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Elon Musk is the heart and soul of Tesla. If the SEC gets its way, he may have to resign.
The U.S. Securities and Exchange Commission filed a lawsuit on Thursday accusing Musk of making “false and misleading” statements about Tesla’s plans to take Tesla private.
What’s truly shocking is that the SEC wants a judge to bar Musk, the company’s chairman and CEO, from serving as an officer or director of a public company.
“It was the nuclear threat that forced him to reconcile,” said John Coffey, a professor at Columbia Law School.
The news shocked Wall Street. Tesla (Tesla) Shares plunged 12% on Friday.
“Tesla without Elon Musk would be worth a lot less,” Coffey said. “The penalty does fall on Tesla shareholders. Who is going to run the company?”
Musk defended himself, calling the SEC’s lawsuit an “unjust act” that left him “deeply saddened and disappointed.” The CEO said he always acted “in the best interests of truth, transparency and investors.”
How serious are the SEC’s charges?
Very.
The agency chose to charge Musk under Section 10b-5 of the Exchange Act. This is the method the SEC uses to go after insider traders and market manipulators.
“This is a very serious allegation,” said Thomas Gorman, a partner at Dorsey & Whitney and a former SEC staffer.
Coffee said that in theory, a judge could issue a “lifetime” ban against Musk, permanently barring him from serving as a company officer or director. Although the SEC does not require a specific time frame, it often satisfies requirements for less than a lifetime ban.
Martha Stewart’s 2006 settlement with the SEC over insider trading prohibited her from serving as CEO or CFO of any public company for five years.
The SEC clearly wanted to use this high-profile case to make a point: Corporate executives cannot make statements without considering their accuracy.
“The SEC has achieved their goal: to make headlines. Boy, have they done that,” said Randall LaSalle, a professor at John Jay College of Criminal Justice.
What happens next?
Often, these issues are resolved through settlement. It is unusual that the dispute was not resolved before the SEC filed suit.
“Most defendants try to settle as quickly as possible. But Mr. Musk has never been a completely rational actor,” Coffee said.
While Musk may be hoping for a settlement now, the litigation could drag on for weeks or even months.
That could cause problems for debt-laden Tesla. The company said it doesn’t need to raise capital, but Tesla analysts believe the company will need to raise cash quickly to pay down debt and invest in its business. Investors may be reluctant to provide Tesla with more money when its CEO is in trouble and executives are exiting.
Cornell Law School professor Charles Whitehead said it’s possible Musk could reach a settlement that would allow him to reduce his role but remain at the company.
“Why would the SEC want to harm the company rather than the tweet itself?” Whitehead said. “It’s like throwing the baby out with the bathwater.”
CNN Business (New York) First published September 27, 2018: 8:42pm ET