Tesla Inc. – SEC Overreaching to Pin Musk; Unlikely to Succeed

Tesla Motors (TSLA US) is in the news once again for all the wrong reasons. This time it is the SEC that has filed a civil complaint against Musk alleging recklessness on part of Musk, and hence wants a jury to bar Musk from acting as an officer and director of a publicly traded company. The saga began with the going private tweet of August 7, 2018.

To the chagrin of investors bullish on Tesla Motors’ (TSLA US) (“Tesla” or the “Company”) prospects, and to the delight of those bearish on the Company’s equity valuation and the prognosis for its business going forward, the Securities & Exchange Commission (“SEC”) alleged in a court filling in the New York Superior Court (“NYSC”), that Musk is unfit to be an officer and director of a publicly-traded corporation. Lo and Behold, the bears, rejoiced as the stock fell 12%-13% in after-hours trading, and is currently bid at $261/share, compared to a close of $307/share or thereabouts on Thursday, September 27, 2018.

Although we are no legal eagles, we remain convinced that SEC has a feeble made-up case and will be unable to prosecute Musk on any of the alleged charges filed by it the NYSC. The simplest explanation for that is that as per media reports including the following: Tesla’s Musk pulled the plug on a settlement with the SEC at the last minute and Here’s the settlement Musk could have taken from the SEC, SEC and Musk did talk about what a settlement agreement would look like? Musk walked away at the last moment because he believed that his integrity was at stake with these so-called “No guilt, No Denial” type of settlements. A high risk- high reward strategy that a sane individual would accept, but we are talking Musk here. Insanity drives the man:)

In ANTYA’s view, the fact that SEC wanted to settle means all the following:

  1. SEC knew that its circumstantial case against Tesla is tenuous at best.
  2. SEC knows and understands that any significant change in the leadership of Tesla will be far more detrimental to shareholders of the Company than anything that Musk may or may not do.
  3. SEC knows that enforcement proceedings and legal challenges can be long-drawn processes that rarely end in convictions, and almost invariably end in settlements. Therefore, SEC wants to cut short the process.

The settlement that SEC offered involved:

Adding two independent directors to Tesla’s board of directors; and Musk resigning from his role as Chairman of the Board for two years

We know Musk refused, which was followed by SEC’s complaint in NYSC.

NATURE OF PROCEEDING AND RELIEF SOUGHT By SEC

“The Commission brings this action against Musk pursuant to Section 21(d) of the Exchange Act [15 U.S.C. § 78u(d)] to enjoin the transactions, acts, practices, and courses of business alleged in this Complaint and to seek orders of disgorgement, along with prejudgment interest, civil penalties, and an officer and director bar against Musk, and such further relief as the Court may deem appropriate.”

Clearly, in this instance, there is no disgorgement, prejudgment interest, insider trading, fraud – intentional or otherwise — or anything else. So why does the SEC propose an “officer and director bar” against Musk?

For those that have not read the complaint in its entirety, the only point that SEC is trying to make is that Musk has been reckless in his behavior, and may have harmed those that bought the stock after his tweet on August 7, 2018. In SEC’s words;

As a result of Musk’s false and misleading statements and material omissions, investors who purchased Tesla stock in the period after the false and misleading statements but before accurate information was made known to the market were harmed.”

Point taken! Episodes involving a marijuana puff on youtube, the unwarranted insinuations against a cave diver in Thailand, the proposal to send “short shorts” to those with extremely bearish views of the Company, are perhaps indicative of an individual living on edge. Nonetheless, it is NOT the SEC’s role to push him over the precipice.

We highlight one well-known and clear as mud (pun intended) instance of front-running/insider trading, poor corporate governance involving fraudulent accounting, etc., where SEC was happy to settle with the concerned parties for hundreds of millions of dollars, rather than prove guilt. Instead of us trying to highlight what happened the following story from Forbes lays it out very well: Bill Ackman And Valeant Settle Allergan Insider Trading Lawsuit For $290 Million. In this particular instance, all parties involved made substantial gains, knowing recklessly well what had transpired, and walked away scot-free.

What did Ackman say upon settling the suit?

We continue to believe the case had absolutely no merit, “We decided, however, that it was in the best interest of our investors to settle the case now instead of continuing to spend substantial time and resources pursuing the litigation.”— Bill Ackman

Though we always have remained confident in our position and were prepared to try these cases on their merits, this agreement will eliminate disruption to our business.” – Joseph Papa, Valent CEO

Source: New York Post

Combined, the two, Ackman and Valeant, paid $290 million to settle a suit with, “No merits”.

Leon Cooperman similarly settled the insider trading case alleged by SEC without admitting wrongdoing or agreeing to an industry bar. Fines paid totaled $4.9 million. Details are available in Hedge Fund Billionaire Settles With SEC. Nonetheless, Mr. Cooperman called the SEC process “extraordinarily abusive”.

That brings us to Musk and SEC allegations. SEC’s investigations and compliance highlight the following facts.

  1. There were meetings between Musk and the Saudis, beginning January 2017 all the way to July 31, 2018, with another interaction on August 10, 2018.
  2. The lead representative disclosed personally to Musk that he had bought 5% of Tesla, was interested in a going-private transaction, and confirmed that he was empowered to make decisions in this regard.
  3.  The lead representative asked for Musk’s guidance for a “going private” transaction and represented that so long as the terms were reasonable.

Musk informed Tesla’s board about the meeting of July 31, 2018, with the Saudi’s, on August 2,2018. Some of his top management was aware of the proposed transaction as well. There are many other details that have been file as part of the complaint. However, unless we are misreading it, it appears that SEC has framed the charge assuming that the tweet was intended to harm short-sellers but concludes it by saying that it was harmful and reckless for those that bought the stock.

Where the SEC Erred?

In ANTYA’s view, by calling for a jury trial, SEC is already hinting that it is not looking for a guilty plea and that it does not want to prove that Musk’s intent was fraudulent. If the plan was not deceptive or did not encourage self-gain, — which it did not — the jury is unlikely to dock a visionary entrepreneur with all the remedies that the SEC is seeking. It is also evident to investors today and will be to those jurors that will ultimately sit in judgment at a future date, that SEC’s proposed enforcement action caused more harm to long-term investors today while handing a victory to those few that are short the stock.

In the first week of October, Tesla will release production and sales numbers for Q3-2018. In ANTYA’s opinion, the stock will once again bounce back above $300/share. We remain steadfast in our view that there is no long-term large-capitalization revenue and EBITDA growth story globally, that comes close to matching Tesla. Nevertheless, the stock has been volatile and has traded in a band of $280-$330, ignoring traffic accidents and going-private tweets for the time being. In November 2018, the stock will break out of that range and move upwards.
Although ANTYA does not consider SEC’s proposed enforcement action as mere noise or distraction, we also do not believe that SEC has anything meaningful to imperil Musk’s leadership of Tesla. SEC will get a settlement without Musk leaving Tesla.

No Jury is Going to Rein in Musk’s Recklessness

Revisiting the “reckless” aspect of Musk, a jury is bound to recognize that the same recklessness that SEC has cited in its complaint, resulted in the creation of Paypal, SpaceX, Tesla, and The Boring Company. The same recklessness will send a man to Mars in competition with NASA and has outpaced both established global companies, as well as, all government-funded institutions
everywhere.

That streak of recklessness has upended the automotive sector, brought rockets back to earth, is creating a subterranean transport network to ease gridlock, and will create the first vertically integrated fleet of fully autonomous cars.

Good Luck to SEC.

Subscribe
Notify of
guest
0 Comments
Inline Feedbacks
View all comments
Menu
0
Would love your thoughts, please comment.x
()
x