Elon Musk is stepping down as Tesla’s chairman, a role took long before becoming its CEO, and will pay a $20 million fine to settle Securities and Exchange Commission fraud charges he faced over tweets about taking the company private. It was the best and only option for the billionaire entrepreneur to avoid being forced out of Tesla entirely if he’d fought the suit and lost.
In announcing terms of the settlement on Saturday, the SEC said in a statement it also charged Tesla for not having “disclosure controls and procedures relating to Musk’s tweets.” The company will also pay $20 million in penalties to settle the matter. Importantly, Tesla must add two new independent members to its board, which up to now has been dominated by Musk allies including his brother and long-time investors and friends .
“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,” Stephanie Avakian, co-director of the SEC’s Enforcement Division, said in the statement. Musk will be replaced by an independent chairman, and can’t be re-elected to to that position for three years.
The SEC filed suit against Musk on Thursday, initially without also naming Tesla, claiming his August 7 comments on Twitter about having “funding secured” to take Tesla private at $420 a share, constituted securities fraud because that statement was untrue and he knew it or should have. The agency began investigating the tweets last month. Soon after, Tesla’s board announced that itwould remain public and not pursue Musk’s privatization plan.
Under Musk Tesla has grown from a niche maker of sleek, but pricey electric cars packed with interesting new tech and gobs of acceleration. In the eight years since Tesla’s Nasdaq IPO the Palo Alto, California-based company has remained unprofitable and only reported GAAP-based net income in two non-consecutive quarters. Musk has, however, vowed that Tesla will swing to profitability beginning in this year’s second half.
Doing so depends on a successful transition to high-volume manufacturing with its more affordable Model 3 sedan. After massive delays and early production challenges with the car in last year, Tesla appeared to have built up to an impressive assembly rate of 5,000 of the cars per week at the end of 2018’s first half. But recently, Musk’s initial production “hell” for the car turned into “logistics hell,” as Tesla’s avoidance of using car dealers and distributors meant it didn’t have enough car carriers to get Model 3s to customers, so of whom have been waiting up to two years for one.
The settlement comes as Tesla rushes to deliver as many cars as possible with the close of its third quarter on September 30. The SEC litigation also arrived on the heels of libel lawsuits brought this month against Musk by a British man who’d aided in the rescue of youths trapped in a Thai cave, whom the Tesla chief accused of being a pedophile. He provided no evidence to support that claim.
In interviews with the New York Times in August , Musk discussed his habit of working up to 120 hours a week to help Tesla boost Model 3 production, and of taking Ambien to sleep, despite the drug’s negative side effects. He also created an uproar this month when hesmoked marijuana during a podcast interview with a comedian.
Importantly, Tesla has also had a large number of executive departures since 2016, raising questions about the stability of its top-level management team. But for all the drama and legal problems Musk has created for Tesla he’s essentially indispensable for the company right now, UBS analyst Colin Langan said in a research note prior to the settlement.
“Historically, Tesla has had easy access to capital markets, largely due to the public’s perception of Musk as a visionary,” he said. “Without Musk, investors may no longer be willing to continue funding a company that has never reported an annual profit.”
The SEC characterized Musk’s privatization tweets as fraud because he “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.
The tweets were a bombshell, coming in the middle of the trading day, and caused Tesla shares to surge by more than 10% until Nasdaq stepped in to temporarily halt trading of the stock. That was a “significant market disruption,” the SEC said.
The combined $40 million in penalties will be paid to investors who were harmed by the stock price rise Musk triggered under a court-approved process. Those are investors who’d shorted Tesla shares and had to cover the difference when it suddenly surged. That may be particularly galling for Musk, who has a long-running feud with investors who short Tesla.
Of Tesla’s nine board seats that of investor and Musk pal Steve Jurvetson , cofounder of Draper Fisher Jurvetson has been empty since November 2017, when he also left his former venture capital firm due to a sexual harassment investigation. Activist shareholders have also argued that an independent member should replace Kimbal Musk, Elon’s brother.