Elon Musk and Tesla have been sued by the Securities and Exchange Commission (SEC) for fraud over the company’s aborted plans to take the electric car company private.
The move could potentially lead to Musk being banned from leading a public company, or fines for him and the company. Shares of the automaker fell more than 4% in after hours trading Thursday once the news had broken.
The SEC and the justice department have been investigating Tesla after Musk suggested in August he was preparing to take Tesla private and claimed he had “funding secured”.
The SEC said: “This statement was false and misleading. Over the next three hours, Musk made a series of additional materially false and misleading statements via Twitter.”
Tesla’s shares shot up 11% on the news, but it transpired that Musk had only had preliminary talks about taking the troubled company private and that funding had not been secured.
That news also triggered lawsuits from investors, some of whom have been betting heavily on a collapse of Tesla’s share price. As the SEC noted, “Musk has complained that Tesla has been unfairly targeted by short sellers [investors betting on a share price collapse] and predicted that short sellers would be ‘burned.’”
Explaining the tweet, Musk said he understood Saudi Arabia’s sovereign wealth was prepared to provide funding to take the company private at a proposed price of close to $420 per share.
“According to Musk, he calculated the $420 price per share based on a 20% premium over that day’s closing share price because he thought 20% was a ‘standard premium’ in going-private transaction,” the SEC alleged in its suit.
“This calculation resulted in a price of $419, and Musk stated that he rounded the price up to $420 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.’”
Elon Musk said in a statement: “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 told CNBC that they were “fully confident” in Musk after the lawsuit was filed.
The SEC, the US’s top financial watchdog, can bring civil actions against a company or its directors and could fine the company. The regulator can also ban executives from being a corporate officer or director of a public company.
In the suit, the SEC said: “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. By engaging in the conduct alleged in this complaint, Musk violated, and unless restrained and enjoined will violate again, Section 10(b) of the Securities Exchange Act of 1934 (‘Exchange Act’)… and Rule 10b-5 [17 C.F.R. § 240.10b-5] thereunder.”
The SEC suit comes after the entrepreneur has been mired in a series of scandals. He has called the British diver who helped rescue trapped boys from a Thai cave a “pedo” and appeared on a live radio show where he appeared to smoke cannabis.
