Elon Musk One Toke Over the Line, Again

-edited

The Credit Strategist notes that Musk crossed the line once again violating SEC rules.

Musk Crosses The Line Again

This is a guest post by permission from the Credit Strategist March 1 issue.

Tesla’s February 28th conference call to announce it is closing all of its retail stores and launching a $35,000 version of its Model 3 was another failed attempt by Elon Musk to create excitement around his flailing company. At this point, however, the story at Tesla is shifting away from its business problems to its rising legal risks. Last week, the company’s General Counsel, Dane Butswinkas, resigned on the morning after Elon Musk published and then retracted a tweet filled with false information about Tesla’s production numbers. At that time, however, Mr. Butswinkas announced that he would continue to represent the company at his Williams & Connolly. That didn’t last long, however, as Williams & Connolly resigned last night as well. No reason was given, but it may have something to do with the firm’s discomfort with representing a client that seems intent on violating the securities laws because Tesla was at it again last night.

Not content to try to make a proper public announcement after market hours last night, Tesla in its infinite wisdom decided to conduct a highly unusual conference call for select members of the media and investment community. Such a call is improper because it provides selective disclosure of material information to a favored group of people who can then invest based on what they learn. Those invited to the call were asked not to publish the recording or transcript of the call and were asked not to forward or share the call-in number in a blatant effort by the company to restrict the information discussed. To my knowledge, this conduct violates the securities laws on fair disclosure.

During this private call, Musk discussed material information (that is, information that would affect an investor’s decision whether to buy or sell the stock) including informing people that the company will not be profitable in the first quarter of the year but expects to be profitable in the second quarter and that he could not give a good estimate of Model 3 demand. We only know this because one of the participants on the call tweeted this information, which no doubt means he will not be invited to the next illegal get-together. Musk refused to answer questions about margins and other material topics on the call. The fact that the company’s management (ex-Musk, of course, who already made it abundantly clear the he believes he is above the law) or board of directors thought it was remotely acceptable to hold such a call speaks to a level of arrogance and willful defiance of the norms of corporate of governance and respect for the rule of law that is nothing short of breathtaking. It is clear that Robyn Denholm, the newly appointed Chairwoman of Tesla’s Board of Directors, is an empty suit, and that Larry Ellison and Kathleen Wilson-Thompson, Tesla’s new outside directors, are doing nothing to protect shareholders or the public (and in this respect Ellison is continuing his bleak record as a director of Theranos, Inc.)

Last week, the SEC filed a motion to hold Musk in contempt for violating his consent decree with the SEC. That filing only prompted more outbursts from Musk flaunting his disdain for securities regulators. But this private conference call is a whole new level of nose-thumbing. At this point, the SEC needs to vindicate its own dignity. It should file for an emergency injunction to prevent Tesla from any further violations of the securities laws and asking Tesla and Musk to show cause why Musk should not be removed immediately as CEO and barred from serving as an officer or director of any public company for a period of at least five years.

Musk’s defenders will argue that such a severe remedy will damage Tesla’s shareholders, but they do not deserve protection from their decision to own the most egregiously overvalued stock in the market. They have been given more than adequate warning that Tesla stock is not worth remotely where it is trading and the company is run by an individual who consistently acts in a reckless and lawless manner. The SEC’s job is to protect investors from fraud but not to protect investors from themselves. Nor is it their job to prop up a company whose board of directors is unwilling to do its job. Anyone who decides to own the stock in the face of mounting evidence that the company’s business is flailing coupled and its CEO repeatedly violating the securities laws it acting recklessly with his or her money.

Disclosure: I have no position in Tesla stock and have not had any position for months.

End Credit Strategist

I no longer have a position in Tesla either, but I do have an appropriate set of videos, one from September, the other a musical tribute.

Musical Tribute

Addendum

Well, that didn't take long: Tesla’s Elon Musk, facing contempt charges, says semi-secret meeting was a mistake

Mike "Mish" Shedlock

Comments (12)
abend237-04
abend237-04

A good lawyer is a good listener and confidant, but you have to be able and willing to listen. The best CEO I worked for usually traveled with one. Elon looks more and more like a man who can't manage and can't be managed, the final stage of corporate hubris.

WRichard
WRichard

@Mish, what happend with the 920M convertible bond?

mark0f0
mark0f0

Good grief, he's doing everything he possibly can to end up like the real Nikola Tesla. Per a quick search on the Google website:

"When Tesla died in 1943, he was bankrupt, alone and teetering on the verge of insanity."

r00sty
r00sty

I should point out that the fair disclosure rule only applies when information is disseminated to specific individuals. It is entirely possible that only people who are not barred from receiving information early were invited to the call. Since we are unaware of who exactly was invited to the meeting, it is hard to say whether such an act was illegal or not.

I appreciate the author's effort to skirt liability by saying "to my knowledge, this is illegal", but we are turning to this article as an authority on the issue. If I can obtain more knowledge than the author by googling the issue for about 5 minutes, that makes me suspicious. Either the author did not perform due diligence, or they intentionally left out this important detail.