Elon Musk settles SEC fraud case – and his Tesla tweets are the big casualty

Chris Davies - Sep 30, 2018, 7:01am CDT
Elon Musk settles SEC fraud case – and his Tesla tweets are the big casualty

Elon Musk has settled with the SEC, stepping down as chairman of the Tesla board and paying $20m in penalties – a figure matched by the automaker – though the biggest loss may well be on his Twitter account. The outspoken and often controversial billionaire found himself on the wrong side of the US Securities and Exchange Commission earlier this year, after tweets about taking Tesla public were accused of being securities fraud.

Musk’s August 7 tweet suggested that Tesla could go private at $420 per share – “a substantial premium to its trading price at the time,” the SEC pointed out in a statement about the settlement today – and that he had secured funding for the transaction. In fact, the SEC argued, Musk had no such arrangement finalized. Tesla’s stock surged over 6-percent, but the move to go private failed to pan out.

As the SEC views it, Musk’s twitter account had already been promoted as an official mouthpiece for Tesla. Indeed, the Commission highlights, the automaker said in 2013 that the founder and CEO’s tweets should be seen “as a means of announcing material information about Tesla.”

Despite that, though, “Tesla had no disclosure controls or procedures in place to determine whether Musk’s tweets contained information required to be disclosed in Tesla’s SEC filings. Nor did it have sufficient processes in place to that Musk’s tweets were accurate or complete.”

A settlement agreed between Musk, Tesla, and the SEC will see them neither admit nor deny the charges. Nonetheless, the penalties are fairly broad-reaching. For anybody who has become used to reading Musk’s tweets for their entertainment value, indeed, it could come as quite the disappointment.

Musk stays CEO, but loses his Chairman role

Elon Musk remains Tesla’s CEO, which had been one of the key concerns by investors and Tesla backers in the aftermath of the SEC revealing it was investigating the tweets. However, he must step down as Chairman of the automaker. “Musk will be ineligible to be re-elected Chairman for three years,” the SEC says.

Exactly how that will change Musk’s role – and the control he has at Tesla – will remain to be seen. However, it’s clear that the breadth of powers he currently has may well be diluted by losing the chairman’s position. The chairman effectively oversees a chief executive officer, and indeed has the power – along with the rest of the board – to replace the CEO altogether, if they deem it is in the best interests of the company.

There’ll be more independent oversight

A new Chairman isn’t the only change to Tesla’s board. The SEC has insisted on two new independent directors, who will join the governing body. One of the downsides of having a CEO also be Chairman is that the latter role is at its core intended to evaluate the performance of the former.

Independent directors, meanwhile, add an extra degree of perspective to the board as a whole. Selected from people outside of Tesla, with no management ties to it, they’re typically expected – among other things – to act as intermediaries between the directors and the shareholders. Often, though, they’re seen more as a safe guiding hand than anything else, selected for the sage wisdom and rationality they can bring.

Until now, Tesla’s board has comprised of nine people, including Elon Musk as Chairman. Seven of those nine are independent directors. Several also serve on the Tesla Audit Committee, the Nominating and Governance Committee, and the Compensation Committee.

Both Tesla and Musk will open their wallets

What consists a meaningful penalty when you’re dealing with a billionaire? That’s a good question, and according to the SEC the answer is $20 million. That’s how much Elon Musk will pay as a penalty as part of the settlement.

It’s not just Musk, though. Tesla, too, will pay $20 million, as a reflection of its shortcomings in not having means in place to control its CEO’s tweeting. Neither will be able to use the penalty for tax purposes, either, and the money will be “distributed to harmed investors under a court-approved process” the SEC says.

Get ready for a more restrained Elon Musk

If charging Musk $20m won’t inconvenience him, muzzling his public voice might. “Tesla will establish a new committee of independent directors and put in place additional controls and procedures to oversee Musk’s communications,” the SEC says. That’s going to have, potentially, the biggest impact of any part of the new settlement.

In short, it means that any sort of public communication relating to Tesla that Musk makes – including through social media like his Twitter account, through the Tesla blog, via press releases, or on investor calls – must first be pre-approved by a new oversight process. The automaker will have to come up with that oversight system itself, making sure that Musk’s off-the-cuff remarks could no longer be considered manipulative when it comes to factors like Tesla’s share price.

“The total package of remedies and relief announced today are specifically designed to address the misconduct at issue,” Stephanie Avakian, Co-Director of the SEC’s Enforcement Division said of the settlement, “by strengthening Tesla’s corporate governance and oversight in order to protect investors.”

Neither Tesla nor Elon Musk have commented publicly on the settlement, nor the implications for the automaker. Indeed, Musk spent the weekend tweeting primarily congratulatory messages about the tenth anniversary of SpaceX’s first successful launch, as well as discussing the move to deliver new Tesla cars to buyers’ home or work addresses, rather than expect them to come in and pick up the vehicles at a dealership.


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