Criminal investigation could hurt Tesla fundraising and recruitment
The Justice Department is investigating whether public statements made by Elon Musk and Tesla – the electric car company he runs – were misleading enough to constitute criminal fraud, the company confirmed.
The inquiry began after Musk’s infamous Aug. 7 Twitter post, in which he claimed he had “funding secured” for a plan to take Tesla private. Tesla stock shot up on the news, and then fell as no source of the funding was revealed. Musk pulled the plug on the plan three weeks later.
Because the Securities and Exchange Commission is also investigating Tesla, the market may have already absorbed any potential fallout, said securities lawyer and former SEC investigator Jay Dubow at law firm Pepper Hamilton. “When the SEC is looking at a company or an individual, I assume it’s likely the DOJ is looking too,” he said. “Many investigations the SEC is involved in these days have a criminal component to them.”
The news, however, could affect the company’s ability to attract new capital and lure new talent. Tesla has been burning cash and bleeding top executive talent.
“On the debt side, they would definitely be raising money at far higher costs than they did last year. That was true even before the DOJ probe,” said David Whiston, stock analyst at Morningstar. In August 2017, Tesla sold $1.8 billion in bonds rated high risk and carrying an interest rate of 5.3 percent. Investors have bid those bonds down to an 8 percent yield, Whiston noted.
Meanwhile, more than 18 senior executives have left Tesla this year, including Dave Morton, who started as chief accounting officer the day before Musk’s go-private Twitter post and left within a month. Investigators will probably look into the circumstances of the former Seagate chief financial officer’s quick departure.
Some Tesla investors have been pushing the company’s board of directors to bring in a new chief executive or a chief operating officer to help Musk, who is dealing with a range of personal issues, including a defamation suit filed against him Monday by a participant in the rescue of Thai children from a flooded cave earlier this year. Musk had accused the man, via Twitter, of pedophilia and child rape. Musk is also dealing with the fallout from a recent YouTube webcast in which he accepted a marijuana cigarette from the show’s host and smoked it.
“From a talent perspective, it would take a special executive to take on a company with this much headline risk and Elon Musk as your boss,” Whiston said. A fresh executive “would want autonomy,” he said. “What would be the point of walking away from something lucrative if Musk is going to be breathing down your neck?”
The extent of the SEC and Justice Department investigations is unclear. In a statement Tuesday, Tesla said: “Last month, following Elon’s announcement that he was considering taking the company private, Tesla received a voluntary request for documents from the DOJ and has been cooperative in responding to it. We have not received a subpoena, a request for testimony, or any other formal process. We respect the DOJ’s desire to get information about this and believe that the matter should be quickly resolved as they review the information they have received.”
The company did not respond to questions about whether it has received a subpoena from the SEC, whether Musk personally received a subpoena from the Justice Department, and whether the company’s statement covers both Tesla and Musk or Tesla alone.
The SEC and Justice Department could find no wrongdoing and drop their cases. If the inquiry results in an indictment, prosecutors might try to make a plea deal, while defendants could take any case to trial, Dubow said. A guilty finding could result in a prison sentence, he said. Securities fraud carries a maximum sentence of 25 years, and wire fraud (which includes internet communications) 20 years.