Shares of Tesla (TSLA) tumbled Friday, extending losses after Thursday’s news that the Securities and Exchange Commission (SEC) filed a lawsuit accusing Tesla CEO Elon Musk of defrauding investors when he tweeted last month that he was considering taking the company private.
The stock was down 13.9% to $264.77 per share at market close Friday.
The SEC’s complaint alleges that Musk “falsely indicated” 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.” Musk “had not even discussed, much less confirmed, key deal terms, including price, with any potential funding source,” the SEC said in its complaint.
The lawsuit seeks an order for Musk to disgorge ill-gotten gains, pay penalties and be banned from serving as an officer or director of a public company.
Tesla could be in trouble without Musk
While Musk’s fate at the company is uncertain, at least one analyst warns that Tesla could have issues raising much-needed capital without Musk at the helm.
“Historically, Tesla has had easy access to capital markets, largely due to the public’s perception of Musk as a visionary,” UBS analyst Colin Langan wrote in a note. “Without Musk, investors may no longer be willing to continue funding a company that has never reported an annual profit.”
Tesla’s free cash flow in the second quarter alone totaled negative $739.5 million, bringing the company to a net loss of $717.5 million, the company reported in August. Langan estimates Tesla would need to raise capital in 2019.
Langan reiterated his “sell” rating of the stock with a $190 price target.
FILE PHOTO: Tesla Chief Executive Elon Musk attends a forum on startups in Hong Kong, China January 26, 2016. REUTERS/Bobby Yip/File Photo
The SEC’s complaint prompted Citigroup analysts to downgrade Tesla’s stock to “sell” from “neutral” Friday, according to a note to clients.
“There’s little question that Mr. Musk’s departure would likely cause harm to Tesla’s brand, stakeholder confidence and fundraising,” analysts wrote in the note. “If Mr. Musk ends up staying on, the reputational harm from this might still prevent the stock from immediately returning to ‘normal.'”
The analysts added that it’s a “risk/reward call,” but that “even after the post-close stock pullback ($to 274), risk/reward is still tilted negatively.”
The company and its directors are “fully confident in Elon, his integrity, and his leadership,” according to a joint statement from Tesla and its board of directors. “Our focus remains on the continued ramp of Model 3 production and delivering for our customers, shareholders and employees.”
Musk and his team of lawmakers were reported to have turned down a settlement agreement with the SEC at the last minute, deciding to fight the charges instead, according to the Wall Street Journal.
“This unjustified action by the SEC leaves me deeply saddened and disappointed,” Musk said in a statement Thursday. “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.”
“Funding secured”
Musk said Aug. 7 in a company blog post that he was considering taking Tesla private at $420 per share, representing a 20% premium over the stock price following the company’s second-quarter earnings release. Musk had also written in a Twitter post that he had “funding secured” for such a deal. He concluded the blog post saying that the “proposal to go private would ultimately be finalized through a vote of our shareholders.”
“We allege that Musk had arrived at the price of $420 by assuming a 20 percent premium of what Tesla’s then existing share price (was), and then rounding up to $420 because of the significance of that number in marijuana culture, and his belief that his girlfriend would be amused by it,” Steven Peikin, co-director of enforcement at the SEC, said during a press conference following release of the complaint.
The SEC wrote in its complaint that Musk’s Aug. 7 statements “created the misleading impression that certain terms of a transaction to take Tesla private had been determined when, in fact, they had not even been explored, and in some cases, proved to be impossible.”
In a follow-up company blog post issued Aug. 13, Musk explained that his assertion of having “funding secured” was based on multiple encounters he had with the Saudi Arabian sovereign wealth fund, where he felt there was “no question that a deal with the Saudi sovereign fund could be closed.” But the SEC wrote in its complaint that “Musk’s statements were premised on a long series of baseless assumptions and were contrary to facts that Musk knew.”
“An officer’s celebrity status or reputation as a technological innovator does not give license to take those responsibilities lightly,” Peikin said.
Musk also violated Nasdaq rules requiring that companies such as Tesla notify the stock exchange at least 10 minutes prior to publicly releasing material about events including proposed privatization, the SEC alleged in its complaint.
The Justice Department was reported earlier this month to have opened a criminal probe into Tesla over Musk’s statements about bringing the company private. Tesla confirmed that it had received a voluntary request for documents from the DOJ and was “cooperative in responding to it,” the company said in a statement at the time.
