15 August 2018

Legal action and regulatory questions follow controversial Musk tweets

SEC asks for explanation from Elon Musk, while investors suing him for damaging interests of short-sellers.

Investors and the SEC reacted to Elon Musk surprise announcement on Twitter that he was considering removing Tesla from the stock market and that the funds needed to do so. Like the law suits, the SEC’s inquiries originated from its San Francisco office. Mr Musk later confirmed the support of Saudi Arabia.

SEC questions

One of the tweets read, ‘am considering taking Tesla private at $420. Funding secured,’ which would value the carmaker at around $70bn (£54bn). Telsa's stock price surged more than 13% above the previous day’s close. The US Securities and Exchange Commission (SEC) asked Tesla if Mr Musk's tweets were true and asked why the announcement was not made in an official communication to the markets and investors. The SEC generally allows companies to disseminate news using social media as long as they have told shareholders they might use those channels in addition to regulatory filings. The regulator also asked why the disclosure was made on Twitter rather than in a regulatory filing, and whether the company believes the announcement complies with investor-protection rules. Tesla could come under an enforcement investigation if regulators develop evidence that Musk’s statement was misleading or false, but a formal enforcement investigation has not been announced to date. 

‘Nuclear attack’

Investors argued the announcement aimed to damage the interests of short-sellers, with whom Mr Musk has an ongoing battle, claiming he engineered a scheme to squeeze short-sellers with a series of tweets about taking the company private. Two lawsuits were filed at San Francisco's federal court by Kalman Isaacs and William Chamberlainon. Plaintiff Mr Isaacs said Mr Musk misled the market to artificially inflate Telsa's stock price, adding Tesla’s failure to correct amounted to a ‘nuclear attack’ designed to ‘completely decimate’ short-sellers, who make their money borrowing shares they believe are overpriced, selling them, and then repurchasing them later at what they hope will be a lower price. Mr Musk has frequently used his Twitter account to complain about ‘negative propaganda’ from short-sellers. Investors claim that they lost millions due to the Mr Musk's comments. Mr Musk revealed he had met with Saudi Arabia's sovereign fund, which already holds 5% of the shares, to discuss the possible departure of the electric car manufacturer's stock market, and sated this is why ‘I referred to the 'secured financing' in the announcement of August 7.’