Elon Musk, the founder, chief executive officer, and former chairman of Tesla Inc. (NasdaqGS:TSLA), is in trouble with the Securities and Exchange Commission (SEC)…
This time, he’s in hot water for doing what he agreed not to do in the September 2018 settlement he made with the SEC over his infamous August 2018 “Am considering taking Tesla private at $420. Funding secured” tweet.
What happened this time and what led up to it isn’t just a problem for Musk, it’s a problem for Tesla.
Evolution of the “Twidiot”
Yesterday, February 25, the SEC asked a federal court in the Southern District of New York to hold Musk in contempt for violating the terms of their September 2018 settlement.
Musk’s August tweet violated SEC regulations regarding disseminating misleading material information that could affect a public company’s stock.
Tesla’s stock skyrocketed on the heels of Musk’s tweet about taking the company private at $420 a share.
The problem was, there were no serious privatization talks even going on – and certainly no funding arranged or promised to affect any going-private transaction.
The SEC went after Musk, and shareholders and short sellers sued him and the company.
In order not to file securities fraud charges against Musk, the SEC proposed a settlement of the matter whereby Musk would have to step down as chairman for two years, pay a fine of $10 million, add two independent board members, and hire a lawyer to review tweets related to material company news.
He agreed to the terms – then he backed out a day later.
The SEC filed securities fraud charges that day.
Two days later, Musk settled – only with different terms. He would have to give up the chairman’s role for three years and both he and Tesla would have to pay $20 million each in fines.
And, the provision Musk balked at in the first settlement offer (that Musk wouldn’t be able to admit or deny the charges, meaning he couldn’t say “I settled, but deny I broke any laws”) was highlighted in the new settlement.
The Justice Department is still looking into the matter.
When You Can’t Beat ‘Em, Short ‘Em
Musk and Tesla are still engaged in lawsuits.
Meantime, Musk went on a tear disparaging and mocking the SEC, going as far as telling Lesley Stahl in a 60 Minutes interview in December that none of his tweets were being censored and that no one has to read his tweets before he hits send.
Then, he twit-tweeted again last week.
Granted, the latest offending tweet occurred after the stock market was closed, though there’s still after-hours trading going on, and Musk fired off a corrective tweet four hours later, but the damage had been done.
The first tweet said, “Tesla made 0 cars in 2011, but will make around 500k in 2019.”
The corrective tweet read, “Meant to say annualized production rate at end of 2019 probably around 500k, ie 10k cars/week. Deliveries for year still estimated to be about 400k.”
Announcing that Tesla would make 100,000 more cars in 2019 than previously estimated is a material statement that would positively impact the stock – if it were true.
But it wasn’t.
[URGENT] Mark this date: 4/1/19
The tweet hadn’t been reviewed by the company’s general counsel or Musk’s legal tweeting babysitter.
In other words, as I said last week, Musk is spitting in the SEC’s face.
They’re not taking his actions lying down. Asking a federal court to slap a contempt charge on Musk is serious.
It’s not serious enough to get Musk removed as an officer or executive of a public company. That’s a possibility, but highly improbable because of the offense not rising to a criminal contempt level, according to legal minds commenting on possible pending charges.
But it is serious for Musk and Tesla.
Tesla’s laid off thousands of workers, had to reduce prices for their cars twice last year, and is suffering from the loss of tax credits that helped propel sales.
At the same time, the head start Tesla enjoyed as the leading EV (electric vehicle) manufacturer in the world, thanks to Musk’s showmanship, his attention getting press, and that he’s become a revered cult-like figure, are being eroded by a swelling crowd of competitors launching better-looking, faster, and cheaper EVs.
Musk is becoming a negative. He’s now crossed over into the realm of twidiot.
His reputation and Tesla cars are inseparable – or at least they were.
Musk’s antics and law breaking have gone too far. He’s losing credibility and that’s likely to affect Tesla’s reputation and sales.
The bloom is off the rose and Tesla’s stock is showing it.
Like I said last week, it’s a good time to short it.
Thanks, Elon, for being a twidiot and destroying your aura, Tesla’s invincible position, and your stock.
P.S. – I know we’re leaving on a less than stellar note in terms of Tesla, but that’s just how the cookie crumbles when your founder can’t control himself on social media. But, what I didn’t have a chance to tell you earlier that I want to put a bug in your ear about now, is this: This is my first invite to you to this year’s Black Diamond Conference. It’s an exclusive gathering held twice a year, where our best and brightest Money Morning readers can meet us and chat – in a beautiful resort in Delray Beach, Florida, this April. Spots are limited and they’re filling up quick, but I encourage you to check out what this conference has in store for you – and most importantly, for your wealth-building efforts. I’d love to shake your hand and hear your thoughts on what we talk about every week here. I’ll be back with more details soon, but for now, click here to check it out.