Elon Musk could be in big trouble over Tesla tweet
YESTERDAY, Elon Musk shocked the business world. He tweeted his intention to make his electric-car company Tesla private.
He went so far as to suggest a price of $420 a share, valuing the company at some $70 billion. He said he had the necessary financing arranged.
Naturally, Tesla's shares immediately jumped.
Securities lawyers watched in disbelief.
Musk has a close personal association with Tesla. But he's not a majority shareholder. He actually owns less than a 20 per cent stake in the business.
"I do not believe this is the appropriate way to suggest going private," director of the John L. Weinberg Center for Corporate Governance at the University of Delaware Charles Elson told NBC.
Now, the US Securities and Exchange Commission has formally taken interest in Musk's tweets. It is 'making inquiries' as to the truthfulness of the statement which has had so much of an impact on Tesla's stock price.
It also wants to know why the announcement was made on Twitter.
Using social media to make major business announcements isn't an offence. Just so long as investors know to expect it there. This is to prevent some investors getting an unfair advantage by getting the information before others.
"Personal social media sites of individuals employed by a public company would not ordinarily be assumed to be channels through which the company would disclose material corporate information," the SEC said in a statement when Netflix first caused commotion by announcing a major performance milestone on social media, and not normal business news channels.
At stake in the SEC-Musk-Tesla investigation is whether or not Elon Musk was being false or misleading in his business-related tweets.
Under US law, companies and their officers cannot give shareholders misleading information.
And the rapid stock-price shifts demonstrated that the investing public believed what Musk tweeted.
His supposed offer of $420 a share was some 20 per cent above trading levels at the time of the tweet. Prices closed the day 11 per cent up.
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If his Tesla buyout tweets were just musings or an angry reaction, such as his angry outburst that one of the Thai cave divers was a 'paedophile' in response to criticism of his rescue submarine offer, it could put Musk in a whole lot of hot water.
He and his company could face regulatory action and private lawsuits.
"If his comments were issued for the purpose of moving the price of the stock, that could be manipulation, it could also be securities fraud," former SEC Chairman Harvey Pitt told CNBC. "The use of a specific price for a potential going private transaction is highly unprecedented and therefore raises significant questions about what his intent was. So, that would have to be investigated."
It appears someone may have pointed this out to Musk after his initial tweet. So the tech entrepreneur sent out a staccato of fresh tweets reinforcing his intentions.
He continued to imply his stated desire isn't a hoax. It's real.
Trading in Tesla's shares was then halted by regulators awaiting news of the move through more formal channels than Twitter.
By mid afternoon Tuesday US time, Musk sent out an email to employees: "Being public means that there are large numbers of people who have the incentive to attack the company," he said. "A final decision has not yet been made, but the reason for doing this is all about creating the environment for Tesla to operate best."
He added that an erratic stock price "can be a major distraction".
That the idea of Musk buying out the company had been discussed was confirmed by six of Tesla's nine directors. Musk, however, did not repeat or repeal his claim that he had financing for the $70 billion deal.
When Tesla's stocks reopened for trade, it surged 10 per cent higher. So people still believed he had the money to back up his claim.
"If funding is certain, there is documentation to demonstrate that," Thomas Farley, a former president of the New York Stock Exchange, told the Wall Street Journal . "This is a very easy one to manage, and they should manage it."
Musk and Tesla haven't provided many more details of the potential deal since Musk's tweets.