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SEC Probes Tesla CEO Musk’s Tweets

Posted by hkarner - 10. August 2018

Date: 08-08-2018
Source: The Wall Street Journal

The regulator is examining whether Musk’s statement was truthful and why the disclosure was made on Twitter

Tesla Chief Executive Elon Musk

WASHINGTON—U.S. regulators are asking Tesla Inc. whether Chief Executive Elon Musk was truthful when he tweeted that he had secured funding for what would be the largest-ever corporate buyout, people familiar with the matter said.

Officials at the Securities and Exchange Commission want to know whether Mr. Musk had a factual basis for tweeting Tuesday that the going-private transaction was all but certain, with only a shareholder vote needed to pull it off, the people said.

The SEC’s inquiries, which originated from the agency’s San Francisco office, suggest Tesla could come under an enforcement investigation if regulators suspect that Mr. Musk’s statement was misleading or false.

It couldn’t be learned on Wednesday whether the agency had opened a formal enforcement investigation. An SEC spokesman declined to comment. Tesla didn’t respond to a request for comment.

Under U.S. law, companies and corporate officers can’t give shareholders misleading information about meaningful company events. Mr. Musk also could be in trouble if regulators develop evidence that he made a statement aimed at goosing his company’s share price.

Mr. Musk shocked Wall Street by tweeting Tuesday that he planned to take the electric-car maker private at $420 a share, or $72 billion. That is about 20% above the stock’s trading price earlier that day and 11% higher than its Tuesday closing price. In his tweet Tuesday afternoon, Mr. Musk wrote that the buyout had “funding secured,” but he didn’t provide any details.

Thomas Farley, a former president of the New York Stock Exchange, said it would be relatively straightforward for regulators to fact-check some of Mr. Musk’s statements. Mr. Farley said regulators could ask to see any legal agreements that Tesla has with financial partners or backers on the going-private deal.

“If funding is certain, there is documentation to demonstrate that,” Mr. Farley said. “This is a very easy one to manage, and they should manage it.”

The probe by the SEC adds to a swirl of news around the electric-car maker this week. A group of Tesla board members said Wednesday Mr. Musk spoke to them last week about taking the company private.

“Last week, Elon opened a discussion with the board about taking the company private,” the statement from several board members said. The talks included how being a private company could “better serve Tesla’s long-term interests, and also addressed the funding for this to occur,” independent directors Brad Buss, Robyn Denholm, Ira Ehrenpreis, Antonio Gracias, Linda Johnson Rice and James Murdoch said in the statement.

Mr. Murdoch, chief executive of 21st Century Fox, is the son of Rupert Murdoch, executive chairman of Fox and News Corp, publisher of The Wall Street Journal.

The board has nine members, of which seven are independent. The statement wasn’t signed by Mr. Musk, his brother Kimbal Musk or the remaining independent director, Steve Jurvetson, who is currently on leave.

Mr. Musk and Tesla haven’t provided many more details of the potential deal since Mr. Musk’s tweets Tuesday afternoon.

The SEC generally allows companies to disseminate news using social media as long as they have told shareholders they might use those channels in addition to regulatory filings. Tesla told investors in a November 2013 filing to follow Mr. Musk’s Twitter feed for “additional information” about the company.

The company filed its regular quarterly report with the SEC Monday evening, days after the board discussions had begun, but it said nothing in the report about a potential buyout.

Tesla wouldn’t be required to tell the public more until something is completed, said Jill Fisch, a law professor at the University of Pennsylvania. If it did, it might say something that later turns out to be incorrect and has to be retracted. Still, she said, “I think ensuring a level playing field in the way in which information reaches the investing public is very important.”

At the very least, Mr. Musk’s announcement served Tesla’s purposes by boosting its share price. If it remains elevated, that could help the company hold on to much-needed cash, by giving it more flexibility in dealing with convertible bonds coming due soon.

Tesla has $920 million in convertible bonds that come due in March, with a conversion price of $359.87. If Tesla stock is below that level at the time, the company will have to spend cash to redeem the bonds; if the stock price is above that level, the convertible holders will convert them into Tesla shares, relieving the company of the need to lay out cash.

Tesla had $2.2 billion in cash on its balance sheet as of June 30 and free cash flow of negative $1.8 billion in the first half of 2018.

Tuesday’s spike took Tesla stock above the trigger price, and the shares remained above it Wednesday, though they slipped 2.4% to close at $370.34.

Mr. Musk has been at war with short sellers—investors who are betting Tesla’s stock price will decline—and has used Twitter before to joust with them.

In an email to employees on Tuesday, Mr. Musk cited short sellers and other pressures public markets put on companies as factors in announcing he wanted to take the company private. In subsequent tweets, Mr. Musk wrote that going private would end “negative propaganda” from short sellers.

“That will be the question that comes out: What was the reason for the disclosure?” said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware.


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