Elon Musk Versus The SEC – When A Tweet Costs $40 Million


Elon Musk, Tesla’s crestfallen chairman and CEO, is arguably a controversial leader.  At once heralded as the type of prolific entrepreneur and visionary for whom space and the internal combustion engine are not complex obstacles, but rather the next frontier for his companies, SpaceX and Tesla.  To others, however, he is the very emblem of erratic corporate leadership, marking the limits of imagination, personal restraint and hyper-productivity, even suffering from what some would call an Icarus complex, with one wax wing a Twitter account and the other hubris.

Elon Musk has not only flown to close to the sun, he has perhaps Tweeted all too often under the twin guise of impetuousness and imperviousness, which resulted in a $20 million settlement with the Securities and Exchange Commission, SEC, for which he is personally liable.  This also comes with an agreement that he would step down as Tesla’s chairman in 45 days.  Separately, Tesla has agreed to pay $20 million to settle claims that it failed to put up guardrails on Elon Musk’s communications, which may be an impossibility, along with the addition of two independent directors to replace Elon Musk on the company’s 9-person board, which includes his brother.  All of this conspires to show that micro-sized communications, 280 characters at a time, can be costly indeed with outsized effects.  The words of that other prolific inventor Benjamin Franklin spring to mind when he said a slip of the foot you may soon recover, but a slip of the tongue you may never get over.  A timeless aphorism that could have spared Tesla shareholders the 30% freefall from the August 7, 2018 share price of $379.57 to the September 28, 2018 close of $264.77, along with the expected wild ride that lies ahead.

In many ways Elon Musk dodged a bullet, for the SEC’s original lawsuit carried the heftier punishment of banning him from serving as a public company director or officer.  This would have been a veritable scarlet letter for such a prolific leader and an example to Musk’s supporters of an excessively punitive action.  How the market, and perhaps most tellingly Tesla’s board, responds to these costly settlements remains to be seen.  More importantly, with a $40 million tweet, a mere rounding error of Musk’s $19.7 billion net worth and Tesla’s $50 billion market cap, what will the board and investors demand of Elon Musk?  The punctuation mark that ended Musk’s summer of discontent was the ill-fated tweet on August 7 suggesting that he had arranged the capital to take Tesla private at $420 a share, something that was later posited as a Saudi-backed deal, but turned out to be a marijuana reference to amuse his girlfriend.  As it happens, no such deal was in hand, shareholders where left scorned, the SEC’s enforcement units were alerted and, ironically and perhaps unrelatedly, the Saudi’s invested $1 billion in Lucid, a Tesla competitor.  This cascade of errors, for which a tweet was the closest proximate cause, is a painful example of unintended consequences.

While this is clearly one of the costliest Tweets Elon Musk – or perhaps anyone – ever issued, it is not the most erratic, which risks adding to Musk’s potential disrepute as it shows a CEO who has his eye off the ball.  During the drama that unfolded in Thailand to rescue 12 wayward soccer players and their coach from a flooded cave, Elon Musk got into a Twitter-tiff with Vernon Unsworth, a British diver, over the rejected mini-submarineTesla engineered in a bid to aid rescue efforts.  While the miraculous rescue of the boys and their coach should have been the end of the story insofar as it involves Elon Musk, the companies he leads or the shareholders and stakeholders who entrust him, this case descended into a bizarre series of Twitter accusations made by Elon Musk that Vernon Unsworth was a pedophile.  An accusation that has resulted in further legal action.  All of this is clearly an unnecessary distraction and while $40 million will hardly register on Elon Musk’s or Tesla’s financial accounts, it does add to legitimate concerns about strategic and operational distractions.

These distractions include the loss of key executives, the loss of potential privatization suitors, to the extent Saudi courtship was legitimate, as well as very real customer product liability, quality and safety concerns, that now include a 19-month Model 3 backlog.  When you build an iconoclastic product like a Tesla vehicle, that at once breaks the carbon-hungry dependency on fossil fuels and the century-long monopoly of the internal combustion engine, while bridging a technologically ludicrous hands-free future, there are bound to be risks.  While a Tesla driver may occasionally let go of the wheel and can be distracted at their own peril, there is a much higher standard for those at the helm of publicly-held companies. CulldC from Forbes

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