominous. But when Elon Musk,
Tesla’s chief executive, tweeted those
words on Aug. 7, he set off a firestorm.
Securities and Exchange Commission is ramping up an investigation
about whether he misled investors and violated federal securities
laws. It served
a subpoena on Tesla to determine if there was
funding to take the company private at $420 a share, as Mr. Musk
seemed to claim in his tweet.
was already under investigation about its disclosure of production
issues with its Model 3 vehicle, including a subpoena from the S.E.C.
to a parts supplier, according
to The Wall Street Journal. The fact that there was already a
subpoena most likely means the investigation of Mr. Musk’s tweet was
folded into the earlier inquiry. There were also whistle-blower
complaints filed with the S.E.C. about
undisclosed thefts and drug dealing in a factory.
it all together, and it appears that an investigation has the
potential to move down a number of paths. The question is how this
might play out for Tesla and Mr. Musk.You
have 3 free
formal investigation does not mean a case will be filed. It does
indicate that the S.E.C. is committing resources, and investigations
tend to take on lives of their own. Where they end is not always where
they started heading, especially when there is a thorough review of
most likely focus of the investigation of the tweet is whether Tesla
and Mr. Musk violated
Rule 10b-5, the primary antifraud rule, by misleading investors.
Because Mr. Musk is a director and an officer of Tesla, his statements
can be attributed to the company, especially when it did not
immediately issue any corrective disclosure after the Twitter post
10b-5 prohibits any scheme to defraud, which includes misstatements or
omissions of material information that affect the market value of
shares. Given how erratic Tesla’s stock has been, and how it responded
so quickly to Mr. Musk’s tweet, showing that the information was
material and might have harmed investors if it was misleading does not
appear to be difficult.
a more difficult issue to proving a violation of Rule 10b-5 would be
showing that the defendant acted with an intent to defraud, or at
least was reckless in making statements that were misleading or
incomplete. Mr. Musk gave an
emotional interview to The New York Times
about how “excruciating” the past year has been. Unfortunately, the
securities laws do not provide an exhaustion defense, and just saying
“never mind” does not necessarily dissipate the market impact of
danger to Tesla and Mr. Musk is this: The S.E.C. could
seek to barMr. Musk from serving as a director or an officer of
a public company if he is found to have committed fraud. Such a ban
would cause Tesla significant problems. It could force Mr. Musk out of
Tesla. And if the company was taken private, an order barring him from
a leadership role at a public company would complicate Tesla’s return
to the public markets.
possible defense to a potential fraud charge would be that Mr. Musk
reasonably believed there was sufficient financing at the time he
posted the statement.
there are hurdles to that defense. The S.E.C. would need to prove only
that Mr. Musk’s actions had been reckless, defined as a significant
departure from the proper standards of business conduct. Evidence that
Saudi Arabia’s sovereign wealth fund or the private equity firm Silver
Lake had reservations about financing a deal, or that the discussions
were still continuing, may be enough to show recklessness.
S.E.C. may investigate whether Mr. Musk sought to drive up the price
of Tesla’s shares to
harm short-sellers, a group he has blamed for much of his stress
over the past year. Issuing a statement designed to affect the share
price can constitute market manipulation in violation of Rule 10b-5.
is a difficult violation to prove. It requires the S.E.C. to show that
the person acted with that specific purpose. Making a case based only
on a single tweet would be a challenge even though the statement drove
up Tesla’s stock. Mr. Musk could offer a more innocent explanation,
such as he was merely jumping the gun to reveal his desire to take the
S.E.C. could pursue securities fraud charges under Section
17(a) of the Securities Act of 1933. The provision requires the
S.E.C. to prove negligence only in the sale of securities that
involved “a fraud or deceit upon the purchaser.” Tesla has sold stock
and bonds over the past two years, so a case involving any disclosure
issues related to the production of its cars could form the basis of
tack has advantages for Mr. Musk, Tesla and the S.E.C. It requires
showing only that the issuing of corporate information was mistaken or
at least inartful. It would not jeopardize the company’s ability to
issue shares, because it is a claim only of negligence, not of fraud,
and the S.E.C. appears to have stopped requiring companies and
individuals to admit culpability as part of a settlement, so a
resolution under this provision would not affect private litigation.
serious consideration is being given to taking Tesla private, the
company and Mr. Musk have an incentive to reach a resolution with the
S.E.C. as quickly as possible. The firms that might help fund a deal
may be hesitant to commit financing if the cloud of an S.E.C.
investigation is hanging over Tesla. But resolving the investigation
will not be easy, at least not until there is greater clarity about
what exactly Mr. Musk meant with his ill-fated tweet.