“Am considering taking Tesla private at $420. Funding secured.” With that short, simple tweet, world-famous billionaire and Tesla CEO, Elon Musk, prompted a flurry of investor activity and set alarm bells off at the Securities and Exchange Commission (the “SEC”). ((Kevin McCoy & Nathan Bomey, SEC Charges Tesla CEO Elon Musk With False Statements, Seeks His Removal, USA Today (Sept. 27, 2018), https://www.usatoday.com/story/money/2018/09/27/sec-charges-elon-musk-tesla-over-tweets-take-company-private/1447172002/. )) Musk followed that tweet up with several more outlining how the transaction would play out. He stated that “shareholders could either [choose] to sell at [$]420 or hold shares & go private” ((Elon Musk (@elonmusk), Twitter (Aug. 7, 2018, 11:13 AM), https://twitter.com/elonmusk/status/1026894228541071360.)) and that “investor support [was] confirmed.” ((Elon Musk (@elonmusk), Twitter (Aug. 7, 2018, 12:36 PM), https://twitter.com/elonmusk/status/1026914941004001280.))
Musk also sent an email to all Tesla employees that day (August 7) explaining his rationale for wanting to take the company private. ((Elon Musk, Taking Tesla Private, Tesla (Aug 7, 2018), https://www.tesla.com/blog/taking-tesla-private?redirect=no.)) In this email, which was also published on Tesla’s public blog, Musk discussed the various benefits that the company would enjoy by virtue of being a private company, such as being freed from the quarterly earnings cycle and not having to deal with the pressure to meet Wall Street projections. ((Id.)) Musk also mentioned short sellers in his email to employees, claiming that Tesla was the “most shorted stock in the history of the stock market “and that there were “large numbers of people who [had] the incentive to attack the company.” ((Id.))
After tweeting about the potential deal, Tesla’s stock price predictably soared, as investors clamored to cash in on the transaction. All in all, by day’s end Tesla’s stock price had increased from $343.84 per share to $379.57 per share – an increase of over ten percent. ((Tesla, Inc. Common Stock Historical Prices, Nasdaq (Nov 7, 2018), https://www.nasdaq.com/symbol/tsla/historical.)) However, less than twenty-four hours later, after Musk was unable to identify who or what the source funding for the deal was, many investors became skeptical of whether Musk had actually reached an agreement to take Tesla private. ((Alex Sherman, It’s Been 24 Hours and Tesla Still Hasn’t Said Where Its Secured Financing is Coming From – Here’s What That Probably Means, CNBC (Aug. 8, 1:54 PM), https://www.cnbc.com/2018/08/08/24-hours-musk-tweet-secured-financing-mystery.html.)) And investors were not alone in questioning the veracity of Musk’s claim; the SEC was reportedly investigating the matter less than a day after Musk’s initial tweet to determine whether his claim was true or not. ((Dave Michaels & Michael Rapoport, SEC Probes Tesla CEO Musk’s Tweets, Wall Street J. (Aug. 8, 2018, 7:27 PM), https://www.wsj.com/articles/sec-has-made-inquiries-to-tesla-over-elon-musks-taking-private-tweet-1533757570?mod=hp_lead_pos1.)) This uncertainty was reflected in Tesla’s stock price, as by day’s end on August 8, the day after Musk’s initial tweet, Tesla’s stock was trading at $370.34 per share, as opposed to $420 per share, which it would have been at had investors been confident in the likelihood of the deal happening at that price. ((Robert Ferris & Dawn Kopecki, Tesla Likely to Face SEC Investigation Following Musk Tweets Amid Debate of Market Manipulation, CNBC (Aug. 8, 2018, 4:18 PM), https://www.cnbc.com/2018/08/08/tesla-likely-to-face-sec-investigation-following-musk-tweets.html.))
The next update in the saga came on August 13, when a blog post titled “Update on Taking Tesla Private” was published on Tesla’s public blog. ((Elon Musk, Update on Taking Tesla Private, Tesla (Aug. 13, 2018), https://www.tesla.com/blog/update-taking-tesla-private.)) In this blog post, Musk clarified for the first time why he had said, “funding secured.” ((Id.)) In his words, Musk believed that funding was secured because he felt there was “no question that a deal with the Saudi sovereign fund could be closed, and that it was just a matter of getting the process moving.” ((Id.)) Musk’s post also disclosed that he was still discussing key terms with the Saudi sovereign fund and that no detailed proposal had been presented to the board. ((Id.)) In sum, this post, while seemingly an attempt to answer some of the many questions that surrounded the potential deal, failed to provide enough details to persuade the investing public that the deal was going to materialize.
The uncertainty of whether Tesla was actually going private (and what price it might go private at) was resolved on August 24 when Musk posted on Tesla’s public blog that the company would stay public. ((Elon Musk, Staying Public, Tesla (Aug. 24, 2018) https://www.tesla.com/blog/staying-public.)) In this post, Musk explained that the majority of Tesla’s shareholders would prefer the company stay public and that going private would be more time-consuming and distracting than he had expected. ((Id.)) By the end of day on August 27, the first trading day after Musk’s announcement that Tesla would remain public, Tesla’s stock had dropped to $319.27 per share, far below the price that it had swelled up to immediately after Musk’s initial tweets. ((Yahoo Finance, https://finance.yahoo.com/quote/TSLA/history/ (last visited Nov. 9, 2018).))
After this news broke, many onlookers were convinced that Musk had never actually secured funding for the transaction, and that it was all part of a scheme to harm Tesla short sellers. ((Scott Simon & Uri Berliner, Tesla to Stay Public, Nat’l Pub. Radio (Aug. 25, 2018), https://www.npr.org/2018/08/25/641843036/tesla-to-stay-public.)) This line of thinking seemed possible because Musk has an extensive history of attacking short sellers. ((See Matthew DeBord, Elon Musk Didn’t Used to Care About Short Sellers – Here’s Why He Does Now, Bus. Insider (Aug. 17, 2018, 3:34 PM), https://www.businessinsider.com/why-elon-musk-cares-about-short-sellers-2018-8.)) Musk has said some rather outlandish things in interviews when it comes to short sellers, such as “they’re jerks who want us to die” and “they’re constantly trying to make up false rumors and amplify any negative rumors.” ((Neil Strauss, Elon Musk: The Architect of Tomorrow, Rolling Stone (Nov. 15, 2017, 1:00 PM), https://www.rollingstone.com/culture/culture-features/elon-musk-the-architect-of-tomorrow-120850/.)) He has also taken to Twitter in the past to mock short sellers, once tweeting “short burn of the century comin[g] soon.” ((Elon Musk (@elonmusk), Twitter (May 4, 2018, 6:02 AM), https://twitter.com/elonmusk/status/992388944774938626?lang=en&mod=article_inline.)) Musk’s history with short sellers, in addition to him walking back his plan to take Tesla private, naturally led some to believe that the whole ordeal was an elaborate rouse meant to harm short sellers.
After investigating the matter for over a month, the SEC officially filed its claim against Musk on September 27. In its complaint, the SEC alleged:
Musk knew that he (1) had not agreed upon any terms for a going-private transaction with the Fund or any other funding source; (2) had no further substantive communications with representatives of the Fund beyond their 30 to 45 minute meeting on July 31; (3) had never discussed a going-private transaction at a share price of $420 with any potential funding source; (4) had not contacted any additional potential strategic investors to assess their interest in participating in a going-private transaction; (5) had not contacted existing Tesla shareholders to assess their interest in remaining invested in Tesla as a private company; (6) had not formally retained any legal or financial advisors to assist with a going-private transaction; (7) had not determined whether retail investors could remain invested in Tesla as a private company; (8) had not determined whether there were restrictions on illiquid holdings by Tesla’s institutional investors; and (9) had not determined what regulatory approvals would be required or whether they could be satisfied. ((SEC Complaint: Elon Musk, https://www.sec.gov/litigation/complaints/2018/comp-pr2018-219.pdf))
These allegations, if true, would constitute a violation of Section 10(b) of the Exchange Act, as Musk would have made untrue statements of material facts and omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading in connection with the sale or purchase of securities. ((See 17 C.F.R. § 240.10b-5 (1951).)) In its suit, the SEC sought a permanent injunction, disgorgement, civil penalties, and an order that would bar Musk from serving as an officer or director of any publicly traded company. ((Id.))
Musk described the SEC’s suit against him as an “unjustified action” that left him “deeply saddened and disappointed.” ((Kristen Korosec, Tesla CEO Elon Musk Calls SEC Fraud Charges an Unjustified Action, Tech Crunch (Sep. 27, 2018, 6:10 PM), https://techcrunch.com/2018/09/27/tesla-ceo-elon-musk-responds-to-sec-securities-fraud-charges/.)) Nevertheless, investors quickly took note of the lawsuit, and Tesla shares dropped more than thirteen percent in after-hours trading on September 27, the day the SEC lodged its complaint against Musk. ((Kirsten Korosec, Tesla Shares Plummet After SEC Files Fraud Charges Against Elon Musk, Tech Crunch (September 27, 2018, 4:33 PM), https://techcrunch.com/2018/09/27/tesla-shares-fall-more-than-10-after-sec-fraud-charges-against-elon-musk/.))
On September 29, just two days after the SEC filed its claim against Musk, the parties reached a settlement. ((Elon Musk Settles Fraud Charges; Tesla Charged With and Resolves Securities Law Charge, U.S. Secs. and Exchange Comm’n (Sep. 29, 2018), https://www.sec.gov/news/press-release/2018-226.)) Settling this quickly allowed both sides to avoid litigation costs and allowed Tesla to avoid negative publicity that could stem from lengthy litigation. ((Javier E. David, SEC Settles Charges With Tesla’s Elon Musk, Will Remain as CEO But Relinquish Chairman Role and Pay Stiff Fine, CNBC (Sep. 29, 2018, 5:20 PM), https://www.cnbc.com/2018/09/29/sec-settles-charges-with-teslas-elon-musk-will-remain-as-ceo.html.)) The Settlement also pertained to charges that the SEC brought against Tesla that same day. ((Elon Musk Settles Fraud Charges; Tesla Charged With and Resolves Securities Law Charge, supra note 28.)) The SEC alleged that Tesla failed to implement adequate controls or procedures to monitor Musk’s use of Twitter to disseminate information about Tesla, which, if true, would be a violation of Rule 13a-15 of the Exchange Act. ((SEC Complaint: Tesla, Inc., supra note 23.)) Rule 13a-15 was implemented in an attempt to regulate how publicly traded companies disclose information to the public. This type of situation – a CEO of a publicly traded company spontaneously tweeting that he is taking his company private – is exactly the sort of thing the rule was meant to prevent. Tesla seemingly had no control over Musk’s Twitter account, which clearly violates Rule 13a-15, and thus it is no surprise that Tesla was quick to settle the charges brought against it. ((Elizabeth Lopatto, After the SEC Settlement, Who Will Review Elon Musk’s Tweets?, The Verge (Oct. 5, 2018, 7:00 AM), https://www.theverge.com/2018/10/5/17937768/elon-musk-sec-settlement-twitter-tesla-shareholder-lawsuit.))
Both Tesla and Musk settled the charges against them on September 29. ((Elon Musk Settles Fraud Charges; Tesla Charged With and Resolves Securities Law Charge, supra note 28)) The settlements required (i) Musk to step down as Tesla’s Chairman and be replaced by an independent Chairman; (ii) Tesla to appoint two new independent directors to its board; (iii) Tesla to establish a new committee of independent directors and put in place additional controls and procedures to oversee Musk’s communications with the investing public; and (iv) Musk and Tesla to each pay a separate twenty million dollar penalty. ((Matthew Goldstein, Elon Musk Steps Down as Chairman in Deal With S.E.C. Over Tweet About Tesla, N.Y.C Times (Sep. 29, 2018), https://www.nytimes.com/2018/09/29/business/tesla-musk-sec-settlement.html.))
And with that settlement, the saga following Musk’s infamous tweets finally concluded. While most CEOs are not nearly as active as Musk on Twitter, ((Susan Pulliam, For Tesla’s Elon Musk, Twitter is Sword Against Short Sellers, Wall St. J. (Aug. 2, 2018, 8:39 PM), https://www.wsj.com/articles/for-teslas-elon-musk-twitter-is-sword-against-short-sellers-1533216249.)), his story can still serve as a warning to other company executives. Social media has made it easier than ever before to communicate with millions of people instantaneously, and while that is beneficial in many ways, it also creates a number of pitfalls for company executives that have to comply with securities laws governing the dissemination of company information. Perhaps some will learn from Musk’s mistakes, or maybe we will see even more instances in which social media is the downfall of company executives.
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