Musk out, Tesla up (for now) - October 14, 2018

Musk out, Tesla up (for now)

The SEC fined Elon Musk and Tesla for $20 million each because of Musk’s tweets about taking Tesla private. According to their settlement, the Tesla founder can remain the CEO of the company, but he has to resign as the chairman in 45 days. Tesla prices were on a serious rollercoaster during the fiasco, and the ride may not be over.

The US’ Securities and Exchange Commission (SEC) fined Elon Musk for $20 million for tweeting about taking Tesla private but backtracking on his idea. We wrote about why Musk though about going private, but even then, many believed that he only wanted to raise stock prices and fend off short position holders with his comments. This raised legal doubts about the issue, too. What’s more, soon after publishing our post we had to update it, since the Tesla CEO canceled his plan. Because of this, the SEC found that Musk indeed committed fraud and charged him.

Charge and fall

There were several reasons why the SEC charged Musk with fraud. First, Musk knew that there were no certain funding sources for going private. He tweeted that funds were secured, therefore he misled investors. What’s more, he didn’t contact other investors and shareholders about his plans. He didn’t inform the competent authorities about his plan either. (CNBC uploaded the full document of the charges here.)

In a statement after the charges surfaced, Tesla said that they have confidence in Musk as a leader. Investors didn’t agree: soon after the official charge of Elon Musk the stock prices of Tesla fell sharply. In just one day, they dived more than 13%.

Settlement, resignation and rise

Prices didn’t remain low for long, though. Just two days after the charges became public, Musk and SEC settled their differences. To drop charges Musk must give up his role as the chairman of Tesla Inc. for at least three years. He also has to pay $20 million as a penalty. This might seem a lot, but it’s only 0.1% of his $20 billion net worth. The company itself will also have to pay the same penalty.

Tesla Inc. stock prices during the Musk fiasco

Click on the image to see it in full resolution

The markets responded extremely well to the news of the settlement and the resignation. In a day, prices went back above $300 with a 17% soar. Ever since then prices are going up and down, but Tesla so far didn’t lose that much confidence with this fiasco.

Musk remains in spotlight

A reason why this trust is still there might be that Musk will remain an important part of Tesla. He is still the CEO of the company, he only lost his position as chairman. Him as a visionary can help Tesla in the future. He will have more oversight, though, as the company must appoint two new independent directors to its board.

But Musk’s erratic behavior still can push prices down. He didn’t give up his fight against short position holders, and he already picked a fight with some funds. While Tesla must hire a lawyer to monitor Musk’s communications, so far he didn’t stop speaking his mind about everything on Twitter. What’s more, while Musk was able to get away from SEC with a settlement, other lawsuits can be started against him. That may also push Tesla stock prices down.

Disclaimer: This analysis is for general information and is not a recommendation to sell or buy any instrument. Since every investment holds some risk, our main business policy is based on diversification to minimize threats and maximize profits. Innovative Securities’ Profit Max has a diversified portfolio, which contains liquid instruments. This way, our clients can maintain liquidity, while achieving their personal investment goals on the long term.

(Header image: Tesla Europe)