A few weeks ago Motoring Weekly published an article about the recent behaviour of Elon Musk, the founder, Chairman and CEO of Tesla. In that article, was a comment about the Securities and Exchange Commission (SEC) in the US investigating his announcement that he had secured funding to take Tesla private.
He tweeted the price he expected to get and did this without the knowledge of the Board – which didn’t go down well with the Board, the SEC or even senior management, some of whom quit. It is critical for the smooth running of a corporation that all three are aware and comfortable with the position of the entity. Now the SEC has completed its investigation – it wasn’t that hard really and they have swiftly reached a resolution. Apparently the resolution could have been less painful for Tesla, however Musk put his nose in and the result was worse than it could have been. He really does think that he is a god and shouldn’t be punished, however has come away with a bloodied nose.
Having confirmed that the tweet stating the price was not true, the SEC charged Musk and Tesla with misleading investors. After the tweet was released the stock price rose to meet the $420 per share as the tweet suggested. After Musk backtracked, the stock plummeted then after the SEC had announced their charges against the company and founder, the stock dropped another 11-14%.
As part of the resolution, the SEC wanted Musk to issue a statement and prevented him from saying that he had done nothing wrong. Musk refused – he wanted to say he was negligent and threw a strop when the SEC refused that wording. He had mislead investors clear and simple, however he still believes he did nothing wrong! Musk told the Board that if they accepted the deal put on the table by the SEC, he would quit and he persuaded them to issue a statement that they had full confidence in Musk and his ability to run the company. That was a red rag to a bull for the SEC who promptly issued a lawsuit against Tesla. The Board realised that they had backed the wrong horse and promptly sent their lawyers to the SEC to negotiate.
If the SEC had taken the Tesla Board to court with a proven case of misleading the investment community, all of the members could have been forced out and possibly barred from future directorships. Other companies would not consider them for a position if the SEC was successful, so it was in their best interest to abandon Musk.
The outcome hurt Musk and the company far more than it would have done if Musk had accepted the original penalty. Musk’s own fine was doubled to $20M and Tesla had to pay a further $20M – Musk appears to have effectively paid that as well because he was forced to buy $20M of Tesla stock! So in reality he could have got away with a fine of $10M and ended up paying four times that! In addition, Musk was banned from being a Chairman for three years.
From a governance perspective, the Board has to expand to allow more independent directors and one of those will become the Chair. This is actually good governance and something that should have been in place already. Having a Chair and CEO in the same person is not well balanced – there needs to be distance between the Board and management for better oversight.
This was good news for the investors who bought a depressed stock and promptly helped it gain value again. However, this is not the end of this saga. The Justice Department is also investigating the issue and a class action has been created on behalf of the short sellers who were making a buck on the volatility of the stock prior to the announcement. Musk hates short sellers and thought he was getting back at them when he announced the intent to go private.
There are many other lawsuits involving Tesla or Musk that warrant a separate article!