Elon Musk at the Governor's Conference 2017

30 Sep Elon Musk stays Tesla CEO, agrees to step down as Chairman with a total of $40 million in penalties

Sep 30, 2018 | by Iqtidar Ali

Finally after a roller-coaster ride, matters between SEC and Tesla/Elon Musk are settled in lieu of a $40 million fine in total — additionally Elon Musk agrees to resign as Chairman of Tesla board but remains the CEO of the company.

The terms of the settlement include:

  • Musk will step down as Tesla’s Chairman and be replaced by an independent Chairman. Musk will be ineligible to be re-elected Chairman for three years;
  • Tesla will appoint a total of two new independent directors to its board;
  • Tesla will establish a new committee of independent directors and put in place additional controls and procedures to oversee Musk’s communications;
  • Musk and Tesla will each pay a separate $20 million penalty.  The $40 million in penalties will be distributed to harmed investors under a court-approved process.

These terms of the agreement between Tesla/Elon Musk and the Securities and Exchange Commission were made public yesterday in a press release by the SEC (read in full below).

Securities and Exchange Commission intends to pay the $40 from the penalties to the harmed investors from Elon Musk‘s tweets and blog posts about taking Tesla private — but in reality this lawsuit has done more damage to TSLA shareholders than Musk’s tweets as the share-price went from ~$307 to $264 within the last week.

SEC was not totally satisfied with the explanation that Elon Musk provided through the Tesla blog on why he is not considering taking the company private anymore and filed a lawsuit against him, suspecting fraud by the CEO.

Tesla shorts, rival automakers and big oil mafia must have been disappointed by the terms of settlement as Elon Musk remains the CEO of the company, this means the pace of innovation at Tesla will only accelerate as Elon Musk will be unburdened with additional responsibilities as Chairman of the board.

The feelings of the Tesla Cult Members (as once said by Bob Lutz) are summarized by the following words by Scott Kelly (my friend and long time Tesla enthusiast and owner, nowadays helping new Tesla owners with their Model 3 deliveries ‘voluntarily’):

And that, as they say, is that. The $20M slap was inevitable – but, in the grand scheme of things, is just that – a wrist slap. (It’s highly noteworthy that the SEC filed a lawsuit rather than criminal charges.)

For me, the bottom line is that he gets to stay on as CEO; I actually think that giving up the board chair hat is a net benefit. He was just plain carrying too much of a load – and probably had way too big of a target on his chest. This way, he gets to stay on and do what he does best, which is build incredible, world-changing products, and a more business-oriented person can manage the Street. Which I expect to respond very favorably come Monday trading.

Here’s the Securities and Exchange Commission’s press release in full:

Washington D.C., Sept. 29, 2018

The Securities and Exchange Commission announced today that Elon Musk, CEO and Chairman of Silicon Valley-based Tesla, Inc., has agreed to settle the securities fraud charge brought by the SEC against him last week.  The SEC also today charged Tesla with failing to have required disclosure controls and procedures relating to Musk’s tweets, a charge that Tesla has agreed to settle.  The settlements, which are subject to court approval, will result in comprehensive corporate governance and other reforms at Tesla—including Musk’s removal as Chairman of the Tesla board—and the payment by Musk and Tesla of financial penalties.

According to the SEC’s complaint against him, Musk tweeted on August 7, 2018 that he could take Tesla private at $420 per share — a substantial premium to its trading price at the time — that funding for the transaction had been secured, and that the only remaining uncertainty was a shareholder vote.  The SEC’s complaint alleged that, in truth, Musk knew that the potential transaction was uncertain and subject to numerous contingencies.  Musk had not discussed specific deal terms, including price, with any potential financing partners, and his statements about the possible transaction lacked an adequate basis in fact.  According to the SEC’s complaint, Musk’s misleading tweets caused Tesla’s stock price to jump by over six percent on August 7, and led to significant market disruption.

According to the SEC’s complaint against Tesla, despite notifying the market in 2013 that it intended to use Musk’s Twitter account as a means of announcing material information about Tesla and encouraging investors to review Musk’s tweets, Tesla had no disclosure controls or procedures in place to determine whether Musk’s tweets contained information required to be disclosed in Tesla’s SEC filings.  Nor did it have sufficient processes in place to that Musk’s tweets were accurate or complete.

Musk and Tesla have agreed to settle the charges against them without admitting or denying the SEC’s allegations.  Among other relief, the settlements require that:

  • Musk will step down as Tesla’s Chairman and be replaced by an independent Chairman.  Musk will be ineligible to be re-elected Chairman for three years;
  • Tesla will appoint a total of two new independent directors to its board;
  • Tesla will establish a new committee of independent directors and put in place additional controls and procedures to oversee Musk’s communications;
  • Musk and Tesla will each pay a separate $20 million penalty.  The $40 million in penalties will be distributed to harmed investors under a court-approved process.

“The total package of remedies and relief announced today are specifically designed to address the misconduct at issue by strengthening Tesla’s corporate governance and oversight in order to protect investors,” said Stephanie Avakian, Co-Director of the SEC’s Enforcement Division.

“As a result of the settlement, Elon Musk will no longer be Chairman of Tesla, Tesla’s board will adopt important reforms —including an obligation to oversee Musk’s communications with investors—and both will pay financial penalties,” added Steven Peikin, Co-Director of the SEC’s Enforcement Division.  “The resolution is intended to prevent further market disruption and harm to Tesla’s shareholders.”

The SEC’s investigation was conducted by Walker Newell, Brent Smyth, and Barrett Atwood and supervised by Steven Buchholz, Erin Schneider, and Jina Choi in the San Francisco Regional Office and Cheryl Crumpton in the SEC’s Home Office.

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