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The biggest fans of Elon Musk may think that the occasional indifference of Tesla's president and CEO about the legal and regulatory requirements is charming and even a sign of genius. But on Thursday, the Securities and Exchange Commission warned Musk and investors that its celebrity status or reputation as a technology innovator did not allow it to take these responsibilities lightly.
The SEC quickly investigated Musk's series of allegedly false and misleading tweets from August 7 on a potential transaction to take Tesla.
TSLA, -13.90%
private, lay charges in federal court late Thursday, less than two months later.
Lily: SEC pursues Elon Musk for "misleading" tweets, seeks to prevent Tesla CEO
David Chase, a former SEC enforcement division lawyer who now represents white-collar defendants in his own firm, told MarketWatch: "The SEC could act quickly because it was a straight forward and straightforward case. . Either he had factual support for the tweet or he did not.
In his complaint, SEC lawyers methodically explained why Musk missed all the steps of a cautious "go-private" operation when he made his private offer in a tweet on Aug. 7.
"I was as surprised as anyone when Musk tweeted the go-private proposal, that he chose this medium to communicate material information," Chase said in an interview with MarketWatch. "But given his position as president, CEO and main shareholder, I also assumed that there was a factual basis for that."
As of January 2017, Musk had three or four meetings in person with representatives of a Saudi sovereign investment fund. During these meetings, according to Musk's testimony to the SEC, the Fund's chief representative expressed his desire to make a significant investment in Tesla and to establish a Tesla production facility in the Middle East.
Between July 31, 2018, when the SEC said that Musk met again with the fund's representatives and on the morning of August 7, when he tweeted his private sale announcement, Musk did not have any more substantial communications with fund representatives a private transaction at a price of $ 420 with any potential source of funding, said the SEC.
Neither did he contact any other potential strategic investors to assess their interest in participating in a privatization transaction or retain advisers to assist them in a privatization transaction until they were privatized. he tweet, according to the SEC.
The SEC said at the July 31 meeting with the fund that Musk had not discussed the dollar amount or the specific ownership percentage of the fund's investment in a privatization transaction, the proposed specific redemption premium to current shareholders of Tesla or its own process. for the approval of the board of the transaction. He also did not investigate the fund's available liquidity, past experience of participating in a privatization project, and possible foreign ownership restrictions of significant involvement in Tesla or regulatory hurdles.
Musk and Tesla have also not informed Nasdaq, where the shares are listed, before publishing their tweets on August 7th. The Nasdaq rules require that listed companies such as Tesla notify the Nasdaq at least ten minutes before publicly publishing important information about corporate events, such as a proposed privatization action.
The Nasdaq suspended trading on Tesla shares at 14:08 Eastern, about an hour and twenty minutes after Musk sent the first tweet, right in the middle of the day's official trading session. Immediately after this tweet, the volume of transactions and the price of Tesla shares increased. The Nasdaq lifted trading halts on Tesla shares about 90 minutes later. Following the resumption of trading, Tesla's stock price continued to climb, closing at $ 379.57, up more than 6% from the first time Musk tweeted to have taken Tesla privately earlier in the year. day, according to the SEC's complaint.
Bennett Lasko, a private sector lawyer who represents companies and executives in securities litigation, told MarketWatch: "This is a pretty glaring case. Musk said he got some money and did not do it. He did not even discuss the prize with any source of funding. Hundreds of millions of dollars have changed hands in a matter of hours, and by the time the dust settled at the end of August, investors have probably lost more than $ 1 billion. "
See also: Musk's plan to take Tesla privately and authorize outside shareholders is not an easy solution.
Lily: SEC will still have many questions for Tesla and Musk, experts say
Musk's calculation resulted in a price of $ 419 and Musk told the SEC that he had rounded the price up to $ 420 because he had recently learned the relationship between "420" in marijuana growing and not a good reason to choose a price.
"Musk's description of the pricing approach may have seemed to the SEC to be flippant, bordering on arrogant disregard for compliance with securities laws," Chase told MarketWatch. "It was material information based on the dramatic evolution of share prices, although there was a lingering doubt because of the reference" 420 "that it could be a joke.
The SEC made a very specific point in describing the potential motivation for Musk's intentionally false and misleading statements. "Musk complained that Tesla was unfairly targeted by short sellers and predicted that short sellers would be" burned, "according to the SEC's complaint. On May 4, Musk tweeted, "Oh, uh, the little burn of the century is coming soon. The flamethrowers should arrive just in time. And on June 17, Musk tweeted that short sellers "have about three weeks before their short position explodes."
Lasko told MarketWatch: "Musk's fierce war with short sellers provides an obvious reason for him to mislead the market intentionally. The allegations could support a criminal charge against him. But it is common for civil cases to allege facts that may justify a criminal charge and none have ever been brought. "
The Wall Street Journal reported Thursday night, citing unnamed sources, that Musk's lawyers canceled an agreement with the SEC at the last minute.
CNBC reported that the SEC had asked Musk to relinquish his role as president for two years and appoint two independent directors.
The SEC seeks to permanently restrict and prohibit Musk from repeating similar conduct by ordering "to be prohibited from acting as an officer or director" because, unless it is "restricted and enjoined", he states that he will "continue to violate" the law so this time with "scientist", or full intent, according to the complaint.
"The bar of the officer and the director, or the length of it, may have been an obstacle to an immediate settlement," Chase told MarketWatch. "Musk may want to negotiate the bar or at least reduce the length unless forever."
A spokeswoman for Tesla told MarketWatch that the company and the board of directors had declined to comment on this statement:
"Tesla and the Board of Directors have full faith in Elon, its integrity and leadership in the company, which has resulted in the most successful American automotive company for over a century. Our goal remains the continuous production and delivery ramp for Model 3 for our customers, shareholders and employees. "
See also: SEC vs. Elon Musk: What the Prosecution for Tesla Investors Mean
Elon Musk's statement is unsurprising:
"This unjustified action by the SEC leaves me deeply saddened and disappointed. I've always acted in the best interests of truth, transparency and investors. Integrity is the most important value in my life and the facts will show that I have never compromised it in any way.
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