A Tesla Inc. Model S electric vehicle charges at a Supercharger station in Oftringen, Switzerland, on Thursday, Aug. 16, 2018. Tesla chief executive officer Elon Musk has captivated the financial world by blurting out via Twitter his vision of transforming Tesla into a private company. Photographer: Stefan Wermuth/Bloomberg Photo credit: Bloomberg
A bet on Tesla Inc. is very much a bet on Elon Musk, which is why investors might be worried about a regulatory probe leading to the unconventional CEO’s ouster.
Yet legal analysts argue that the U.S. Securities and Exchange Commission — the federal agency that potentially holds Musk’s fate in its hands — is unlikely to try to remove him precisely because doing so would hurt shareholders.
Since Tesla is so closely identified with Musk, such a dramatic move would probably tank the electric carmaker’s stock. That would trigger more pain for investors who’ve already lost money on their holdings while Musk mulled, and then quickly decided against, taking the company private.
The power to temporarily or permanently ban executives from serving as officers and directors of public companies is one of the most powerful enforcement tools the SEC wields. If the agency concludes that Musk, 47, intentionally misled investors when he wrote in an Aug. 7 tweet that he had “funding secured” to take the company private, the regulator could pursue a ban. Musk and Tesla would undoubtedly fight such punishment.
While the SEC hasn’t acknowledged an investigation into Musk or the company, Bloomberg and other media outlets have reported that the regulator is looking into his tweets as well as earlier pronouncements that he and Tesla made about manufacturing and sales goals. Tesla has lost about $13 billion in market value in the aftermath of his Aug. 7 tweet.
Spokesmen for the SEC and Musk declined to comment.
SEC probes can take months or even years, and sometimes end with the agency deciding against bringing an enforcement action. In the meantime, speculation is rampant over how severely the regulator might sanction Musk and what that could mean for Tesla.
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Here are answers to some key questions:
What’s the toughest penalty the SEC could impose?
The SEC is a civil regulator, which mostly limits its enforcement powers to suing individuals and companies for monetary penalties. While individuals want to pay the lowest fine possible, a bar is usually what they resist more. That’s because a suspension typically has a greater financial impact on executives by limiting their earning potential.
One of the SEC’s most high-profile recent spats over a ban involved billionaire investor Leon Cooperman. The agency accused the hedge fund titan of insider trading in September 2016, and people familiar with the matter said at the time that its enforcement attorneys were seeking a multiyear bar on his ability to manage clients’ money. Cooperman initially refused to settle, arguing that he did nothing wrong. A few months later, he agreed to pay a $4.9 million fine to make the case go away after the SEC dropped its demand for a suspension.
When could the SEC seek a suspension?
Bars are typically levied against individuals charged with egregious frauds or those who’ve repeatedly violated the law
In May, Elizabeth Holmes was prohibited from serving as an officer or director of a public company for 10 years after her company, Theranos Inc., which was once worth billions on paper, was found to have made up its blood-testing technology. In 2016, the SEC barred hedge fund manager Steven Cohen from managing other investors’ money for at least two years following allegations of widespread insider trading that prompted then-U.S. Attorney Preet Bharara to refer to SAC Capital Advisors as a “criminal enterprise.”
If the SEC has this power, why doesn’t it use it more?
The SEC settles the vast majority of its enforcement actions. A settlement by definition is a compromise between the agency and defendants, and a bar is a punishment few executives are willing to agree to.
One reason the SEC is hesitant to litigate is because the regulator has limited resources to handle all the investigations it pursues. That issue can be even more pronounced when the SEC is up against a defendant with deep pockets, like Cooperman, who can hire a team of top-notch lawyers.
A cautionary tale of what can happen when a high-profile target takes the SEC to court is Mark Cuban. The Dallas Mavericks owner famously fended off the agency’s insider-trading allegations in 2013, with jurors deliberating a verdict in his favor in under five hours.
So how worried should Tesla investors be?
To win a ban in a litigated case, the SEC must show executives are unfit to serve. Musk’s questionable tweets and behavior aside, legal analysts say his conduct probably falls short of what’s deemed “unfitness” under securities laws.
Also, it hasn’t been suggested that he used information he got as a company insider to make money trading Tesla shares or used his privileged position for some other personal gain. For the SEC — and the attorneys who decide what types of punishment to pursue — that’s a big issue.
John Coffee, director of the Center on Corporate Governance at Columbia Law School, called Musk’s seemingly misleading comment about having lined-up funding for a buyout “reckless.” But Coffee said it won’t lead to a ban.
“The time that the SEC uses that bar — generally, it’s used in insider trading,” he said. “Disqualifying Musk from serving, I think that’s really a penalty that’s borne by the shareholders. They wouldn’t want the criticism,” Coffee said, referring to the SEC.
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