What is Tesla without Elon Musk? That was the question Wall Street was asking on Friday as the electric car company’s share price plummeted following news that the US’s top financial regulator was suing Musk for fraud and seeking to ban him from running a public company.
For the billionaire entrepreneur, it was the latest self-inflicted wound from a series of car crashes that have battered Tesla’s share price and Musk’s reputation. On Friday, Tesla’s share price was down close to 14% as investors worried the car company’s leading light was finally out.
The latest slump came after the Securities and Exchange Commission (SEC) filed a suit in New York accusing Musk of fraud.
Tesla has struggled to hit its targets for months and is rapidly burning through cash. Musk has blamed short-sellers, investors betting on a collapse in a company’s share price, for Tesla’s woes.
In August, Musk appeared to have found a solution: take the company private. In a now infamous tweet he wrote: “Am considering taking Tesla private at $420. Funding secured.”
That statement was “false and misleading”, the SEC alleges, and was the first of a series of “materially false and misleading statements”.
Far from knowing that he had an offer, Musk “knew or was reckless in not knowing” that his statements were false or misleading. “In truth and in fact, Musk had not even discussed, much less confirmed, key deal terms, including price, with any potential funding source,” the SEC said in its lawsuit.
Even the $420 price was misleading – based on a joke rather than a spreadsheet.
“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 transactions. 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’.”
The SEC has the power to levy fines on directors and companies if they are proven to have misled investors. More seriously for Musk, and Tesla, they can ban a director from serving as an officer in a public company – a measure they are pursuing against Musk.
Musk clearly thinks Tesla cannot run without him. On Friday, reports began to circulate that Musk and the SEC had been close to a deal before the SEC filed its suit. The settlement would have meant fines for Musk and Tesla, and more seriously, a ban on Musk serving as chairman for two years. According to CNBC, Musk could not accept that deal. Now the case looks set to go to court, another headache for Musk to deal with.
Analysts are divided about the likely outcome of the case. Gene Munster, managing partner at Loup Ventures, believes there is a 50/50 chance Musk will remain as CEO after the matter is resolved “and an even greater chance he remains involved somehow with Tesla in any case”.
“As demonstrated by the stock’s reaction, investors believe the removal of Musk from Tesla would be negative for the prospects of the company, despite his recklessness in the go-private tweets. If the SEC is granted its request to remove Musk, there’s a question as to whether they’re doing more to harm continuing shareholders or protecting them, at least in the eyes of the market,” he wrote in a note to investors. He believes a substantial fine is the most likely outcome.
Gordon Johnson, an analyst at Vertical Group who has been predicting a collapse in Tesla’s shares for months, is less optimistic.
There was evidence of “clear manipulation”, he said on TD Ameritrade Network. Johnson believes Musk’s ability to inspire investors with a vision of a brighter future has blinded them to the “horrendous” fundamentals at Tesla.
“The point is, there’s always this carrot that Elon Musk is dangling out in the future of something that is going to take this company to nirvana, if you will, and he consistently misses it,” he said.
“Without him constantly putting out comments on Twitter to give investors the hope that one day they’re going to get to where revenue and earnings to justify this valuation, the stock will come under tremendous pressure because people will be forced to focus on the fundamentals.”
For now, Musk is preparing to fight. Musk said he was “deeply saddened and disappointed” by this “unjustified action”. “Integrity is the most important value in my life and the facts will show I never compromised this in any way,” he said.
The board too issued a statement in support of Musk, saying it was “fully confident in Elon, his integrity and his leadership of the company”.
But the board’s support will not end Tesla or Musk’s bad run. The department of justice too is now looming into Musk’s tweets and could bring a criminal case if it finds he deliberately misled investors. Musk’s nine-word tweet could be the most costly mistake he has ever made.
