Logic Vanishes In The Musk

Not everyone can become the subject of a DIY party game and a Securities and Exchange Commission lawsuit in the same year, but Elon Musk has always been an outlier.

The CEO of Tesla, Inc. (NASDAQ:TSLA) has long pursued his passions without evidently worrying much about the opinions of others. In the past year, his behavior has gone eccentric to erratic. He has shut down financial analysts who were doing their job by asking questions about the company’s finances; potentially libeled a diver who participated in the Thai cave rescue; and appeared to smoke marijuana on camera during an interview with podcaster Joe Rogan. Even Musk himself seemed to have some awareness of his behavior’s inappropriateness. He told The New York Times in August that he’d been working up to 120 hours per week and that the prior year had been “excruciating.”

So I don’t doubt that Musk deserves to be ousted as the head of Tesla. In light of the past year, especially, I question whether he is emotionally suited and strong enough to meet the demands of running that company, not to mention SpaceX and the many side ventures in which he engages. It is not at all clear to me that any one human could do all those jobs simultaneously. Even if it is theoretically possible, most people who run public companies would consider it a breach of their duty to shareholders even to try to keep so many plates spinning at once.

The final straw for the SEC, however, was Musk’s “false and misleading” statement on Twitter about taking Tesla private. On Aug. 7, Musk tweeted: “Am considering taking Tesla private at $420. Funding secured.” Given the mention of the figure 420, many readers assumed the tweet was a joke; however, subsequent tweets suggested Musk was serious. The tweet blindsided Tesla’s board and sent investors scrambling to react. As Therese Poletti, a MarketWatch columnist, commented at the time, “The tweet was the Wall Street equivalent of yelling fire in a crowded theater when there isn’t even any smoke.” A little more than two weeks later, Musk walked back the idea.

Musk’s statements were the foundation of the SEC’s lawsuit against him. The suit accused Musk of committing fraud by making false public statements with the potential to hurt investors. The agency initially sought to bar Musk from serving as an officer or director of a public company. In theory, a judge could have imposed a lifetime ban, though usually the time frame has been much less in similar cases. (Elizabeth Holmes, the former CEO of Theranos, received only a 10-year ban from the SEC as part of a settlement with the agency, though she still faces separate criminal charges.)

I have no quarrel with the SEC’s contention that Musk – and, by extension, Tesla – needed to be significantly punished for his toying with the market by claiming, without apparent justification, that he had secured funding to take the company private. You can’t do that, and you can’t get away with it if you do.

But the SEC’s logic seemed to be that, for Musk’s offense of injuring Tesla shareholders by his misbehavior, the punishment should be … to cripple those very same shareholders by forcing his immediate departure. As Charles Whitehead, a professor at Cornell Law School, commented to CNN last week: “Why would the SEC want to harm the company more than the tweet itself? That would be like throwing the baby out with the bathwater.”

Of course, the SEC may very well have demanded Tesla’s decapitation mainly as a bargaining chip, in which case the gambit succeeded. Two days after the SEC filed its lawsuit, Musk agreed to pay a $20 million fine and step down from his role as chairman of the board for a least three years, though he will be allowed to stay on as CEO. He accepted the deal without admitting to any wrongdoing.

As The Wall Street Journal described, until now Musk was not only Tesla’s chairman and CEO, but also its chief shareholder, engineer, salesman and marketer. The widespread perception that Musk and Tesla are essentially synonymous was evident in the 12.34 percent drop in the company’s stock following the announcement of the SEC’s lawsuit, despite the fact that Tesla was not named as a defendant. (Tesla subsequently agreed to pay $20 million to settle separate claims that it did not adequately police Musk’s tweet.)

If Musk were to leave Tesla entirely, he should do so because of action by Tesla’s board, which would presumably develop some plan to either keep the company alive or arrange for someone who can generate value for its shareholders to acquire it. If the board doesn’t act, shareholders themselves could bring legal action for breach of duty, though the prospects of such action usually aren’t great. At least there is a chance that Tesla can rid itself of that Musk-y overhang.

The SEC apparently filed its lawsuit after Musk and his lawyers walked away from an initial settlement at the last minute. We don’t know precisely how it differed from the one he ultimately accepted, but we do know that the settlement is a better outcome for shareholders than the regulatory fit of pique the SEC’s lawsuit represented.

Musk has never been content to be like everyone else, but in this case, settling was both the more conventional outcome and the better one. It would have been a shame if Tesla’s public shareholders were the ones to ultimately pay the price for his drive to carve his own path, whatever the consequences.

• Become A Funded Futures Trader