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 now Tesla is tanking. That’s putting intense pressure on Musk and the electric-carmaker’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 plunged 12 percent to $270 Friday afternoon in New York, wiping out some $6 billion in shareholder value.
Moving with unusual speed, the SEC 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.
“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 decision to sue 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 accord was never public.
SEC spokesman Ryan White declined to comment, while Tesla officials didn’t immediately respond for 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. But Musk is far from typical, as demonstrated by his decision to smoke marijuana on a podcast, call a cave explorer in Thailand a pedophile and send out a shocking Aug. 7 tweet during market hours stating that he was going to buyout 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.”
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.
(By Matt Robinson and Ben Bain)