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Trading  | September 29, 2018

In a decision that stunned the more hardened market cynics, last week the Securities and Exchange Commission filed a lawsuit against Elon Musk, alleging that the Tesla CEO committed securities fraud when he Tweeted that he had “funding secured” for a bid to take his company private at $420 per share. Just as striking was that Musk decided in the 11th hour not to settle this lawsuit with the SEC, leaving some analysts mystified as to why Musk would want to spend the time, money and resources to fight the agency, who has a 94.7% success rate in market manipulation cases, according to Vertical Group’s Gordon Johnson.

This defiance left many wondering what Musk’s “genius” line of thinking was in believing that his actions may have been acceptable. Apparently, Musk thought a couple of conversations “verbal commitment” with Saudi nationals that supposedly culminated more than a week prior to his Tweet – and resulted in no tangible numbers or defined terms for a proposed deal – was enough to state to his 22 million Twitter followers that a go-private deal was then only contingent on a shareholder vote. 

Overnight, the Wall Street Journal gave us our first look into the thought process of the CEO, and a glimpse into what Musk’s defense strategy will look like.

The article astonishingly states that Musk believes the SEC’s “reasoning is flawed” in thinking that a written agreement and fixed price were necessary to get a proposed $70 billion plus go-private deal done. The deal would have been the largest buyout in history. Musk also reportedly didn’t think that regulators were taking into account that Saudi businesses have a history of using “verbal agreements in principle”. 

Perhaps this defense may hold some water for his original tweet, where he stated that he was “considering” taking the company private. 

But to follow up with a claim that the only reason the deal wasn’t certain was because it was “contingent on a shareholder vote”, indicating that every other aspect of what would have been the largest buyout in history was already in place, is where Musk’s reasoning will be severely challenged – especially with the Saudis themselves later making it clear that no formal deal had been agreed on – and not just on social media and the public comment circuit:

… from William McGaw:

Elon Musk to analyst: “Boring, bonehead questions are not cool. Next?”

Boring, bonehead answers to securities fraud allegations are also not cool. Next?

… from Jeffrey Dugas:

Musk can claim he “believed” anything he wants. I can claim that I “believed” my income was not taxable last year, but that’s not going to stop the IRS from coming after me for not filing a return. After the fact claims of “belief”, without any corroboration from another party with which he had a “verbal” agreement mean nothing. It will good to see Musk in the dock. This will be a teachable moment for an arrogant one who thinks his droppings do not stink.

… from Kevin Dretzka:

Try taking an oral “agreement” to your banker and getting a $10 cash advance secured by the  the oral agreement.   He is a genius, you know.

It sounds like the serial scammer has finally run out of get-out-of-jail cards.

… from Chris Petruzzi:

Apparently, Musk has no emails, no text message, etc. which would corroborate his story.   I find it difficult to believe that a  $50 billion+ deal could be made without even any contemporaneous notes on Musk’s computer.  

… from Vamshi Yamsani:

isn’t this the same person who had ‘sources’ claiming VW was interested in Tesla’s go-private act? VW completely denied having anything to do with it only a few days later. Why should we believe this person now? And then, “verbal agreement” for 70 Billion dollars!? Okay

… from Mitchell Kleinman:

Read the complaint.  It is astoundingly damning and shows a disregard of most principals of corporate governance and securities laws.  Paragraph 30 details all of the things Musk had both time to do and should have done between his last meeting with the sovereign fund and his tweet.  He simply did none of them.

… from Yiuri Vizitei:

He got caught trying to punish the shorts. Period. And then he had the hubris to act like he is above the law. There is a reason why most founders make terrible CEOs. The qualities which make great founders make for terrible CEOs. Particularly of  public companies. In a “normal” situation, he would have been long retired and speaking on the TED circuit. But the investors bought his cult of personality and now pay the price for that mistake.

From William Bair:

Words fail me as I read that headline.  If that was truly Elon Musk’s belief, then he is not the appropriate person to serve as CEO of a public company

And from R Boxwell:

He’s like the Trump of Silicon Valley — can’t this guy shut up?

As a back up defense, Musk has also stated that he personally could’ve led the go private transaction by using his shares of SpaceX, if he had gotten some of Tesla’s larger shareholders behind him.

Musk spent a day in August giving testimony to the Securities and Exchange Commission in San Francisco. According to sources cited by the Journal, the SEC believed that based on this testimony and the additional evidence that they had an “open and shut” case showing that Musk had violated securities laws.

Meanwhile, we also learned that the settlement that Musk turned down was reportedly for a two year bar as chairman of the company which would have reportedly allowed him to continue as CEO. He also would’ve paid a fine “in the millions of dollars”. The deal had reportedly already been approved by the commissioners of the SEC before Musk backed out at the last minute.

Former SEC chairman Richard Breeden said on CNBC last week that Musk backing out of this settlement would likely be seen as “another reckless act”. 

After Musk made it clear to the SEC that he didn’t want to settle, lawyers were forced to pull together their complaint and file it later that day.

In the complaint, several other fascinating details were revealed, such as the fact that Musk thought $420 per share would be a “standard” premium for a go-private offer. He arrived at the number $420 because of its association with marijuana culture and because he thought it would “impress his girlfriend.”

Even Musk told the SEC that during his July 31 meeting between him and the Saudi nationals, the last meeting before Musk’s tweet, that he did not discuss any of his assumptions related such a go-private deal with the representatives of the fund.

This left the SEC no choice but to file the complaint, which now seeks to remove him from his role as both chairman and CEO.

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