Fears about Musk’s future sink Tesla shares

(Reuters) – Shares of Tesla Inc (TSLA.O) plunged up to 13 percent on Friday as investors worried about the future of Chairman and Chief Executive Elon Musk at the electric carmaker after U.S. securities regulators accused him of fraud.

The 47-year-old billionaire entrepreneur has been directly involved in almost every detail of Tesla’s product design and technology strategy, and is credited as the driving force behind the loss-making company’s ability to raise capital.

The U.S. Securities and Exchange Commission (SEC) on Thursday accused Musk of tweeting false and misleading information in August about financing for his now-aborted plan to take the company private, and said it was seeking to remove him from his role.

Musk walked away at the last minute from a settlement with the SEC that would have required him to give up key leadership roles at the company for two years and pay a nominal fine, according to reports on Friday.

Musk has hired to defend him in this case former assistant U.S. attorney Chris Clark of Latham & Watkins and Stephen Best at Brown Rudnick, who successfully defended internet billionaire Mark Cuban in an insider trading case, according to people familiar with the plans who asked not to be identified.

Tesla did not immediately respond to a request for comment. The SEC declined to comment on the reports of settlement.

Tesla had disclosed on Sept. 18 that the U.S. Department of Justice was investigating Musk’s public statements on the go-private plan.

One person with knowledge of the SEC’s thinking said on Friday that the SEC lawsuit or a potential settlement did not preclude further action by the Justice Department.

The Justice Department declined to comment.

In previous fraud cases such as blood-testing firm Theranos, the Justice Department brought criminal charges three months after the SEC announced its settlement with the company’s founder Elizabeth Holmes.

The Justice Department’s criminal probes typically take longer since the standard of proof is higher than the SEC’s civil cases, said legal experts.

“A lot of the time they do work together, but the DOJ’s investigation may go on longer. The SEC wouldn’t delay its case for the DOJ,” Teresa Goody, CEO of law firm Goody Counsel and a former SEC attorney.

GRAPHIC: Tesla stock timeline – tmsnrt.rs/2IkPQ8S

UNCERTAIN FUTURE

At least five research firms said Musk might have to resign following the SEC lawsuit.

A parking sign is shown at a newly installed Tesla Super Charging station in Carlsbad, California, U.S. September 14, 2018. REUTERS/Mike Blake

“I think it was a big mistake to turn down the settlement offer,” CFRA analyst Garrett Nelson said.

“By choosing to instead fight the accusations, Musk’s future with the company becomes completely uncertain,” Nelson said.

Some analysts said SEC’s action was the beginning of a legal battle with authorities, short-sellers and other investors over Musk’s actions that could cost Tesla heavily.

“The SEC civil action may lead to Musk’s exit from Tesla (either permanently or temporarily) and the Musk premium in the shares dissipating,” Barclays analyst Brian Johnson said.

Musk has driven the company to the verge of profitability with a costly ramp-up of production of its Model 3 sedan over the past year. He said overnight he had done nothing wrong and the company’s board reiterated its support for him.

“The bottom line is, what he did was stupid, it was wrong, I don’t think he’s going to be thrown out,” said a large Tesla investor, who asked not to be identified due to sensitivity of the situation.

“My guess is he’ll pay a big fine. I wouldn’t be surprised if as a settlement to the SEC he drops his chair of the board” role.

Shares were last down 12 percent at $270.39 in midday trading, wiping about $6 billion off Tesla’s market value.

The SEC’s lawsuit, filed in Manhattan federal court, caps a tumultuous two months set in motion on Aug. 7 when Musk told his more than 22 million Twitter followers that he might take Tesla private at $420 per share, with “funding secured.”

The regulator charged that Musk “knew or was reckless in not knowing” that his tweets were false and misleading.

Reporting by Munsif Vengattil, Sonam Rai and Vibhuti Sharma in Bengaluru; Michelle Price and Jan Wolfe in Washington; Ross Kerber in Boston; Editing by Patrick Graham and Meredith Mazzilli

Our Standards:The Thomson Reuters Trust Principles.

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