The $40 million tweet: Elon Musk settles with SEC, Tesla bears the brunt
A tweet in August sent by Elon Musk has cost the entrepreneur dearly.
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The fateful tweet, in which Musk hinted at plans to take the innovative automaker Tesla private, led to the US Securities and Exchange Commission (SEC) charging Musk with securities fraud.
"Am considering taking Tesla private at $420. Funding secured, " "="" class="c-regularLink" target="_blank" rel="noopener nofollow">Musk said. "Shareholders could either to sell at 420 or hold shares & go private."
The unexpected news causes a furor not only on social media but in Tesla's investment circle.
A day after the message caused stock fluctuations, a small number of investors confirmed that several meetings had taken place in which the Tesla CEO discussed taking the company private.
Musk's public statement not only raised eyebrows at the $420 a share claim -- which would value the automaker at roughly $70 billion, far beyond its current market cap of $45.1 billion -- but also prompted speculation on which entities had 'agreed' to provide funding.
The price point of $420 was allegedly nothing more than a reference to cannabis, which Musk chose in order to amuse his girlfriend.
See also: SEC sues Elon Musk over "misleading tweets"
The executive then emailed Tesla employees, commenting:
"As a public company, we are subject to wild swings in our stock price that can be a major distraction for everyone working at Tesla, all of whom are shareholders. Being public also subjects us to the quarterly earnings cycle that puts enormous pressure on Tesla to make decisions that may be right for a given quarter, but not necessarily right for the long-term.
Finally, as the most shorted stock in the history of the stock market, being public means that there are large numbers of people who have the incentive to attack the company."
No matter the reasoning behind a wish to take the automaker private, the way in which Musk made his announcement caused SEC to act.
Last week, the commission charged Musk with securities fraud over his public tweet, claiming that the executive made "a series of false and misleading tweets" over the company's future.
SEC said on Thursday that "Musk had not discussed specific deal terms with any potential financing partners, and he allegedly knew that the potential transaction was uncertain and subject to numerous contingencies."
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In addition, the tweet "led to significant market disruption," according to the agency. As a result, the perhaps ill-advised message amounted to the violation of securities laws.
This is certainly not the first time a tweet has resulted in controversy or trouble for Musk. However, this is the most costly -- at least, so far.
Over the weekend, SEC settled with the Tesla CEO, charging Musk $20 million and Tesla a further $20 million.
In a document describing the settlement, the US regulator said Musk has not admitted or denied the allegations but has agreed to step down as Tesla's Chairman and will not seek re-election for at least three years.
Tesla will appoint an independent chairman to replace Musk, and will further appoint an additional two directors.
In addition, SEC has insisted on some new measures of control over the CEO in the future through "a new committee of independent directors and additional controls and procedures to oversee Musk's communications."
The $40 million fine, once collected, will be "distributed to harmed investors under a court-approved process," SEC says.
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"As a result of the settlement, Elon Musk will no longer be chairman of Tesla, Tesla's board will adopt important reforms -- including an obligation to oversee Musk's communications with investors-and both will pay financial penalties," said Steven Peikin, co-director of the SEC's Enforcement Division. "The resolution is intended to prevent further market disruption and harm to Tesla's shareholders."
Nine words, $40 million. The price of the tweet may be high, but the outcome for Musk could have been far worse. Originally, SEC sought to ban him from serving as a company officer completely, which would have rocked the foundations of Tesla irrevocably.
At the time of writing, Tesla stock is trading at $264.77 pre-market, a reduction of 13.9 percent at closing.