While Tesla shares initially jumped this week after a tweet from CEO Elon Musk revealed he is considering taking the company private, most of those gains were quickly lost.
The electric vehicle maker’s shares plummeted the next day 6% after skyrocketing as much as 11%.
Many on Wall Street were concerned that the necessary funding to take the company private has been secured, which Musk claims has been. The fact that the SEC is even reportedly inquiring had traders on edge.
Then a Bloomberg report revealed that the SEC had been gathering information on Tesla prior to Tuesday, and was looking into Tesla’s public statements on production numbers and sales targets.
Musk had tweeted, “Am considering taking Tesla private at $420. Funding secured,” which had some concerned if he had violated SEC regulations.
“That’s a clear factual statement,” explained John C. Coffee Jr., a professor at Columbia Law School who specializes in corporate law and securities fraud.
“If it’s not fully secure, that’s potentially a very material misrepresentation, and a very straightforward violation of Rule 10b-5” of the securities law.
“A chief executive can’t just say he’s taking the company private at a price he determined, without any explanation and without any attempt to negotiate a deal,” said Professor John Coates, a professor at Harvard Law School. “He has to go to the board, which needs to appoint a special committee of independent directors, which would hire investment bankers and lawyers to help negotiate a deal. There must be some attempt at an arms-length transaction.”
“If I were their lawyer, I’d tell them to have an 8-K filing at the S.E.C. the first thing in the morning,” Professor Coates continued.
“Typically you’d halt the stock to make an announcement like this,” chimed in Greg Sichenzia, a lawyer who advises companies on securities law, who spoke to Business Insider. “I know he gets legal advice, but it’s unclear whether he sought it before tweeting.”
“When you announce the price, it certainly smells like market manipulation,” he added. “If any part of it isn’t true, he could certainly be facing legal liability. It’s surprising that the CEO of a company would announce news like that.”
Harvey Pitt, who formerly served as chairman of the Securities and Exchange Commission ( SEC ), remarked, “If his comments were issued for the purpose of moving the price of the stock, that could be manipulation, and it could also be securities fraud. The use of a specific price for a potential going-private transaction is highly unprecedented, and therefore raises significant questions about what his intent was. So that would have to be investigated.”