Elon Musk is under ‘intensifying scrutiny’ from the SEC

The Securities and Exchange Commission (SEC) has ‘intensified’ its probe into Elon Musk and Tesla, according to sources familiar with the matter.

The independent US regulator was already making enquiries into the company following a tweet by 47-year-old multi-billionaire Elon Musk about taking electric car company Tesla private.

However, the CEO is now under increased scrutiny from the SEC, sources say.

Tesla has yet to be accused of any wrongdoing, however the SEC enquiry is designed to ensure no rules were broken.

Musk tweeted out about taking the company private on Tuesday at a stock price of $420 a share, a significant jump from its current position. 

After an initial surge in share prices to roughly $375 a share on the same day, Tesla stock has since fallen by almost five per cent down to $352.45.

However, the tweets have raised concerns around whether Musk violated fair-disclosure rules established by the SEC around using social media platforms for market manipulation.

The regulator has remained silent on the issue since Musk’s surprise announcement. 

  

The Securities and Exchange Commission (SEC) is scrutinising Elon Musk and Tesla regarding tweets the CEO posted earlier this week regarding taking the company private. Tesla has yet to be accused of wrongdoing, but the SEC is taking a close look to make sure no rules were broken (file photo)

Officials looking into whether the public statements of Tesla CEO Elon Musk breach federal security laws are looking with ‘increased scrutiny’, sources close to the matter told Bloomberg.

SEC enforcement attorneys in the San Francisco office were already gathering general information, according to those with knowledge of the regulators plans.

However, lawyers are now scrutinising whether Musk’s tweet about having funding secured to buy out the company was meant to be factual.

Musk’s tweets about a possible buyout for Tesla are likely not enough to put him in legal jeopardy unless the SEC proves the information was false or inaccurate, securities lawyers told Bloomberg.

As a rule, the SEC holds executives responsible for their statements and considers them to be material information – requiring them to be true.

At this time the SEC inquiry is preliminary and there is no guarantee formal action will be taken. Both Tesla and SEC have refused to comment on the matter.    

‘I don’t really understand the idea of what was suggested in the potential for them to go private,’ Dick Weil, CEO of Janus Henderson Group, said in an interview.

‘That’s obviously an incredibly large valuation to somehow take into the private market.’

Security experts say the tweets are probably not enough to warrant legal action unless it can be proved the statements are false or inaccurate.

According to a statement from six of the nine directors on Tesla’s executive board, Musk addressed the possibility of taking the firm private last week.

They said he had ‘addressed the funding for this to occur’ without providing details.

The tweets raised concerns about whether Musk violated fair-disclosure rules established by the SEC around using social media platforms for market manipulation. 

Tesla could be hit with a full-scale investigation if regulators determine the CEO’s statement on Twitter broke the rules by being false or misleading, according to WSJ. 

At this stage, it’s unclear if any laws have been broken – but, in any case, experts agree that Musk’s surprise announcement on social media is unprecedented, and may have consequences.

‘If a company has always issued its earnings releases in a conventional matter, and it had not alerted investors, then that can be a problem, because an investor who happens to watch the Twitter feed, may have an unfair advantage,’ Ira Matetsky, a partner at Ganfer Shore Leeds & Zauderer in Manhattan told MarketWatch. 

Tesla has only told investors to monitor the CEO’s Twitter feed in a public filing once, back in 2013.

After listing a slew of Tesla sites that are frequently updated with the latest information, including its investors’ and press sites, the 2013 document states: ‘for additional information, please follow Elon Musk’s and Tesla’s Twitter accounts.’ 

Given this advice and Musk’s wide-reaching Twitter presence, with more than 22 million followers, the expert says Musk’s lawyers could argue the new information was readily available, even if his delivery was not traditional.

WHAT ARE THE SEC’S RULES AROUND FAIR DISCLOSURE?

Tesla CEO Elon Musk’s tweets about the firm going private have reportedly drawn a closer look from the Securities and Exchange Commission. 

The SEC is now looking at whether what Musk said was truthful and why he announced the information on his Twitter. 

The regulatory agency has certain rules around what companies can and cannot speak about on social media platforms, as part of its fair disclosure rules. 

Many believe Musk’s tweets are likely to be weighed against the Reed Hastings Rule, which was established in 2012. 

The rule was established when Netflix CEO Reed Hastings used his Facebook to post that the streaming service had ‘exceeded 1 billion hours for the first time.’ 

This warranted further investigation by SEC regulators, who later determined that posting material information on social media is allowed. 

However, companies must make sure that shareholders are notified that material announcements will be made on social media channels, as well as given proper access to them. 

In Musk’s case, Tesla has only told investors to monitor the CEO’s Twitter feed in a public filing once, back in 2013. 

Beyond that, regulators will be working to find out whether Musk’s claims were honest. 

Musk tweeted that financing had been secured for a take-private deal and that the company had received broad investor support. 

If Tesla doesn’t have the funding in place, experts say Musk’s tweets could amount to market manipulation, since it would be an example of false statements causing the company’s shares to skyrocket. 

But, Musk may not be out of hot water just yet. 

‘If he doesn’t have financing in place, but the deal happens anyway, then it may be, no harm, no foul,’ Metetsky told MarketWatch.

‘If this was a pipe dream going nowhere, there will be a case.’ 

In the hours following the revelation of plans to take Tesla private, Musk went quiet on Twitter – unusual silence for a CEO known for his voracious social media activity.

He finally tweeted again early Wednesday evening, but failed to address the growing controversy. Instead, he shared a chart illustrating Tesla vehicle deliveries and Autopilot hardware.  

Musk’s initial message came after a report said Saudi Arabia’s sovereign wealth fund had bought a $2 billion – or nearly 5 per cent – stake in Tesla.

Should Musk ultimately decide to take Tesla private at a price of $420 per share, or more than $70 billion, it would mark the largest buyout in history.  

‘Last week Elon opened a discussion with the board about taking the company private,’ Tesla’s board said in the statement.

‘This included discussion as to how being private could better serve Tesla’s long-term interests, and also addressed the funding for this to occur. 

‘The board has met several times over the last week and is now taking the appropriate next steps to evaluate this,’ they added.  

Tesla hasn’t disclosed any details about funding beyond noting that the firm had secured the necessary means for a take-private transaction. 

So far, no one has stepped forward to say they’re backing the buyout. 

Musk's tweets have raised concerns about whether the CEO violated fair-disclosure rules established by the SEC around using social media platforms for market manipulation

Musk’s tweets have raised concerns about whether the CEO violated fair-disclosure rules established by the SEC around using social media platforms for market manipulation

Should Musk ultimately decide to take Tesla private at a price of $420 per share, or more than $70 billion, it would mark the largest buyout in history

Should Musk ultimately decide to take Tesla private at a price of $420 per share, or more than $70 billion, it would mark the largest buyout in history

READ THE FULL STATEMENT FROM TESLA’S BOARD

‘Last week, Elon opened a discussion with the board about taking the company private. 

This included discussion as to how being private could better serve Tesla’s long-term interests, and also addressed the funding for this to occur. 

The board has met several times over the last week and is taking the appropriate next steps to evaluate this.’ 

– Signed by Tesla board members Brad Buss, Robyn Denholm, Ira Ehrenpreis, Antonio Gracias, Linda Johnson Rice, and James Murdoch

In a letter to shareholders after his tweet on Tuesday, Musk fleshed out his idea, suggesting they would get the option to sell their shares for $420 each or remain investors in a private Tesla, out of the glare of Wall Street and its need for quarterly results.

He said that would allow Tesla to ‘operate at its best, free from as much distraction and short-term thinking as possible.’

It’s highly unusual for the head of a major company make a significant announcement in such casual manner. 

The tweet prompted questions about how serious Musk’s intentions were.  

‘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.’   

However, several Wall Street analysts expressed skepticism about Musk’s ability to gather the financial backing to complete such a deal.

Musk tweeted out about taking the company private on Tuesday at a stock price of $420 a share, a significant jump from its current position. After an initial surge in share prices to roughly $375 a share on Tuesday, the stock has since fell by nearly five per cent to $352.45 

Musk tweeted out about taking the company private on Tuesday at a stock price of $420 a share, a significant jump from its current position. After an initial surge in share prices to roughly $375 a share on Tuesday, the stock has since fell by nearly five per cent to $352.45 

‘Who gives $30 to $50 billion to buy back the shares?,’ asked NordLB analyst Frank Schwope. 

‘And if you stay as a shareholder you get less information than before and you depend more and more on Elon Musk.’

Many cited Tesla’s massive debt load as a sticking point in its plans to go private. 

‘The company is cash-flow negative,’ Steven Kaplan, a University of Chicago professor, told BBC. 

‘How do you use any debt on a company that is cash-flow negative?’  

JPMorgan analyst Ryan Brinkman said he gave only a 50 per cent probability that Tesla would go private. 

The six board members who issued the statement on Wednesday included James Murdoch, chief executive of Twenty-First Century Fox Inc and Brad Buss, who was the chief financial officer of solar panel maker SolarCity until it was bought by Tesla in 2016.

Other board members mentioned in the statement included Robyn Denholm, Ira Ehrenpreis, Antonio Gracias and Linda Johnson Rice. 

Tesla’s other board members are Musk, his brother Kimbal Musk and venture capitalist Steve Jurvetson.

WHY DOES ELON MUSK WANT TO TAKE TESLA PRIVATE?  

In a shock announcement on Tuesday, Tesla CEO Elon Musk announced that he has weighed taking the electric car company private at $420 a share. 

A take-private price of $420 a share would value Tesla at $82 billion and marks a significant jump from the stock’s current levels of roughly $379 a share.

Going private involves a transaction(s) that take a company off the public market, meaning retail investors can no longer trade shares on the stock market. 

Take-private transactions may be led by a non-controlling shareholder, a private equity firm making a leveraged buyout or a consortium of companies. 

Musk said he has received broad investor support for the move. The only thing standing in the way of an official announcement is a shareholder vote. 

Going private would allow Tesla to avoid many of the pressures of the public markets, such as wild stock swings, scrutiny from Wall Street analysts, as well as ‘attacks’ from short-sellers – a group that Musk has said ‘want [Tesla] to die so bad they can taste it.’ 

In a letter to employees, Musk said Tesla’s volatile stock has served as a ‘major distraction’ to staff and that being public created a lot of pressure on the company to ‘make decisions that may be right for a given quarter, but not necessarily right for the long-term.’ 

If Tesla goes private, it would no longer be forced to file public financial statements or host quarterly earnings calls with Wall Street analysts. 

These events tend to cause upward or downward swings in Tesla’s stock. 



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