The Industry

What the SEC’s Lawsuit Against Elon Musk Means for Tesla

Elon Musk could be forced to step down as CEO of Tesla.
Elon Musk could be forced to step down as CEO of Tesla. Spencer Platt/Getty Images

It appears that Tesla CEO Elon Musk just made a double-or-nothing bet with the Securities and Exchange Commission.

On Thursday, the SEC filed a lawsuit against Musk alleging that he misled investors when tweeting about the possibility of taking the electric car company private in August. If the SEC prevails, Musk will be barred from serving as an officer or director of a public company and will have to pay an unspecified fine. Reports now suggest that Musk dropped out at the last minute from a deal with the SEC that would’ve allowed him to avoid the harsher penalties. The SEC brought the suit to a Manhattan federal court just hours after Musk killed the deal.

According to a CNBC report, the requirements of the abandoned settlement were such that Musk could have remained as CEO of Tesla and would not have had to admit any wrongdoing. He would have had to step down as the company’s chairman for two years, pay a fine, and appoint two new independent directors.

Now Musk faces the prospect of being unable to serve as the CEO or chairman of any public company for a set amount of time. Musk’s decision not to settle also makes him more vulnerable to a lawsuit from Tesla’s shareholders, even if he eventually prevails over the SEC. Tesla’s stock fell more than 12 percent on Friday morning, potentially making this the company’s worse day on the stock market since 2013.

Despite the dour outlook if Musk loses the case, Tesla’s board issued a statement in support of the CEO and chairman on Thursday evening:

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 U.S. auto company in over a century.

Our focus remains on the continued ramp of Model 3 production and delivering for our customers, shareholders and employees.

The SEC’s suit stems from a series of tweets Musk sent in August in which he claimed that he had secured funding for a deal to take Tesla private at $420 a share. The company’s stock soon rose by as much as 7.3 percent. Musk later revealed that he had been in talks with Saudi Arabia’s sovereign wealth fund about the deal, but then the Saudis invested in a competing electric car company called Lucid Motors within a matter of weeks. Tesla admitted that it did not in fact have the requisite funding, and Musk announced that he would be keeping the company public. The SEC now alleges that Musk “knew or was reckless in not knowing” that his tweets were misleading and further claims, “In truth and in fact, Musk had not even discussed, much less confirmed, key deal terms, including price, with any potential funding source.”

“The nature of what the SEC needs to establish in this matter is pretty simple. Musk has handed it to them on a silver platter,” Chester Spatt, a professor of finance at Carnegie Mellon University and former chief economist for the SEC, told Slate.

Spatt predicts that Tesla will now have a very difficult time with financing as long as there’s uncertainty about the lawsuit, making it tricky for the company to scale up or replace a piece of convertible debt.

“That settlement was a softball,” Spatt said, adding that the requirements that Tesla appoint a chairman beside Musk and two independent directors to the board would likely have been beneficial to shareholders. “This was a gift to the stockholders. They need a more sophisticated board, no doubt about it. This is part of their problem: there’s not enough adult supervision.”