Elon Musk is in trouble once again over something he tweeted. Yes, we all know he says stuff that’s really out there, but this time around he has landed even Tesla in some legal trouble.
Musk had tweeted on August 7, “Am considering taking Tesla private at $420. Funding secured.” He followed that up with another tweet, “Shareholders could either to sell at 420 or hold shares & go private.”
Some 10 days later came news that the US Justice Department was looking into those announcements. Sounds serious, doesn’t it? Like some of those intimidating men in nondescript black suits drove to Elon Musk’s office in black SUV’s after reading his tweets.
Anyway, it looks like another Elon Musk tweet had landed him in a soup yet again. And given the antipathy between Musk and American news media, such a serious issue concerning one of the world’s more prominent billionaires warrants a closer look, or a deeper dive as we like to refer to it.
Elon Musk, Provocateur/Troll
When Elon Musk isn’t playing genius, billionaire, philanthropist, and solver-of-problems-he-wasn’t-asked-to, he’s an engaging, witty if provocative social media personality. Let’s face it, his belligerence in the wake of the cave rescue saga in Thailand left even longtime admirers hoping he’d just leave the matter well alone.
A lawsuit for calling one of the divers a pedophile hasn’t slowed him down much. He is viewed as a funny guy by many people, and as a troll by many others. Musk’s needling of the media, and his regular pushback against what he claims are news reports being economical with the facts, earned him notoriety with the PC brigade.
The word sexism was also thrown about until it was revealed that the reporter who accused him of it, Erin Baba, had earlier made fun of Musk’s genitalia. Can we use that word in a serious deep dive? Musk was also recently seen smoking marijuana during a webcast.
What I’m saying is, Elon Musk never has a dull day on social media. But does that make for a safe and steady leader? Even he may have gone too far this time around. His actions are said to be costing Tesla in very real terms. He’s facing some heat for this and is in danger of going from idiosyncratic to unhinged.
Musk, and a most difficult year
Speaking to the New York Times, Elon Musk said, “This past year has been the most difficult and painful year of my career. It was excruciating.”
That would not be an inaccurate way to describe Musk’s year. The Times noted that during the interview, he choked up more than once, lamenting that he almost missed his brother’s wedding and spent his own birthday in Tesla’s offices as the carmaker struggled to meet production targets on a crucial new model. Then there’s the little fact that he survived as CEO by the skin of his teeth. We’ve covered his troubles in previous podcasts, and have even done a biography of sorts.
For now, let’s revisit the Department of Justice angle for a minute. Musk’s tweet claiming he had secured funding to take Tesla private at $420 per share meant that Tesla, as a company, would have a valuation of around $70 billion.
That would make it the largest corporate buyout in history. As Vox noted, “The tweet raised eyebrows because it wasn’t clear how much groundwork had actually been laid for such a maneuver, and it’s illegal for companies and executives to give shareholders misleading information about potentially meaningful corporate events.”
Musk and Tesla put up a few blog posts attempting to explain the tweets. However, a couple of weeks later, Musk changed his tune, saying he would keep Tesla public. But the about face hasn’t laid to rest any of scrutiny surrounding his prior tweets. On 18th September, Tesla announced that the Justice Department had requested documents following the August 7 tweets.
Bloomberg also reported that Tesla might face a criminal probe by the US government. The company released a statement that said, “We respect the DOJ’s desire to get information about this and believe that the matter should be quickly resolved as they review the information they have received.” It added that it had not received “a subpoena, a request for testimony, or any other formal process” but was cooperating with a ‘voluntary request’ for documents.
To compound Musk’s grief, the SEC, or Securities and Exchange Commission, a government agency responsible for “protecting investors, and maintaining fair and orderly functioning of securities markets” also launched a probe into his tweets.
On the day Musk tweeted about privatization, Tesla shares, which the New York Times claims are “a popular target for so-called short sellers who bet on certain stocks losing value,” rose by 11 percent. It has since become clear that neither Elon Musk nor Tesla had lined up the necessary financing.
There might have been only preliminary conversations with some investors. After the announcement about the investigation by the Justice Department, Tesla’s stock price fell nearly 7 percent, according to Vox. Bloomberg reported that the company’s shares are down nearly 8.5 percent this year.
The new SEC investigation was in addition to another investigation already underway regarding Tesla misleading customers about its Model 3 production issues. The criminal inquiry by the DoJ is still in the initial stages, according to the Bloomberg report. Justice Department probes can last for months, and prosecutors can sometimes decide to not bring any charges.
How does the probe affect Tesla and Elon Musk?
The SEC probe has the potential to seriously affect Tesla’s credibility.
The agency had first ruled on the use of social media for disclosing material information when Netflix’s CEO Reed Hastings wrote on Facebook in July 2012 that views on his company’s video-streaming service had “exceeded 1 billion hours for the first time.”
The regulator determined that Hastings wouldn’t face enforcement action and declared most social media “perfectly suitable” for communicating company information as long as investors are alerted and access isn’t restricted. According to securities lawyers quoted by Fortune, “Musk’s initial post on a possible buyout probably wouldn’t be enough to put him in legal jeopardy unless it proved to be false or inaccurate.”
But even before the August 7 tweet, the Securities and Exchange Commission had been investigating Tesla Inc. discreetly. As another Bloomberg report noted, “Actions probed by the SEC aren’t typically so public and the agency prefers to keep it that way until it concludes whether laws were broken.”
The other probe is examining if Tesla had issued misleading pronouncements on manufacturing goals and sales targets. The company’s has struggled to improve production of the Model 3 sedan, the first vehicle it intends to mass produce. It came to light in July of this year that Tesla had sued one Martin Tripp, an ex-employee, for allegedly stealing company data and attempting to sabotage the company’s production line.
The Washington Post reported that Tripp filed his own complaint with the SEC alleging that the carmaker has been lying to investors and churning out cars that are unfit for the road. Tripp claimed that Tesla employed many questionable tactics to boost Model 3 production, including shipping batteries with puncture holes that make the car fundamentally unsafe for driving. He also claimed Tesla lied about the total number of Model 3 vehicles it sells every quarter.
In response to these allegations, Musk wrote in an email to Tesla employees, “I was dismayed to learn… about a Tesla employee who had conducted quite extensive and damaging sabotage to our operations. This included making direct code changes to the Tesla Manufacturing Operating System under false usernames and exporting large amounts of highly sensitive Tesla data to unknown third parties.”
However, in a month of consistent bad news for Tesla and Musk, one judge granted them a reprieve. Reuters reported that a federal court in San Francisco had dismissed a lawsuit by shareholders over delays in Model 3 production. The lawsuit against Tesla and Elon Musk claimed that “production forecasts were inflated and deceptive, leading investors to put money into Tesla based on forecasts that proved unrealistic.”
District Judge Charles Breyer dismissed the case, saying, “federal securities laws do not punish companies for failing to achieve their targets.” He said the plaintiffs had failed to make their case that Tesla executives should have known the company's production facilities were not up to the challenge of producing 5,000 Model 3s per week.
This ruling assumes a bit of significance because the delays have formed a key argument for Tesla's critics and stock-market short-sellers who claim Tesla's forecasts are deceptive. The production delays have been a financially pain point for the company which needs revenue from Model 3 sales to balance its books and begin paying off debt. In an investor’s call in July, Musk called Model 3 production a "bet the company" decision.
Elon Musk, Enfant Terrible?
In light of such deeper issues, Elon Musk, who is a charismatic CEO, is being increasingly seen more as a liability than an asset. Tesla’s board of directors finds itself at a critical juncture. It does not want to, but may have to, take sides - a larger-than-life CEO whose success is synonymous with their brand, and to whom many are personally close, or their responsibility to shareholders.
Musk has always been perceived as a brash and ambitious Silicon Valley entrepreneur who helped found several influential tech companies. As the New York Times report notes, “he has often carried himself with bravado, dismissing critics and relishing the spotlight that has come with his success and fortune.”
But during the interview, he also said he viewed the incriminating tweet as an attempt at transparency. He admitted that no one had seen or reviewed it before he posted it. He said in the interview that he wanted to offer a 20 percent premium over where the stock had been trading, which would have been about $419.
He rounded it off to $420. Here’s where it gets interesting. The number 420 has become code for marijuana in counterculture. Musk said, “It seemed like better karma at $420 than at $419. But I was not on weed, to be clear. Weed is not helpful for productivity. There’s a reason for the word ‘stoned.’ You just sit there like a stone on weed.”
He then spoke about the funding he said was secured. Musk told the New York Times he was referring to a potential investment by Saudi Arabia’s government investment fund. Representatives of the $250 billion fund had been discussing with him the possibility of financing a transaction to take the company private — perhaps even in a manner that would result in the Saudis’ owning most of Tesla.
But nothing came of it. Another possibility, according to the newspaper, was that SpaceX would bankroll Tesla’s privatization and take an ownership stake. As such speculation soared, investigators in the San Francisco office of the SEC asked the company for explanations. Why, you ask?
Well, normally, information about a public company’s plans is laid out in detail after extensive preparation and issued via official channels. In Tesla’s case, board members, caught unawares by their CEO’s tweet, were miffed that they had not been briefed. They scrambled to put together a statement that could defuse the outrage that was spreading.
Now we’re seeing reports that the interview has raised concerns surrounding the health of Tesla’s chairman and CEO. Shares plunged 8.9 percent on August 17, the steepest drop in almost two years. References in the interview to Ambien use and driving while tweeting have led to calls that Tesla’s board needs to step up oversight of the CEO and largest shareholder.
Maryann Keller, an independent auto industry analyst, told Bloomberg, “If the board is going to take any initiative, they will clamp him down...He isn’t doing the stock or the perception of him as a leader any good.” And there lies the rub.
Stephen Diamond, associate professor of law at Santa Clara University who specializes in corporate governance, said, “It’s clear that Musk cannot continue to run four companies at a time...Tesla needs and deserves a full-time, exclusive CEO. But the first question the board needs to clarify is this: Is Tesla for sale, or not?”
But Musk isn’t going to make it easy for anyone to rein him in at tesla. He almost threw a challenge, saying, “if you have anyone who can do a better job, please let me know. Is there someone who can do the job better? They can have the reins right now.” Some reports indicated that Tesla’s board is on the lookout for senior talent but is not actively searching for a COO.
Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, said, “...(the) board needs to think long and hard about their relationship with their CEO, as their own reputations are very much at risk.
They are the last responsible party here, besides the U.S. government. The actions of the last few weeks have caused a crisis of confidence in Musk’s leadership. Tesla’s board is viewed as being very close to Musk, but they have legal and ethical obligations to shareholders besides him.”
In the end, as Fortune noted, the question is whether any of Musk’s public statements, or that of Tesla, are in breach of federal securities laws. Meanwhile, there’s little doubt that Elon Musk’s conduct seems to overshadow many of his successes. It will be interesting to see what direction this story takes.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
