Streetwise Professor

Soon after the news of the SEC securities fraud lawsuit against Elon Musk, Tim Newman tweeted “Finally says @streetwiseprof.”  Indeed I did.

I am mildly surprised, but presumably Musk’s actions were so outrageous that the SEC couldn’t avoid taking action.

Although it shouldn’t be an issue, because Musk had to have known that his going private tweets were false, the law forecloses any “it was secured in my own mind” defense: recklessness–that he should have known the tweets were materially false–satisfies the scienter requirement.  At least that’s the case for the civil action: I’m not sure about any criminal action by the DOJ.

Several people emailed me soon after the announcement, and my response was (in addition to “It’s about time”): Is this just the first step?  Will the SEC (and perhaps DOJ) expand its investigation, and eventually legal action, to include Musk’s myriad previous dodgy statements?  SolarCity came to mind.  This SeekingAlpha post has a nice summary of some(!) of the others:

There’s been plenty of talk regarding SEC action since the day Elon Musk issued the go private tweet. With the news out Thursday, many would argue that a substantial overhang has been lifted from the stock, but of course, it brings up a lot of other issues that I’ve detailed above. Unfortunately, investors should consider the possibility that more shoes will drop.

There already have been many lawsuits filed from investors who have lost money during this whole fiasco. Additionally, there may be even more action from a number of government bodies. Who knows if the SEC is looking at other items like the Model 3 production ramp or the mysterious solar roof product? Perhaps they might even take a look at this blog post where Elon Musk talked about discussions for going private going back two years. He’s bought tens of millions in Tesla shares since, so would that be trading on material non-public information (insider trading)? Perhaps an investigation is started related to end of quarter sales tactics, where it seems Tesla is holding back deliveries of vehicles despite consumers paying for them. Some say this would be an effort to add much needed cash to the balance sheet or book unearned revenues for quarter’s end.

Not to mention missed production deadlines, the supercharger rollout, and on and on and on.  And what could a deep dive into Tesla’s accounting reveal?

Elon’s co-dependents, AKA the Tesla Board of Directors, came out in his support.

Good luck with that!  Though truth be told, they are so deeply connected to Elon that it would be pointless to try to cut loose from him now: their best bet is to go to the mattresses with him.  Not a good bet, but their best one.

A friend has repeatedly asked me why haven’t there been class action lawsuits.  My reply: not until there is a big break in the stock price.  That is occurring now.  So I wouldn’t stand in front of federal courthouses in the SDNY or NDCal for fear of being trampled by class action attorneys rushing to file.

The knock-on effects of this are many.  As I’ve written repeatedly, despite Elon’s denials (another possible legal vulnerability!) Tesla needs cash.   I don’t see a public equity or debt raise being remotely possible now, which would cripple the company’s ability to grow–and fulfill Elon’s grandiose promises.  Moreover, Elon has borrowed extensively against Tesla stock.  Margin call, anyone?  And if that happens, what will he do and how will that impact the stock?

It was only a matter of time before Elon’s words–and his tweets–came back to haunt him.  The only surprise is that it took such a long time.  But his aura as a visionary protected him.

There is an element of Greek tragedy here.  Hubris brings nemesis.  To say that Elon exhibited hubris is the understatement of the century.  If nemesis is even remotely proportional to hubris, he is in for hellish torments.