Elon Musk left traders scratching their heads last week after tweeting that he was thinking about taking Tesla private for $420 per share—and had "funding secured" to do so. Musk finally cleared up some of the confusion on Monday, publishing a blog post saying that Saudi Arabia's sovereign wealth fund was the funder he had in mind when he posted his "funding secured" tweet.
But Musk's Monday post mostly raised questions about whether he truly had the kind of commitment from the Saudis that would justify his tweet. Musk wrote that he came out of a July 31 meeting "with no question that a deal with the Saudi sovereign fund could be closed." Experts who talked to Ars this week questioned whether that's really sufficient for Musk to tweet that he had "funding secured" for a deal.
"That's not what anyone in the financial markets thinks of when you say 'funding secured,'" said Stephen Diamond, an expert on securities law at Santa Clara University. Ordinarily, he said, that kind of language would signal that Musk had a "term sheet, letter of intent, or some commitment from the other side of the table."
Yet as Musk himself acknowledges, he didn't—and still doesn't—have anything like that from the Saudis. Sources told The New York Times this week that Saudi Arabia's sovereign wealth fund "had taken none of the steps that such an ambitious transaction would entail, like preparing a term sheet or hiring a financial adviser to work on the deal."
“It just doesnt happen”
And that's a problem, because federal securities laws make it illegal for a CEO to publish inaccurate market-moving information about his or her company. Media reports indicate that the Securities and Exchange Commission is investigating Musk's tweet. And that investigation has reportedly intensified this week, with the agency subpoenaing Tesla for details about Musk's proposal. At the same time, Tesla and Musk are facing class-action lawsuits from traders who traded on the basis of last week's tweets.
It's hard to overstate how unusual Musk's behavior last week was.
We asked two securities law experts for examples of past cases that could serve as a precedent for the coming legal fights over Musk's tweets. They were both stumped.
A normal CEO would have checked with securities lawyers before making a major announcement like this, University of Arizona law professor William Sjostrom told Ars. The announcement would have been made with a more traditional press release—most likely after markets had closed for the day.
"The lawyers would have scrubbed the press release, deleted the word 'secured' and put something else that's less definitive," Sjostrom said.
"It's a huge outlier," Diamond said. "It just doesn't happen. In most companies, a CEO who behaves like this would be in trouble with his board. They would be wondering: does this guy have brain damage?"
Tesla faces an SEC investigation and private lawsuits
Federal securities laws make it illegal to spread false or misleading information about a company in a way that affects its stock price. And the law allows enforcement both by federal regulators and by private plaintiffs who are directly harmed by misleading information.
We've already seen action on both fronts. At least two lawsuits were filed against Tesla last Friday. We covered one of those lawsuits on Saturday: short-seller Kalman Isaacs sued Tesla and Musk arguing that Musk's "funding secured" tweet caused him to close out a large short position at an inflated price, costing him tens of thousands of dollars.
We can expect more lawsuits like this in the coming weeks. According to Diamond, these lawsuits are likely to ultimately be consolidated into one federal district court, where it could drag on for several years.
The law also gives the Securities and Exchange Commission the power to investigate cases of suspected securities fraud. The agency hasn't yet commented publicly on Musk's tweets, but multiple media reports have suggested that the agency is looking closely into the issue.
Musks tweet could cost millions
Theoretically, the penalties for securities fraud could include criminal prosecution and a bar on serving as the CEO of a public company. But Sjostrom and Diamond agreed that these remedies were unlikely to occur here. Criminal prosecution would have to be referred to the Department of Justice, and that extreme step is rarely taken in this kind of case. Nor did either expert expect the SEC to try to bar Musk from being Tesla's CEO.
Instead, both the SEC investigation and the class-action lawsuit are likely to be fights over money.
The class-action lawsuits are being filed by people who traded in the hours or days after Musk made his "funding secured" tweet. They've argued that Musk's statement caused them to pay artificially high prices for Tesla shares. The number of traders who can make this argument is relatively limited because only those who traded between last Tuesday's tweet and Monday's blog post can plausibly claim they were misled. Still, the losses could easily be many millions of dollars.
As for the SEC, Sjostrom said it was unlikely that the agency would seek a big fine against Tesla itself. After all, a fine paid by Tesla effectively comes out of the pockets of Tesla shareholders, which is a bit of a pointless exercise.
On the other hand, the SEC could seek to enforce the law against Musk personally, Sjostrom told Ars. Musk's net worth is around $20 billion, though most of that wealth is tied up in Tesla and SpaceX stock.
Announcing news on social media is probably legal
Both Diamond and Sjostrom brought up a famous case involving Netflix CEO Reed Hastings. In 2012, Hastings posted in a public Facebook post that "Netflix monthly viewing exceeded 1 billion hours for the first time ever in June."
That triggered an investigation from the Securities and Exchange Commission. SEC regulations require public companies to provide information on an equal basis to all market participants. Traditionally, companies do this by filing an 8-K form with the Securities and Exchange Commission—Hastings didn't do that, raising concerns that Facebook users might have an unfair advantage over others who do not use Facebook.
But critics quickly pointed out that it wouldn't make sense to punish Hastings for publishing information in a public Facebook post. Public Facebook posts are, well, public. And practically speaking, a Facebook page may actually be more widely available to the market than an SEC 8-K form. The SEC ultimately backed down and did not try to penalize Hastings for his Facebook post.
The same argument applies with even greater force to Musk's Twitter feed, experts told Ars. Twitter is a public platform. Musk has more than 20 million followers and is well known for discussing Tesla-related news on Twitter. Hence, a tweet is an excellent way to quickly get market-moving news out to the general public.
The difference between the Hastings tweet and Musk's tweet, of course, is that the Hastings tweet was clearly accurate. The accuracy of Musk's tweet is more debatable. Musk and his lawyers will have their work cut out for them in convincing SEC investigators and the courts that Musk's positive but preliminary discussion with the Saudis was a sufficient basis for saying that he had "funding secured" for a buyout at $420 per share.
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Ars Technica
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