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Tesla shares fall after SEC alleges Musk lied to investors

The Security and Exchange Commission reached an agreement with Elon Musk. He will pay a $20 million fine and step down as board chairman of Tesla. (Video: Jhaan Elker/The Washington Post)

Tesla shares dropped more than 12 percent Friday morning following the Securities and Exchange Commission’s announcement that it will sue the company’s chief executive, Elon Musk.

The SEC is seeking to ban him from leading any public company, saying he lied to investors when he claimed on Twitter that he had secured the funding to take the automaker private.

The legal action could prove devastating for Musk, one of the nation’s most prominent tech visionaries and a brash icon of entrepreneurialism who made Tesla into one of America’s most valuable car companies. It could also threaten financial peril for the automaker as well as Musk’s other business interests in space travel, artificial intelligence and hypersonic trains.

Of all the celebrity chiefs to emerge from Silicon Valley, Musk has been one of the most revered by a tech culture that prides itself on rule-breaking and risky ventures. But he has also been a polarizing force who flaunted his status as a renegade executive and had no qualms attacking enemies or casually smoking marijuana on a viral video even as the SEC was intensifying its probe.

Musk said in a statement Thursday: “This unjustified action by the SEC leaves me deeply saddened and disappointed. I have always taken action in the best interests of truth, transparency and investors. Integrity is the most important value in my life and the facts will show I never compromised this in any way.”

Tesla and its board issued a joint statement late Thursday saying they “are fully confident in Elon, his integrity, and his leadership of the company, which has resulted in the most successful US auto company in over a century.”

Stock in the company, which has never turned an annual profit, plunged more than 13 percent in after-hours trading.

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The swiftness of the SEC’s investigation surprised analysts and former SEC officials. Probes like this typically takes years, not months, particularly in high-profile cases, said Jordan Thomas, a partner at Labaton Sucharow and a former Justice Department trial lawyer. “The speed in which this case was brought also reflects a more aggressive SEC enforcement division and their high degree of confidence in the case."

Thomas said the consequences for Tesla and Musk would be severe if the SEC prevails. “There is no middle ground, if the SEC’s position is that he be barred from the industry,” he added. “The vast majority of defendants settle with the SEC before filing. I am very surprised that they couldn’t find common ground."

Musk, 47, is Tesla’s chairman, chief executive and largest shareholder, with a roughly 20 percent stake in the company. He oversees virtually all of the company’s development, engineering and design. He also commands a vast audience on Twitter, where he has more than 22 million followers.

Musk stunned global financial markets on Aug. 7 when he issued tweets saying he had the “funding secured” to take his automaker private. But federal securities regulators say his statement was deceptive because the deal was in its infancy.

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“Musk’s false and misleading public statements and omissions caused significant confusion and disruption in the market for Tesla’s stock and resulting harm to investors,” regulators wrote in a complaint filed in Manhattan federal court.

Musk had said the take-private deal was all but guaranteed, tweeting that the “only reason why this is not certain is that it’s contingent on a shareholder vote.” His tweets sent the Silicon Valley automaker’s stock soaring by nearly 11 percent, though investors, analysts and company officials said later that they were blindsided by Musk’s announcement.

After 17 days, Musk announced that he would not pursue the deal, leading the stock to plunge amid growing skepticism over the company’s long-term prospects. The company’s stock has fallen roughly 20 percent since its peak last month.

The SEC is seeking to ban Musk from acting as an officer or director of any public company, as well as civil penalties. If the SEC wins its case, Musk could potentially remain chief of his other business interests, SpaceX and the Boring Company, because they’re private companies. But an SEC trial and the reputation damage to Musk could be a distraction for those firms or discourage financiers from investing in a business that would face complex prospects for going public.

Tesla facing Justice Department investigation over Elon Musk tweets

The SEC’s legal complaint depicts a time of chaos following Musk’s surprise tweets. About 12 minutes after Musk’s “funding secured” tweet, Tesla’s head of investor relations sent a text message to Musk’s chief of staff asking, “Was this text legit?”

Roughly 35 minutes after the tweet, Tesla’s chief financial officer Deepak Ahuja sent a text message to Musk asking whether he wanted executives to “draft a blog post of employee email” to announce the market-moving news. “Yeah, that would be great,” Musk responded.

The complaint also quotes Musk talking about why he decided on $420 as a price at which the company would buy back investors' shares. “Musk stated that because he had recently learned about the number’s significance in marijuana culture and thought his girlfriend ‘would find it funny, which admittedly is not a great reason to pick a price,’ ” according to the complaint.

The Justice Department is separately investigating Musk’s statements to determine whether they were meant to mislead investors, according to a person familiar with the probe. A Tesla spokesman said earlier this month that DOJ investigators had requested documents last month and that the company had complied.

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The company is also facing several shareholder lawsuits over Musk’s statements alleging fraud or market manipulation, as well as whistleblower complaints that Musk had lied to investors about the company’s production.

The SEC investigation is likely far from over, legal experts said. Musk could not only face a criminal indictment, but the SEC could also amend its complaint to include Tesla and its board of directors, experts said.

“It is a very strong case, and it’s a clear and clean case for fraud,” said Teresa Goody, a former SEC official who now advises companies on securities law and corporate governance.

To bring such a criminal indictment, prosecutors would have to prove that Musk willfully violated the securities’ law, she said. The SEC complaint could be used as a foundation for a criminal indictment and could “meet that willfulness test,” she said.

The SEC action is another nightmare for Tesla, which has endured months of production problems and an exodus of top executives as it faces down more than $10 billion in lingering debts.

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The legal battle could also step up pressure on Tesla’s board to install new leadership at the company or establish a post-Musk succession plan.

“This is the most serious challenge that both Elon Musk and Tesla have faced thus far. And this comes after a decade or more of very serious challenges,” said Karl Brauer, executive publisher of Kelley Blue Book. “It doesn’t mean they can’t come back from it. We’re talking about a legal proceeding with serious consequences. It’s all bad news; the question is just how bad.”

But in Silicon Valley, where finding loopholes in existing regulations is often admired, some Musk fans and Tesla investors said they were willing to stick by the hard-charging chief — or were torn on how to react.

“It’s a nightmare to have to deal with this,” said Ross Gerber, a Tesla investor and head of the wealth management fund Gerber Kawasaki. “Elon created this issue himself. One can’t minimize the mistake he made. And he’s created a lot of stress for a lot of people, including me, that didn’t really need to happen.”

But Kawasaki said he believes the SEC had a “weak case” and that shareholders, not regulators, should decide who leads the company. “One could argue he was tweeting in a stream of consciousness, that his disclosure was poor, ill-timed and ill-thought-out. . . . These months of stress pushed Elon to the limit, and he made mistakes.”

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The troubles also come at a critical time for SpaceX, which is being entrusted to fly NASA’s astronauts to the International Space Station, with flights as soon as next April. NASA has stood steadfastly by the company and its erratic chief executive through its ups and downs, which have included two rocket explosions.

Employees are keeping their heads down at the rocket company, trying to focus on their work and keeping the boss’s behavior at bay. Some see him as “a crazy uncle” whose antics they try to ignore, said a person familiar with the company.

Those working on the company’s production line “put it out of their mind,” said the person, who spoke on the condition of anonymity to speak candidly about Musk’s behavior and the effect it was having on the company. “They don’t acknowledge it, at least publicly."

Christian Davenport and Elizabeth Dwoskin contributed to this report.