Securities Law

Elon Musk at the Tesla factory in Fremont, California./Maurizio Pesce via Wikimedia Commons.

The U.S. Securities and Exchange Commission sued Tesla CEO Elon Musk on Thursday in Manhattan federal court, saying he “made false and misleading statements” to investors in early August on Twitter.

CNN, USA Today, and the Wall Street Journal all have coverage.

At issue in the complaint is what Musk said about taking the electric car company private. Musk told his more than 22 million Twitter followers on Aug. 7 that he was considering taking Tesla private at $420 a share—and had secured the funding to do so. He then elaborated on what he would do if he did take the company private.

The SEC says Musk knew or recklessly failed to ascertain whether those statements were false and misleading.

“Musk’s public statements and omissions created the misleading impression that taking Tesla private was subject only to Musk choosing to do so and a shareholder vote,” the SEC argues. “Musk’s false and misleading public statements and omissions caused significant confusion and disruption in the market for Tesla’s stock and resulting harm to investors.”

The tweets came after months of damaging news for Tesla. In April, Wired noted that production of the company’s Model 3 vehicle was delayed substantially, and Engadget reported in August that its solar roof panels have had production delays, too. The Center for Investigative Reporting published an article in April saying Tesla had concealed the true extent of injuries at its factory.

Musk responded by attacking the press, and CNN notes that his personal behavior has been abrasive or erratic in other ways.

The SEC complaint addresses many of these problems. By August, it says, more than $13 billion worth of Tesla stock was being shorted, meaning investors were betting that the stock’s price would fall. About a week before the tweets at issue in the lawsuit, Musk met with representatives of a sovereign investment fund interested taking Tesla private, but the SEC says there was no discussion of even the broadest details.

Musk eventually emailed his directors and officers about taking the company private at $420 a share, a number he’d calculated by adding a premium to the current stock price and then rounding up. He also said the thought of using 420—a number associated with marijuana use—would amuse his girlfriend. Musk did little further work on the matter before his early August tweets. After a negative reaction from inside and outside the company, he published an Aug 24 blog post announcing the company would stay public.

The SEC argues that Musk knew, or was reckless in not knowing, that his Aug. 7 tweets were false and misleading. Tesla’s stock dropped from $356 to $319 a share in less than three weeks as a result of this behavior, it says, thereby harming investors in violation of the Securities and Exchange Act. Tesla stock dropped $42.75 a share to $264.77 at the close of market on Friday.

In addition to returning any profits and paying a fine, the commission is asking the court to order Musk out of any director or officer positions at publicly traded companies.

In a public statement reported by CNN, Musk said “Integrity is the most important value in my life and the facts will show I never compromised this in any way.”


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