Tesla CEO Elon Musk could be the subject of a new investigation by the U.S. Securities and Exchange Commission following his Tuesday tweet saying he wanted to take the electric car company private.
The SEC has inquired with Tesla about Musk’s tweet and a regulator is studying if Musk’s statement in the tweet was truthful, the Wall Street Journal reported Wednesday, citing “sources.” The report also said the SEC inquired why Musk made the disclosure on Twitter.
The Journal said the SEC’s inquiries originated from its San Francisco office and suggest Tesla might come under an enforcement investigation “if regulators develop evidence that Mr. Musk’s statement was misleading or false.” But it said it was unclear whether the regulator had opened a formal enforcement investigation.
An SEC public affairs officer told the Free Press that the regulatory agency had no comment on whether it had contacted Tesla about the tweet.
Tesla has not replied to an email and a phone inquiry seeking comment.
At 12:48 p.m. Tuesday Musk tweeted: “Am considering taking Tesla private at $420. Funding secured.”
Tesla shares rose 11 percent to close at $379.57 after trading was halted for part of the afternoon while investors awaited clarification. The stock’s record high was $389.61 on Sept. 18, 2017.
A former federal prosecutor told the Free Press Tuesday afternoon that the tweet could be in violation of state and federal laws.
“You’re not allowed to issue misleading information that investors could act on, and it looks like investors acted on it,” said Peter Henning, a professor at Wayne State University Law School specializing in securities law.
Jerry York incident
In fact, it’s frowned upon when executive officers of public companies make any incendiary comments about the company during trading hours.
In May 2008, Jerry York, a former auto executive was representing Kirk Kerkorian’s Tracinda Corp., which had taken a large stake in Ford Motor Co. In an interview, he told the media that then-Ford CEO Alan Mulally would hold onto the Lincoln brand but sell Volvo and Mercury – and that Mulally would be right to do so.
Speaking hypothetically, York told Automotive News that if it were his call, he would unload Volvo and Mercury.
“I’m very confident that (Mulally’s plan) is the answer, and I think you’ll see that he’ll put Volvo on the market within the next year and a half,” York said. “There’s no rational reason for keeping Volvo or Mercury.”
York said Mulally did not tell him any of his plans. But Ford eventually did sell Volvo to Chinese-owned Geely and it shuttered its Mercury brand.
York’s comments the day he said them caused such a stir that Ford’s stock price soared to its highest level in six months. A few days after making the comments, York, who died in 2010 at age 71, issued a public apology to then-Ford CFO Donat Leclair for making his comments. York called his comments “off the cuff.”
Social media guidance
In 2013, the SEC ruled that companies can use social media such as Facebook and Twitter to announce key information so long as investors have been alerted about which social media will be used to disseminate the information.
Musk offered some clarification to his tweet later Tuesday, saying the “only reason why this is not certain is that it’s contingent on a shareholder vote.”
Musk, whose tweets initially caused confusion as some investors questioned whether he had been hacked, later confirmed his thinking through Tesla’s official website.
“I think this is the best path forward,” he said in an email to employees, further clarifying that “a final decision has not yet been made, but the reason for doing this is all about creating the environment for Tesla to operate best.”
The explanation could have been too late, Henning told the Free Press. Corporate governance requires a company officer to first notify the board of directors of any deals, then negotiate a deal with the board.
If the SEC believes Musk’s tweet misled shareholders, the SEC could deem it a violation of antifraud prohibition in the federal securities law, said Henning.
“I suspect the corporate lawyers are scrambling right now and hoping the SEC doesn’t go after him and the company, because it could be viewed as a statement from Tesla,” said Henning. “If it misleads investors, the SEC can bring a case even if no one’s been harmed.”
And, legally, Tesla shareholders could sue Musk for a breach of fiduciary responsibility, said Henning. If the tweet gives an impression that Musk is trying to “stampede the board,” that’s a violation of state fiduciary duty of directors, he said.
Musk is already the subject of an SEC investigation. CNBC reported late last month that Tesla whistleblower Martin Tripp is slated to meet with the SEC over Tripp’s allegations that Tesla has made several “material omissions and misstatements” to investors and possibly compromised the safety of Tesla customers.
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