A reminder to be careful when posting on social media
The U.S. Justice Department has opened an investigation into the car manufacturer Tesla, after billionaire chairman and CEO Elon Musk shared plans of taking the company private over Twitter. In a tweet posted at 12:48pm ET on August 7, Musk said:
“Am thinking of taking Tesla private at $420. Funding secured.”
At a price tag of $420 per share, a private buyout would result in a 16% premium on shares prices at the time of the original tweet. After questions regarding current shareholder ownership began to flood throughout the Twitterverse, Musk fired-off a second tweet:
“All current investors remain with Tesla even if we’re private. Would create special purpose fund enabling anyone to stay with Tesla. Already do this with Fidelity’s SpaceX investment.”
During the following two hours, Tesla stock proceeded to climb higher and higher on the tailwinds of the tweet, before NASDAQ officials halted trading at 2:08pm ET. Trading halts generally occur when a publicly traded company is going to release important news about itself, and generally lasts for a period of an hour. The halt provides market participants with the opportunity to assess the significance and impact of the news. According to the Security and Exchange Commission’s (SEC) website, a second type of halt occurs when there is uncertainty whether a security continues to meet the market’s listing standards. Given that the halt on Tesla trading occurred two hours after the unexpected news was announced, it did not fall under either of these situational guidelines. As reported by MarketWatch, many investors who were actively trading at the time of the news felt disadvantaged by the lack of clarity and information surrounding the announcement. Once trading resumed at 3:45pm ET, Tesla shares jumped 10% before closing at $379.57, 9.5% higher than their opening price.
The unexpected tweet and subsequent market fluctuation resulted in more than a few ruffled feathers. The SEC moved swiftly and served Tesla with a subpoena within days of the tweet; a subpoena from the SEC generally requires approval from top officials, indicating that the tweets by Musk were being taken seriously. At the time of this writing, the SEC has indeed opened a civil investigation into the company and their plans for privatization.
Throughout the following days, it became more apparent that Musk’s “funding secured” was far from the truth. In a blog post published by the billionaire entrepreneur, Musk explained that a Saudi sovereign wealth fund had expressed interest in a bid to take Tesla private. According to Musk he’d had several meetings with the Saudis, each one more reassuring then the last. On August 24, however, he announced that he would be heeding shareholders concerns regarding the private buyout and abandon the endeavour.
In addition to the SEC, shareholders also took action against Musk - by August 10, a class-action lawsuit spearheaded by short-seller Kalman Isaacs had been filed against Musk and Tesla on behalf of all investors who bought shares after the tweet. Isaacs alleges that the tweets were intentionally fraudulent, in an attempt to punish those who had shorted the company by sending stock prices soaring. It’s worth noting that Isaacs was indeed short at least 3,000 shares of Tesla and sold them in a panic once the stock price hit $376.
A SEC investigation and class-action lawsuit would be enough to send any company into an all-hands-on-deck damage control frenzy; however, we appear to have only touched the tip of the iceberg. Early last week, Tesla confirmed the U.S. Department of Justice had contacted the company following Musk’s tweets:
“Last month, following Elon’s announcement that he was considering taking the company private, Tesla received a voluntary request for documents from the DOJ and has been cooperative in responding to it,”.
While the Department of Justice investigation is still in its early stages, a criminal investigation does not bode well for any company. As reported by Bloomberg, former Department of Justice prosecutor Paul Pelletier was quoted saying:
“Criminal investigations are never good if you’re a public company because they open up a Pandora’s box and prosecutors will follow threads wherever they lead,”
Tesla has reassured the public that they are cooperating with the DOJ have not received any subpoenas, although general DOJ inquiries and queries have been fielded by the management. While there is no guarantee that the DOJ’s investigation of Tesla will lead to charges being pressed, experts have warned that the investigation could last for months.
Time will tell whether the recent revelations have a lasting impact on Tesla’s success and growth. For a company which has recently haemorrhaged cash over botched Model 3 production automation, anything which detracts attention from their ability to produce vehicles should warrant caution and swift restorative action.