Spark to a flame: Tesla’s Elon Musk sued for securities fraud

Spark to a flame: Tesla’s Elon Musk sued for securities fraud

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Elon Musk, founder and CEO of Tesla and SpaceX, is in trouble in the US. The Securities and Exchange Commission (SEC) has filed a lawsuit against the serial entrepreneur for fraud, alleging that he made “false and misleading” statements regarding his intention to take Tesla private with the aid of Saudi Arabian cash.

This is no minor action: not only is the SEC seeking financial reparations for Musk confusing the stock market and harming investors’ interests, it also wants to bar him from acting as an officer or director of any publicly traded company.

In short, the reckless tweeting of the billionaire carmaker and space technology pioneer may be about to cost him and his companies dear.

Last night, Musk issued this 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.”

So what are the facts?

From a spark to a fire

On 7 August, Musk shocked Wall Street when he took to Twitter to announce that he was considering  taking Tesla off the stock market, suggesting that funding was “fully secured” for the deal, at $420 a share.

At this stage, it was conceivable the tweet was intended as a joke, as ‘420’ is code for the consumption of marijuana – a fact acknowledged in an extraordinary SEC filing:-

“According to Musk, he calculated the $420 price per share based on a 20 percent premium over that day’s closing share price because he thought 20 percent 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 [US musician Grimes – Ed] ‘would find it funny, which admittedly is not a great reason to pick a price’.”

However, an update from Musk on 13 August explained that the money to take Tesla private would come from Saudi Arabia’s Public Investment Fund (PIF), which, in the background, had been “quietly building a three to five percent stake” in the company, according to the FT.

The irony of one of the world’s top two oil producers, and a repressive political regime, helping to take a future-focused electric car company off the public markets was stark.

Musk said that his earlier claim that the funding was secured followed a series of private meetings over a two-year period, including conversations with the managing director of the PIF, Yasir Al Rumayyan, an ally of Saudi crown prince, Mohammed bin Salman.

The PIF had expressed renewed support for proceeding with a deal to take the company private, claimed Musk. Such a deal would be funded principally through equity, he added, with roughly two-thirds of the shares held by existing investors ported over to the newly private company.

Whether this explanation was an honest summation of what Musk saw as the facts, or a frantic damage limitation exercise after his 7 August tweet, will now be decided by the court.

A month after the ‘420 tweet’, Musk was handed a joint of marijuana and tobacco – legal in California – on a Joe Rogan podcast and took a single puff on camera, apparently as a dare.

Despite being clearly set up by the interviewer, Musk not inhaling, and the drug being legal in the state, the incident was enough to grab more headlines and depress Tesla’s stock price.

What happened next

A government lawsuit over the tweet and Musk’s subsequent explanations was inevitable, with private shareholder actions beginning almost immediately after the incident.

Filed on 27 September by the SEC, the document says, “Musk’s statements, disseminated via Twitter, falsely indicated that, should he so choose, it was virtually certain that he could take Tesla private at a purchase price that reflected a substantial premium over Tesla stock’s then-current share price, that funding for this multi-billion dollar transaction had been secured, and that the only contingency was a shareholder vote.

“In truth and in fact, Musk had not even discussed, much less confirmed, key deal terms, including price, with any potential funding source.”

Musk had “never discussed a going-private transaction at $420 per share with any potential funding source,” it adds. “He also knew that he had not satisfied numerous additional contingencies, the resolution of which was highly uncertain.”

Seventeen days after the infamous tweet, Musk announced that Tesla would remain a public company. But the damage had been done: investors were up in arms and litigation was already brewing.

A fitting response

To rub salt into Musk’s self-inflicted wounds, Saudi Arabia’s sovereign fund has since made a $1 billion investment in Californian electric vehicle maker – and Tesla challenger – Lucid Motors.

That funding, announced on 18 September, will enable Lucid to complete development and testing of its first vehicle, the Lucid Air, construct a $700 million factory in Casa Grande, Arizona, and begin rolling out its North America retail strategy, before beginning mass production in 2020.

Clearly, the PIF had intended to make a bet on the emerging future of electric, autonomous transport. But it may be that Musk’s actions left the fund’s managers with a simple choice: back his version of events and be dragged into litigation, or back out and invest the money elsewhere.

In a torrid, self-defeating year for the CEO, Musk is also being sued for defamation by British diver Vernon Unsworth, for repeated – and apparently groundless – allegations about his sexual conduct. Unsworth was involved in the rescue of 14 trapped boys in a Thai cave, a story that gripped the world in July.

Musk’s own solutions to the boys’ plight were rebuffed by rescue workers, including Unsworth, and were seen by some as a publicity stunt.

Again, Twitter was the forum for Musk’s unseemly outbursts.

Internet of Business says

The expression ‘a bull in a china shop’ has often been used to describe a reckless individual upsetting everyone around him, while sending his own achievements crashing to the ground.

The term certainly applies to Elon Musk this year, although he could also be seen as a bull in a pen, trying to free himself from investors’ lassos, while becoming ever more angry and volatile at the mismatch between his long-term aims and short-sellers’ money-making interests.

In the early Spring he was a media darling, a new Steve Jobs for the electric transport and private space-faring age, firing roadsters into space, landing his reusable rockets, and launching experimental satellite constellations to bring broadband to rural areas.

However, after the fatal crash of a Tesla car in March, a different Musk began to emerge from behind the inspiring, futurist image.

This version of Musk was egocentric, short-tempered, and seemingly unable to cope with any criticism, while Tesla attempted to micro-manage media outlets (see Internet of Business, passim) and Musk sought to discredit any negative coverage as ‘fake news’. Not unprecedented in 2018.

But not all of the criticisms came from the media. Days after the crash in California, the US National Transportation Safety Board (NTSB) slammed Tesla for releasing information about the accident without alerting the agency beforehand, as it was obliged to do. The NTSB said, “We take each unauthorised release seriously. However, this will not hinder our investigation.”

The impression was that Tesla was trying to seize control of media messaging rather than follow standard protocols – including government rules. That trend that can now be traced to Musk himself: a classic case of ‘founder’s syndrome‘.

Whether he is fit to run a public company is now a matter for the courts to decide, but one thing should be clear to the man himself: responsible management and impulsive self-sabotage are mutually exclusive concepts.

Step away from Twitter, Mr Musk: you’re a brilliant man, but 140 characters plus one flawed character do not add up to a leader.

Plus: Samsung in the dock

In related news, Musk isn’t the only technology business leader facing legal action. Samsung chairman Lee Sang-hoon has been indicted for union sabotage, alongside 27 other Samsung employees and partners.

At present, Lee’s status is “unchanged” at the company, according to Samsung.

During his time as CFO – a post he left in March – Lee was accused of threatening wage cuts and ending deals with union-friendly contractors.

Last year, vice chairman Jay Y Lee (no relation) received a five-year prison sentence for bribery, embezzlement, and perjury, though it was later reversed.

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