Tesla Inc.’s plunging stock price indicates investors want Elon Musk to quickly cut a deal with the Securities and Exchange Commission. The question is whether the notoriously unpredictable chief executive officer will take the hint.
In suing Musk Thursday, the SEC put shareholders’ worst-case scenario on the table: Musk’s potential ouster from Tesla.
The regulator had offered a much lighter punishment that would have allowed him to stay on as CEO, while paying between $5 million and $10 million, according to a person with knowledge of the matter.
Under the scrapped settlement, Tesla would have also faced a financial penalty, though it was lower than Musk’s, the person said.
But the accord was refused, and Tesla shares have tanked. That puts intense pressure on Musk and the electric-car maker’s board to stop the bleeding.
“He needs to settle, and the Tesla board needs to force him to settle,” said John Coffee, director of the Center on Corporate Governance at Columbia Law School.
Tesla stock (TSLA) plunged 14 percent to $264.77 Friday afternoon in New York, wiping out $7.3 billion in shareholder value. It was the biggest drop for the shares since November 2013, and the stock is now down 15 percent for the year.
Musk, 47, tweeted on Aug. 7 that he had the funding secured to take Tesla private, which sent the company’s shares soaring.
He wrote in a blog post six days later that his statement was based on meetings with Saudi Arabia’s sovereign wealth fund, including one in which an unnamed managing director strongly expressed support for such a transaction.
The Wall Street Journal reported Friday that the Tesla chairman and CEO has dug in on this point. Musk believes he had a verbal agreement in place with the Saudi Public Investment Fund to help finance a take-private transaction, the newspaper said, citing a person it didn’t identify.
Moving with unusual speed, the SEC on Thursday accused Musk of falsely asserting that he had lined up funding to take Tesla private. The regulator said it’s seeking unspecified monetary penalties and, more importantly, will request that a judge bar Musk from serving as an officer or director of a public company. The SEC didn’t sue Tesla.
“My own belief is that the SEC would not have asked for a bar” if Musk had settled, Coffee said. “One can view the proposed bar as a nuclear threat to induce him to settle.”
The regulator’s aggressive move came after Musk rejected a deal that would have subjected him to a short-term bar from serving as Tesla’s chairman, said the person who asked not to be named because the potential accord was never public.
SEC spokesman Ryan White declined to comment, while Tesla officials didn’t respond to a request for comment.
The SEC’s terms might have seemed reasonable to the typical CEO who had ended up in a situation like Musk’s.
For more on Tesla’s recent issues, check out the Decrypted podcast:
But Musk is far from typical, as demonstrated by his recent decisions to smoke marijuana on a podcast, call a cave explorer in Thailand a pedophile and send out tweets during market hours stating that he was going to buy out Tesla at $420 a share.
After the SEC sued, Musk remained recalcitrant. In a statement, he called the regulator’s decision an “unjustified action” that had left him “deeply saddened and disappointed.”
While the SEC and Musk might still reach a settlement, for now the agency’s suit is moving forward. The case was assigned to U.S. District Judge Alison Nathan, an appointee of former President Barack Obama who has seven years experience on the Manhattan federal court. Nathan has set an initial court appearance for Feb. 1.
It’s not unusual for the SEC to lay the trump card of a lawsuit on the table when it can’t get a target under investigation to settle.
In 2010, the agency famously accused Goldman Sachs Group Inc. of peddling a mortgage security without telling investors that a hedge fund had helped design the asset and was betting that it would fail. The case was dropped in the middle of the trading day, and predictably Goldman shares plunged.
Like Musk, Goldman was initially defiant, arguing the allegations were completely unfounded and pledged to “vigorously” fight them. But as the weeks went by and investors got more nervous about the lack of a resolution, Goldman settled, agreeing to pay a $550 million fine.
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