Elon Musk Sued By US Stock Market Authorities For Fraud Over “Funding Secured” Tweet

Twitter giveth, and Twitter taketh away.

Elon Musk has been sued by the US Securities and Exchange Commission (SEC) for sending out a tweet in which he’d claimed that he’d secured funding to take Tesla private. “Am considering taking Tesla private at $420. Funding secured,” Musk had tweeted on 7th August. Tesla’s stock at that point was trading at around $360; with Musk saying that the company would be taken private, its stock had immediately rallied more than 10%.

But the SEC has now claimed that Musk did not have the requisite funding to be able to take Tesla at $420, and his tweet misled investors and artificially manipulated the price of its stock. “Musk’s tweets caused market chaos and harmed Tesla investors,” said the SEC. “In truth and in fact, Musk had not even discussed, much less confirmed, key deal terms, including price, with any potential funding source,” prosecutors wrote in the complaint. 

Musk’s action, thus, could be seen as fraud, especially if he didn’t actually have the funding to take Tesla private — he himself is a large shareholder in Tesla, and his tweet had caused Tesla’s stock price to rise. Musk had thus personally gained from what the SEC says was essentially a lie about taking Tesla private.

The SEC also seemed scornful of Musk in its allegations,  “According to Musk, he calculated the $420 price per share based on a 20% premium over that day’s closing share price because he thought 20% was a ‘standard premium’ in going-private transaction,” the SEC said in its suit. “This calculation resulted in a price of $419, and Musk stated that he rounded the price up to $420 because he had recently learned about the number’s significance in marijuana culture and thought his girlfriend ‘would find it funny, which admittedly is not a great reason to pick a price,” it added. “Neither celebrity status, nor reputation as a technological innovator provide an exemption from the federal securities laws,” said an SEC spokesperson.

The courts will now determine if Musk had indeed committed fraud by tweeting out that he had the funding secured. The ramifications of the hearing will be serious —  the SEC is arguing that Musk never again be allowed to hold the CEO position in any publicly traded company, which would mean that he’d have to give up his Tesla CEO post. The SEC is also arguing that he return any financial gains he made from the tweet, which could translate into a serious fine.

But there might not be any financial gains left. When Musk had sent out his fateful tweet, Tesla’s stock had risen to $379, zooming towards the $420 figured he’d cited. It has been falling steadily ever since, and traded at $300 as of market close today. After the news broke that Musk was being sued, Tesla’s stock has tanked with fears that Musk will be removed as its CEO — it now trades at $273, a far cry from the $420 figure that Musk had promised just over a month ago.