The Securities and Exchange Commission entered into an agreement on Saturday with Tesla Inc. and Elon Musk to settle fraud charges, resulting in the forced eviction of Musk as chairman of the Tesla board and the payment of $40 million in fines. The SEC’s decision comes two days after the regulator filed a lawsuit against Musk, alleging he misguided investors.
Elon Musk’s costly tweet
On August 7th, Musk tweeted that he is looking at the options of taking Tesla private at $420 per share and that he had funding secured for the deal. The announcement took a toll on short sellers. Additionally, lawsuits were filed by Tesla investors alleging the CEO was misleading the markets. The announcement was brought to the attention of the Securities and Exchange Commission, who then demanded further details from Tesla’s board.
The SEC also initiated an investigation on whether Musk deliberately misled investors for personal gains. Following the inquiry, the SEC has found that Musk’s tweet is not backed with sufficient documentary evidence which resulted in a settlement between Tesla, Musk, and the SEC.
Under the agreement, which needs court endorsement, Musk will be permitted to remain as CEO but must depart his position as chairman of Tesla’s board within 45 days. Musk will need to personally shell out $20 million of the fine, without utilizing insurance or any other help, and will be barred from being reinstated as chairman for the next three years.
Tesla will shell out the other $20 million while naming two fresh autonomous directors, with one of them being allowed to become the new chair of the company. The company is also to employ two fresh independent directors to its board and assemble a board committee to supervise Musk’s communications. It is unclear whether the Department of Justice will register criminal charges against Musk.
The SEC filed a complaint against Musk last Thursday afternoon after his tweet on August the 7th stating that he would contemplate taking Tesla TSLA private at $420 per share — a large premium to its trading price at the time — Musk was well aware of the fact that the portrayed transaction was questionable and subject to several contingencies. Instead, Musk announced that financing for the deal was “secured,” and that the only remaining indecision was a shareholder vote.
The SEC has pointed out that Musk had not disclosed precise business conditions, including price, with any probable funding partners, and his explanations about the potential transaction missed adequate facts. According to the SEC, Musk’s deluding tweets caused Tesla’s stock value to fly by over 6% on August the 7th, and caused a considerable market interruption, along with numerous complaints filed with the SEC.
The SEC also charged Tesla for overlooking the necessary disclosure rules and guidelines associated with Musk’s tweets, an allegation that Tesla also has decided to resolve and which will cause elaborate corporate-governance alterations at Tesla. The chairman of the SEC, Jay Clayton, took uncommon action by giving a personal statement after the agreement was made.
Clayton said the decision was taken “in the best interests of our markets and our investors.” He emphasized that the organization will take disciplinary action as deterrence while avoiding actions against investors for the faults committed by an executive.
Clayton opined: “It often is the case that the interests of ordinary shareholders — who had no involvement in the misconduct — are intertwined with the interests of offending officials and the company.”
At the SEC, Clayton said, “the interests of ordinary investors are at the front of our minds and, in matters involving misconduct, we seek to serve those interests to the extent practicable while also ensuring that we remediate and deter misconduct.”
It is anticipated that Musk will stay on as a member of the board of directors under terms of the settlement, which are subject to court approval. Neither Musk nor Tesla accepted or denied the charges but did accept the SEC’s charges. In a press release, the SEC stated: “The $40 million in penalties will be distributed to harmed investors under a court-approved process.”
Brian Johnson, an analyst at Barclays recently appraised in a recent report that Tesla’s stock is sitting on a $130 “Musk premium,” which could vanish if he steps down. Therefore, fundamentally, we can expect the stock to remain bearish in the short-term.
Technically, the stock is trading below the 50-day moving average. Furthermore, the MACD indicator is in the negative region, and we can, therefore, expect a deeper decline in the stock’s price.
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