SEC wrong to sue Elon Musk for fraud: Lawyer

Tesla CEO Elon Musk.Mark Brake / Getty Images

• The SEC sued Tesla CEO Elon Musk on Thursday, saying he made “false and misleading” statements in August about possibly taking Tesla private.
• Former SEC senior counsel Thomas Gorman told Business Insider he disagreed with the agency’s decision.
• While Musk’s statements weren’t smart from a business perspective, that doesn’t necessarily mean he committed fraud, Gorman said.

The Securities and Exchange Commission said on Thursday in a lawsuit that Tesla CEO Elon Musk broke federal securities laws when he made what the agency called “false and misleading” statements in August about possibly taking Tesla private. But a former SEC lawyer told Business Insider he disagrees with the agency’s assessment.

Thomas Gorman, a partner at the law firm Dorsey & Whitney and former SEC senior counsel, said Musk’s statements, which he made on Twitter, weren’t smart from a business perspective, but that doesn’t necessarily mean Musk committed fraud.

“There’s a significant difference between bringing a law enforcement action, charging someone with fraud, and saying, ‘This is not really a great way to do your business,'” Gorman said.

At issue is whether Musk had a reasonable basis for saying he had “funding secured” for a deal to take Tesla private at $420 per share, as he said in an August 7 tweet.

The SEC’s lawsuit claims Musk said a representative from Saudi Arabia’s Public Investment Fund had shown interest in taking Tesla private, but that Musk had never discussed any of the specific terms he described on Twitter with the Saudi fund or any other potential backers before making them public. Those terms included the proposed $420 share price and an option for all existing Tesla shareholders to remain with the company after it went private.

But Gorman said the Saudi fund’s reported interest in a take-private deal was enough to make Musk’s statements legal, if ill-advised. And the SEC’s current allegations that Musk hadn’t ironed out the details don’t change that, Gorman said.

“There’s a reasonable basis for what he said,” Gorman said of Musk’s tweets.

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Winning its case against Musk would be a significant victory for the SEC, as it would send a message to other companies about the agency’s ability and willingness to punish illegal activity, Gorman said. Prevailing in a high-profile case can give the agency a larger impact than its resources would otherwise allow. 

“It’s the equivalent of having the cop on the street corner,” Gorman said. “They can’t stand on every street corner. They can’t stand in the lobby of every company in America. But if they bring high-profile cases, everybody sees them, and if they win, that sends a message.”

But Gorman said he doesn’t believe the SEC brought its case against Musk as a means of self-promotion. While he said disagrees with the agency’s decision, Gorman added that he believes the agency was confident it had enough evidence to sue Musk.

“I’m not questioning their motive. I just disagree with their judgment here,” he said.

Read more about the SEC’s lawsuit against Elon Musk:

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