Following the filing of a fraud case against the Chairman and Chief Executive of the electric car maker Tesla Elon Musk by the US Securities and Exchange Commission (SEC), there was a 13 per cent drop in the shares of the company over worries of investors about the future of Musk.
The fear among investors is that the SEC has asked Musk to be removed from the company and the company would suffer because Musk has been intrinsically entwined with the affairs of the company – giving direction of the company and being the face of the company. He also has immense capability to raise capital.
Musk has been accused of fraud by the SEC because of his tweet in August where he announced his plans of taking Tesla private and even announcing the he had secured funding for the purpose. The SEC also took note of Musk’s calculation of $420 per share for taking the company private. The regulatory body alleged that these comments of Musk were false and misleading.
After about a week, Musk retracted from his proposed plans of taking Tesla private citing pressure from investor not to do so.
According to reports, former assistant U.S. attorney Chris Clark of Latham & Watkins and Stephen Best at Brown Rudnick has been hired by Musk to defend him in this case. The duo had earlier successfully defended internet billionaire Mark Cuban in an insider trading case.
Neither the SEC nor Tesla made any comments on the issue in public or to the media.
The development that Musk’s public statements on the go-private plan were being investigated by the U.S. Department of Justice was disclosed by Tesla on Sept. 18.
Reports said that the SEC lawsuit or a potential settlement would not impede further action by the Justice Department.
There were also no comments from the Justice Department.
There have been previous examples where criminal charges have been filed by the Justice Department even three months after a settlement was announced by the SEC as happened in the case of the blood-testing firm Theranos where the SEC had entered into a settlement with the company’s founder Elizabeth Holmes.
According to legal experts, because the standard of proof is higher than the SEC’s civil cases therefore it typically takes long for criminal investigations by the Justice Department.
“A lot of the time they do work together, but the DOJ’s investigation may go on longer. The SEC wouldn’t delay its case for the DOJ,” Teresa Goody, CEO of law firm Goody Counsel and a former SEC attorney.
Musk might have to resign following the SEC lawsuit, said at least five research firms.
“I think it was a big mistake to turn down the settlement offer,” CFRA analyst Garrett Nelson said.
“By choosing to instead fight the accusations, Musk’s future with the company becomes completely uncertain,” Nelson said.
“The SEC civil action may lead to Musk’s exit from Tesla (either permanently or temporarily) and the Musk premium in the shares dissipating,” Barclays analyst Brian Johnson said.
(Adapted from Reuters.com)