Elon Musk agreed on Saturday to step down as Chairman of the electric car maker Tesla, he founded, an unexpected resolution to a lawsuit filed by the Securities and Exchange Commission 48 hours earlier that threatened to throw Tesla into unprecedented chaos.
The SEC sued Musk on Thursday for allegedly lying to investors
when he tweeted last month that he had “funding secured” to take
Tesla private. It sought to ban the impulsive billionaire from serving as
chief executiveof any public company.
As part of the
settlement, Musk will pay a $20 million fine. Tesla will separately pay another
$20 million, add two new independent directors to its board, and monitor more
closely Musk’s public communications — the source of many of the scandals that
have roiled the ambitious but unprofitable company this year.
The conditions of the agreement “are specifically designed
to address the misconduct at issue by strengthening Tesla’s corporate governance
and oversight in order to protect investors,” Stephanie Avakian,
co-director of the SEC’s Enforcement Division, said in a statement.
Musk and Tesla
were not required to admit to any wrongdoing as part of the settlement. Tesla
declined to comment on the settlement.
Reacting to the
lawsuit earlier in the week, Musk said the SEC’s “unjustified action”
left him “deeply saddened and disappointed.” “Integrity is the
most important value in my life and the facts will show I never compromised
this in any way,” he added.
announced Saturday was all the more surprising because the SEC had offered
similar terms last week after conducting an investigation that was unusually
quick. Musk abruptly rejected that initial settlement earlier this week, people
familiar with the matter said, prompting the SEC to file civil suit Thursday
afternoon. Musk, meanwhile, hired several high-powered attorneys to prepare a
defense, appearing to gear up for the fight of his career.
stock tumbled more than 14 percent following the SEC lawsuit, reflecting the
degree of risk associated with Musk’s leadership of the car maker in jeopardy.
It is unclear why Musk, who rarely backs down from a fight, changed his mind.
attorneys, Bradley Bondi of Cahill Gordon & Reindel, and Musk’s attorney,
Steven Farina of Williams & Connolly, held several late-night calls with
the SEC, attempting to resolve the matter, according to a person close to the
company but not authorized to speak about it publicly.
capitulation was “likely due to pressure from investors,” said
Michelle Krebs, executive analyst at Autotrader. Given the potential penalties
they faced if the case had gone to trial, “Musk and Tesla got lucky. …
Still, a reckless tweet cost a lot of money – the $20-million tweet.”
The monetary penalty is a drop in the bucket for Musk, a
multi-billionaire. Tesla views the settlement as having no long-term impact on
its operations or liquidity, according to the person.
global financial markets on Aug. 7 when he issued tweets saying he had the
“funding secured” to take his automaker private. Musk said the
take-private deal was all but guaranteed, sending the Silicon Valley
automaker’s stock soaring by nearly 11 percent. Then, after 17 days, Musk
suddenly announced that he would not pursue the deal, leading the stock to
plunge amid growing skepticism over the company’s long-term prospects.
securities regulators say his statements were deceptive. Following its
investigation, the SEC said the deal “was uncertain and subject to
numerous contingencies.” Prosecutors alleged that Musk had not taken even
basic steps to close a deal, including discussing specific terms, including
price. In his initial tweet, Musk mentioned $420 as a price, but that was
“because he had recently learned about the number’s significance in
marijuana culture and thought his girlfriend ‘would find it funny, which
admittedly is not a great reason to pick a price,’ ” according to the SEC
with the SEC, Tesla argued that Musk’s statements were true and that, either
way, Tesla was not liable for them, the person close to the company said. In
contrast to the fraud charge the SEC levied against Musk, the SEC settlement
with the company determined Tesla did not have proper disclosure requirements
in place to govern Musk’s tweets.
reflects an important principle, said SEC Chair Jay Clayton. “When
companies and corporate insiders make statements, they must act
responsibly,” he said, including ensuring “the statements are not
false or misleading.”
The $40 million
will be distributed to “harmed investors,” according to the SEC.
is a big victory for the SEC, which faced one of its most high-profile fights
in years if the case had gone to trial. It filed suit just 51 days after Musk’s
Aug. 7 tweet, suggesting prosecutors were confident in their case. But there
were risks. Even if the jury found the evidence of fraud convincing, legal experts
said, they could have been easily charmed by Musk.