Tesla’s Elon Musk settles with SEC, must step down as chairman

Lucy Nicholson / Reuters

• Tesla’s Elon Musk has settled with the SEC, according
  to court documents filed Saturday.
• The SEC sued Musk on Thursday, alleging Musk
  tweeted “false and misleading statements” in August about
  taking the company private.
• As part of the settlement, Musk will neither admit nor deny
  the allegations, and he will resign as Tesla chairman. Musk
  and Tesla will also each pay a $20 million fine.

Tesla’s Elon Musk has reached a settlement with the Securities
and Exchange Commission (SEC), in an agreement that will require
Musk to resign as chairman of the company for at least three
years and pay a $20 million fine, the SEC announced Saturday.

Musk, who as part of the agreement will neither admit nor deny
the allegations, will remain CEO.

The US regulators had sued to remove Musk from the electric
carmaker’s leadership, alleging that Musk had made
“false and misleading” statements after he posted on Twitter
about taking the automaker private.

Musk has
been directly involved in almost every detail of its product
development and technology strategy, and is credited as the
driving force behind the loss-making company’s ability to raise
capital.

The cost of insuring Tesla debt against default rose to its
highest price ever on Thursday and the plummeting share price
attracted new short sellers, who bet against the stock. Short
sellers notched $1.27 billion Thursday alone in paper profits,
according to S3 Partners, which said Tesla recently regained the
title of most-shorted US stock.

The billionaire entrepreneur said he had done nothing wrong and
the company’s board said it supported him.

The Wall Street Journal on Friday, citing a person familiar with
the matter, reported that Musk believed he had a verbal deal for
financing from Saudi Arabia’s sovereign wealth fund to take Tesla
private.

Musk last month
in a blog said he left a July 31 meeting with the fund’s managing
director “with no question that a deal with the Saudi sovereign
fund could be closed.”

The SEC in its suit said the meeting between
Musk and the fund
“lacked discussion of even the most fundamental terms of a
proposed going private transaction.”

Musk, 47, walked
away at the last minute from a settlement with the SEC that would
have required him to give up key leadership roles at the company
for two years and pay a nominal fine, according to reports on
Friday.

But sources, who requested anonymity because they were not
authorized to discuss the matter publicly, told Reuters that
while Musk was
ready to go to trial he could still settle. They did not discuss
possible terms.

CNBC reported that Musk had turned down an SEC deal to give
up his role as chairman, while Fox Business Network reported that
Musk had been
offered a temporary ban as CEO.

Aeisha Mastagni, a portfolio manager for the California State
Teachers’ Retirement System, a Tesla investor, said she was
concerned about the board’s ability to oversee
Musk and the
company and that she would welcome changes to Tesla’s board.

“I think this board is insular, ripe with conflicts; it’s the
poster child for bad corporate governance,” she said.

The board also lacks a director who could take over for
Musk, said
investment adviser Cornerstone Capital’s research chief, John
Wilson. “The problem for investors is that an investment in Tesla
is an investment in Elon Musk,” he said.

Musk has hired
Stephen Best at Brown Rudnick, who successfully defended internet
billionaire Mark Cuban in an insider trading case, according to
people familiar with the plans who also asked not to be
identified. He also hired former Assistant US Attorney Chris
Clark of Latham & Watkins to defend him in the case, the
people said.

Tesla did not immediately respond to a request for comment. The
SEC declined to comment on the settlement reports.

One person with knowledge of the SEC’s thinking said on Friday
that the SEC civil lawsuit or a potential settlement did not
preclude further action by the Justice Department, which has a
higher standard of proof to make a criminal case.

The Justice Department declined to comment.

In a previous fraud case over blood-testing firm Theranos, the
Justice Department brought criminal charges three months after
the SEC announced its settlement with the company’s founder
Elizabeth Holmes.

“The SEC wouldn’t delay its case for the DOJ,” said Teresa Goody,
CEO of law firm Goody Counsel and a former SEC attorney.

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