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Tesla: Shares fall after regulators launch Musk lawsuit Tesla: Shares fall after regulators launch Musk lawsuit
(about 2 hours later)
Tesla shares have sunk after US regulators took legal action against co-founder Elon Musk for alleged securities fraud.Tesla shares have sunk after US regulators took legal action against co-founder Elon Musk for alleged securities fraud.
On Thursday the Securities and Exchange Commission filed a lawsuit over claims made last month by Mr Musk that he had funding to take the company private.On Thursday the Securities and Exchange Commission filed a lawsuit over claims made last month by Mr Musk that he had funding to take the company private.
The billionaire boss of the electric carmaker called the action unjustified.The billionaire boss of the electric carmaker called the action unjustified.
On Friday, the shares opened 10% lower as Wall Street investors had their first chance to react to the news. But the filing was a potentially serious blow for the company, which was already under financial strain.
Mr Musk has led the electric carmaker as chief executive since 2008, presiding over its rise into a company with a market value that rivals Ford and General Motors.
His celebrity status and reputation for entrepreneurial vision attracted investors and legions of fans - even though the firm has consistently lost money and struggled to hit manufacturing targets.
Now the SEC is seeking to bar Mr Musk from acting as an officer or director of a publicly traded company.
The move would strip him of his role at Tesla and could make it difficult for the firm to raise money at a critical moment for the company, which has been spending heavily to increase production of its latest car.
On Friday, the shares opened 10% lower as Wall Street investors reacted to the news.
"The mere possibility that Musk could be removed as chief executive (or entirely from Telsa) is likely to cast an overhang on the stock," analysts for AllianceBernstein wrote.
What are the charges?
Mr Musk stunned the business world in August when he announced on Twitter that he was considering taking Tesla off the stock market and into private ownership.Mr Musk stunned the business world in August when he announced on Twitter that he was considering taking Tesla off the stock market and into private ownership.
He wrote he had "funding secured" for the proposal, which would value Tesla at $420 per share.He wrote he had "funding secured" for the proposal, which would value Tesla at $420 per share.
However, the SEC says Mr Musk's claim that he had secured funding to take the electric carmaker private was "false and misleading". In a complaint filed in New York, the SEC said those claims were "false and misleading".
It is seeking to bar Mr Musk from acting as an officer or director of a publicly traded company. "In truth and in fact, Musk had not even discussed, much less confirmed, key deal terms, including price, with any potential funding source," the regulator said.
His statements, the SEC said in a complaint filed in New York, "created the misleading impression that taking Tesla private was subject only to Mr Musk choosing to do so and a shareholder vote". Mr Musk has opted to fight the claims, reportedly rejecting opportunities for settlement.
"In truth and in fact Musk had not even discussed, much less confirmed, key deal terms, including price, with any potential funding source," the regulator said.
On Thursday, the Tesla chief said that he acted in the "best interests of truth, transparency and investors".On Thursday, the Tesla chief said that he acted in the "best interests of truth, transparency and investors".
"Integrity is the most important value in my life and the facts will show I never compromised this in any way," he said in a statement."Integrity is the most important value in my life and the facts will show I never compromised this in any way," he said in a statement.
Tesla's board of directors said in a statement that they were "fully confident in Elon, his integrity and his leadership of the company".Tesla's board of directors said in a statement that they were "fully confident in Elon, his integrity and his leadership of the company".
The SEC statement said that, according to Mr Musk, he calculated the $420 price per share based on a 20% premium over that day's closing share price because he thought 20% was a "standard premium" when taking companies private transactions. What are his chances?
This calculation resulted in a price of $419, and Mr Musk stated that he rounded the price up to $420 because he had recently learned about the number's significance in marijuana culture and thought his girlfriend, the Canadian indie singer Grimes, "would find it funny, which admittedly is not a great reason to pick a price". The SEC has a strong case when it comes to proving that Mr Musk's tweets - which triggered a temporary spike in the firm's share price - were reckless, said Adam C Pritchard, a professor of securities law at the University of Michigan Law School.
The 7 August tweets took even people within the company by surprise. But he says it may be more difficult to convince a court that the claims merit a lifetime bar from acting as director or officer of a public company, given how critical Mr Musk has been to Tesla's success and ability to raise money.
"Was this text legit?" the firm's head of investor relations wrote to Mr Musk's chief of staff, the complaint says. "If I'm the judge, I'm thinking - do I want to blow up this company just because he's a jackass?" Mr Pritchard added.
'Significant confusion' He says he expects the two sides to eventually negotiate a settlement.
Tesla shares soared after Mr Musk's announcement, before retreating amid questions and doubts. Will Elon Musk leave the company?
Weeks later, Mr Musk backed away from the plan, citing investor feedback. Rebecca Lindland, executive analyst for Kelley Blue Book, said Mr Musk is behind much of Tesla's appeal for car buyers and investors.
The SEC, which is also seeking financial penalties, said his claims created "significant confusion" in the stock market and harmed investors. But, she added, his behaviour in recent months has not done the firm "any favours".
"Taking care to provide truthful and accurate information is among a CEO's most critical obligations," said Stephanie Avakian, co-director of the SEC's enforcement division. This spring, Mr Musk alarmed investors with jokes about Tesla's bankruptcy and abrupt dismissal of questions from financial analysts during earnings calls.
"That standard applies with equal force when the communications are made via social media or another non-traditional form." Then in July, Mr Musk drew widespread criticism after accusing a British cave diver involved in the rescue of Thai teenagers from a flooded cave of being a child abuser.
The SEC complaint sent shares of the firm down by more than 10% in after-hours trade.
Analysis
Dave Lee, BBC North America technology reporter, San Francisco:
Whatever the state of mind Elon Musk was in when he announced he had "funding secured", it could end up costing almost everything he holds dear. It would be nobody's fault but his own.
Wall Street veterans - and indeed, anyone with a modicum of knowledge of how the financial markets work - predicted this very scenario the moment those tweets were posted.
Mr Musk is famously an unconventional chief executive, but when it comes to the financial markets, you can't flout the rules without serious consequences.
It's clear, from emails contained in the SEC's filing, that staff at Tesla were caught completely off guard. His head of investor relations asked if the tweets were "legit". The Nasdaq, confused, halted trading. It all makes Mr Musk unfit to run a public company, the SEC says.
All this because of a tweet sent because Mr Musk thought his girlfriend "would find it funny".
Mr Musk, who co-founded Tesla and has served as chief executive since 2008, is a divisive figure in the business world, who has inspired passionate fans and critics.
Supporters credit Mr Musk, also the head of the rocket company SpaceX, with pushing the car industry to produce electric cars.
But his critics - including many who have made investments predicting the firm's stock will fall - argue that Tesla has consistently lost money and struggled to increase its output, repeatedly missing its own targets.
The financial pressure facing Tesla has mounted this year, as it boosts spending to increase production of its newest car.
Erratic behaviour
In recent months, Mr Musk's own behaviour has also been in the spotlight.
In July, he drew widespread criticism after accusing a British cave diver involved in the rescue of Thai teenagers from a flooded cave of being a child abuser.
The diver later filed a defamation suit.The diver later filed a defamation suit.
He also drew attention after an emotional interview with the New York Times, in which he said he worked "120-hour weeks" and took sedatives.He also drew attention after an emotional interview with the New York Times, in which he said he worked "120-hour weeks" and took sedatives.
And earlier this month, he smoked marijuana live on the web during a podcast with comedian Joe Rogan.And earlier this month, he smoked marijuana live on the web during a podcast with comedian Joe Rogan.
"The disappointing part of all this is it's self-inflicted," Ms Lindland said. "I could see investors potentially being reassured if a strong, experienced stable management team were to come in and replace him."
Still, she said she would want Mr Musk to remain in an advisory role, lending his vision to the firm.
"It's obviously a very big deal...but it doesn't mean it's the death of Tesla," she said.