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September 28, 2018

SEC Moving with "Unusal" Speed to Sue Elon Musk for Security Fraud


SEC charges him with securities fraud, seeks to oust him from Tesla.


Tesla (TSLA) plunged $39 or 12.7% in late trading after the SEC announced that it had charged CEO Elon Musk with securities fraud “for a series of false and misleading tweets about a potential transaction to take Tesla private.”


This particular blatant lie commenced on August 7, when he told his 22 million Twitter followers, and the news media that jump on this stuff, and everyone that reads the news, which was the entire world, during trading hours for maximum stock-price-manipulation effect: “Am considering taking Tesla private at $420. Funding secured.”


“This statement was false and misleading,” the SEC says in the complaint, filed in federal district court in the Southern District of New York. “Over the next three hours, Musk made a series of additional materially false and misleading statements via Twitter including”:

  • “My hope is *all* current investors remain with Tesla even if we’re private. Would create special purpose fund enabling anyone to stay with Tesla.”
  • “Shareholders could either to [sic] sell at 420 or hold shares & go private.”
  • “Investor support is confirmed. Only reason why this is not certain is that it’s contingent on a shareholder vote.”

On that day, TSLA soared $25, or over 7%, before trading was halted. When trading resumed, shares jumped further, and closed up $37.91 or 11% for the day, before it all came gloriously unglued.

“In truth and in fact, Musk had not even discussed, much less confirmed, key deal terms, including price, with any potential funding source,” the complaint says.
Musk knew or was reckless in not knowing that each of these statements was false and/or misleading because he did not have an adequate basis in fact for his assertions.
When he made these statements, Musk knew that he had never discussed a going-private transaction at $420 per share with any potential funding source, had done nothing to investigate whether it would be possible for all current investors to remain with Tesla as a private company via a “special purpose fund,” and had not confirmed support of Tesla’s investors for a potential going private transaction.
He also knew that he had not satisfied numerous additional contingencies, the resolution of which was highly uncertain, when he unequivocally declared, “Only reason why this is not certain is that it’s contingent on a shareholder vote.”
Musk’s public statements and omissions created the misleading impression that taking Tesla private was subject only to Musk choosing to do so and a shareholder vote.

And now the remedies.

“Musk violated, and unless restrained and enjoined will violate again,” antifraud provisions of the federal securities laws, the complaint said. It seeks to oust Musk as CEO and chairman of Tesla and hit him financially. It seeks specifically:
  • A permanent injunction.
  • Disgorgement, with prejudgment interest, of “any ill-gotten gains received as a result of the violations alleged herein.”
  • Civil penalties.
  • “An officer and director bar against Musk,” but not just at Tesla but “of a public company,” any public company, which would force him out as CEO and chairman at Tesla and block him in his future endeavors at public companies. SpaceX is private, so OK, but it could not go public with Musk at the helm.
  • And such further relief as the Court may deem appropriate.
The SEC announcement points out that just because it’s said on Twitter doesn’t mean it’s OK to blatantly lie to investors to manipulate up the shares. Providing “truthful and accurate information is among a CEO’s most critical obligations,” the statement said. “That standard applies with equal force when the communications are made via social media or another non-traditional form.”

And it doesn’t matter if Musk has a halo: “An officer’s celebrity status or reputation as a technological innovator does not give license to take those responsibilities lightly,” it said.
Alas, these charges apparently do not include the most recent lies, such as his absurd BS tweet three days ago that Tesla was “upgrading” its “logistics system,” and because it was “running into an extreme shortage of car carrier trailers,” it would start “building our own car carriers this weekend to alleviate load.”

Tesla building car carrier trailers over the weekend? What moron would actually believe this blatant lie?

Even if no one believes his blatant lies, he still tells them. But then on second thought, there are many true believers who believe anything he says, and plenty of fund managers that have too much money at stake with their Tesla shares that they rode all the way up into ludicrousness so that they must believe every blatant lie he tells, because they must buy the shares when they sell off because they have too much at stake, and they cannot allow the shares to drop….

And they’ll do it again. Shares are down $39 tonight, but they’re still inexplicably high, at around $270, because after each fiasco, of which Tesla has an endless series, the buying by these fund managers that are too deeply into this stuff perks the shares back up.

But already, and for all eternity, “funding secured” can no longer be used with a straight face. 

Courtesy of Wolf Richter via Wolf Street ( (More from Wolf Street here)  

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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Item Reviewed: SEC Moving with "Unusal" Speed to Sue Elon Musk for Security Fraud Rating: 5 Reviewed By: Econ Matters