One important lesson that CEOs should learn from Elon Musk10.01.18
On August 7, Elon Musk, the CEO of Tesla, Inc. (NASDAQ:TSLA), tweeted “Am considering taking Tesla private at $420. Funding secured.” to his approximately 22 million Twitter followers.
At the time of the tweet, Tesla’s stock was trading for a price under $350 per share, so the idea that Mr. Musk had secured a funding source that might pay Tesla stockholders a premium of over $70 per share pursuant to a going private transaction received considerable media coverage.
Putting aside the issue that Tesla did not notify Nasdaq about the release of material information as is required by the rules of that exchange, it was subsequently reported in media coverage that neither Mr. Musk nor Tesla had definitively secured any funding for taking the company private. (Note: Tesla had filed a Current Report on Form 8-K in 2013 with the U.S. Securities and Exchange Commission (SEC) that Mr. Musk would use Twitter to share material information about the company.)
Perhaps based on this widespread media coverage, the SEC acted swiftly and sued Mr. Musk on September 27 in federal court for allegedly making a false assertion in his tweet posted on August 7, which would constitute a violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The SEC also sued Tesla, alleging a violation of Rule 13a-15 under the Exchange Act for a failure to "maintain controls and procedures" regarding proper disclosure. The case against Mr. Musk is SEC vs. Elon Musk, case number 1:18-cv-08865, and the case against Tesla is SEC vs. Tesla, Inc. case number 1:18-cv-08947, both in the U.S. District Court for the Southern District of New York.”
According to the SEC’s complaint, although Mr. Musk had tweeted he had secured funding and investor support, neither was true. Also, the SEC’s complaint alleges that the terms of such a deal had not even been discussed, let alone finalized. Furthermore, in the complaint, the SEC asks for penalties which would include a bar against Musk ever serving as an officer or director of a public.
Over the weekend, Mr. Musk agreed to a settlement with the SEC, offering to pay a $20 million fine and resign as chairman of the company (he can remain as CEO). He could return to the chairman role after three years. Tesla, in addition, will have to pay $20 million for its failure to police Musk's tweet.
In sum, Tesla and Mr. Musk's rather costly settlement with the SEC serves as an excellent reminder that C-suite executives of public companies must be extremely cautious when using social media outlets such as Twitter to disseminate material information about the company to the public.