The US Securities and Exchange Commission (SEC) has sued Tesla CEO Elon Musk, accusing him of securities fraud.
The SEC has charged Musk with making “false and misleading tweets” after he announced on Twitter last month that he would take the electric car maker private with “funding secured”.
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It has since emerged that no such funding existed, although Musk later said that he felt confident Saudi Arabia’s sovereign wealth fund would provide the money.
The SEC complaint said that Musk’s tweets “created the misleading impression that taking Tesla private was subject only to Mr Musk choosing to do so and a shareholder vote”.
“In truth and in fact Musk had not even discussed, much less confirmed, key deal terms, including price, with any potential funding source,” it said.
In a statement to TechCrunch, Musk said:
“This unjustified action by the SEC leaves me deeply saddened and disappointed. 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.”
What is securities fraud?
Securities fraud can take many forms but it essentially boils down to providing false information that induces investors to make investment decisions.
The FBI defines it as covering a “wide range of illegal activities, all of which involve the deception of investors or the manipulation of financial markets.”
It lists high yield investment fraud, Ponzi schemes and broker embezzlement, among others.
The SEC alleges that Musk’s claims harmed investors and is seeking to block him from acting as an officer or director of a public company.
Speaking at a press conference yesterday, co-director of the SEC’s enforcement division Stephanie Avakian said:
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“Taking care to provide truthful and accurate information is among a CEO’s most critical obligations.
“That standard applies with equal force when the communications are made via social media or another non-traditional form.”
Musk’s securities fraud charge appears to be the first time a case has revolved around a tweet.
Tesla shares soared after Musk’s tweet, but have since been volatile. They dropped more than 10% after the SEC complaint in after-hours trading.
Am considering taking Tesla private at $420. Funding secured.
— Elon Musk (@elonmusk) August 7, 2018
The SEC also alleged that Musk’s valuation of $420 per share was influenced by “marijuana culture”.
“We allege that Musk had arrived at the price of $420 by assuming a 20 percent premium of what Tesla’s then existing share price (was), and then rounding up to $420 because of the significance of that number in marijuana culture, and his belief that his girlfriend would be amused by it,” SEC co-director of enforcement Steven Peikin said during the conference.
Elon Musk securities fraud: Historical cases of misleading investors
Arguably the two most famous securities fraud cases are that of Charles Ponzi, whose name became synonymous with pyramid schemes, and Jordan Belfort, also known as the ‘Wolf of Wall Street’. Both of their organisations were scams by architecture.
By contrast, it is Musk’s influence of the share price with misleading information that is under investigation.
More comparable is former WorldCom CEO Bernard Ebbers, who exaggerated the assets of the second largest telecommunications company despite its heavy debt. Ebbers was convicted of fraud in 2005 and shareholders lost around $100bn.
More recently, the CEO of biotech firm PixarBio was arrested and charged for manipulating the company’s stock price. In 2015, Frank Reynolds told investors that the company had a market valuation of $1bn and that its main drug would end “thousands of years of morphine and opiate addiction.” The claims were shown to be untrue and he is now facing 20 years in prison if convicted.
In 2009 the SEC charged Countrywide Financial CEO Angelo Mozilo with securities fraud for misleading investors about significant credit risks. He eventually reached a settlement with the SEC, agreeing to pay $67.5m in fines. He also received a lifetime ban from serving as an officer or director of any publicly traded company.
Notably, it does not appear that Elon Musk sold any of his Tesla shares during this period. As of June 2018, he reportedly owns 33.7 million Tesla shares, making the founder the largest shareholder.
The Tesla board of directors released a statement defending Musk:
“Tesla and the board of directors are fully confident in Elon, his integrity, and his leadership of the company, which has resulted in the most successful US auto company in over a century.”