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Tesla shares soar after Musk settles with SEC

Billionaire Elon Musk, chief executive of Tesla, had faced a Securities and Exchange Commission lawsuit over allegedly misleading investors. (Justin Chin/Bloomberg News)

Tesla shares soared by more than 17 percent Monday after chief executive Elon Musk settled a federal lawsuit over the weekend that could have resulted in his ouster from the company and thrown the all-electric carmaker into chaos.

The Securities and Exchange Commission sued Musk after accusing him of misleading investors when he announced on Twitter in August that he was planning to take the company private and proclaimed that he had already secured the funding to seal the deal. Regulators sought to remove Musk from Tesla and ban the billionaire entrepreneur from serving as chief executive of any public company. The company’s stock dropped by 14 percent following the suit.

Under the settlement, which is subject to court approval, Musk will resign as chairman of Tesla within 45 days and be barred from that position for three years. But he will be allowed to remain on the board and will continue to serve as chief executive, where he oversees the company’s development, engineering and design. Musk and Tesla will each also pay $20 million in penalties to “harmed investors,” according to the SEC.

Neither Musk nor Tesla is required to admit any wrongdoing as part of the settlement.

Some analysts said the settlement will help the company’s bottom line and improve its long-term prospects. Garrett Nelson, an analyst at CFRA Research, upgraded the stock after downgrading it last week in the immediate aftermath of the SEC’s lawsuit. ”With that uncertainty now lifted, and in a manner which we think creates a healthier corporate governance structure than Tesla had previously, our 12-month outlook for the shares is now more positive than it was prior to our downgrade,” he said in a research note Monday.

But some corporate governance experts were surprised by what they described as a few weaknesses in the SEC’s deal, including the fact that Musk would not have to admit guilt. One person familiar with the negotiations who was not authorized to speak publicly said Musk had originally blanched at the SEC’s insistence that he could not profess his innocence after settling.

Some governance experts said that the SEC, whose deal requires the company to install two new independent directors to the nine-member board, should have demanded that Tesla install an outside chairman in Musk’s vacated role. Without that, some worried that the company would elevate someone who would probably mimic Musk’s leadership.

“The board could pick one of his old sycophantic friends, and that wouldn’t be much different at all,” said John C. Coffee Jr., director of Columbia Law School’s Center on Corporate Governance. “On the board he’s got his brother, his old buddies and former employees. None of these people have much independence by the standards of a typical corporation.” Coffee added, “What the man needs above all is adult supervision.”

Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, also questioned why the SEC had not made a stronger effort to reshape the board, where Musk will probably still retain unwavering control even after his resignation as chairman. The board, Elson said, has shown little interest in overseeing or controlling Musk’s worst impulses.

“Look at their response the night the SEC charged him: They backed him completely. That’s not the time for the board to say, ‘We have confidence in him,’ ” Elson said. “That’s the time for them to say, ‘We’re going to look at these charges and evaluate his role.’ ”

While a $20 million fine is a substantial amount for tweeting, some legal experts noted that it amounted to a “parking ticket” for a man worth about $20 billion.

Tesla declined to comment.

Although the settlement with the SEC ends a potentially disastrous legal confrontation, Tesla still faces a Justice Department investigation and several shareholder lawsuits. The company’s underlying business challenges, which have included recent production and delivery delays, may persist, experts say, even as the company has made peace with financial regulators.

“The bulls on Tesla will highlight that this is a great outcome for Tesla, which relative to the worst case scenario of Elon Musk being removed as an executive at the company it is,” Jeffrey Osborne, an analyst with Cowen & Co., said in a note to investors Sunday. But Osborne said he continues to have concerns about Tesla’s progress, notably its cash burn, the competition it faces and its ability to lower costs and “effectively sell a $35k vehicle.”

Musk’s problems are far from over. The settlement could probably boost the fortunes of nearly a half-dozen shareholder lawsuits filed against Musk and the company, alleging that his tweets had misled investors.

“The private plaintiffs in this action are going to have quite a day,” Elson said.

Tesla also has yet to turn an annual profit, fueling concerns that the ambitious automaker may not become a profitable corporation with staying power. But Musk remains optimistic, according to a recent filing. In a first for Tesla, the company filed with the SEC an email he sent to employees over the weekend. The email highlighted the company’s newly cautious approach to Musk’s communications.

“We are very close to achieving profitability and proving the naysayers wrong, but, to be certain, we must execute really well tomorrow (Sunday),” he said, according to the SEC filing.

The company’s next earnings report will serve as a crucial test for the company and Musk’s leadership. He has pledged that Tesla will see its first annual profit in the second half of the year.