SEC Sues Tesla's Musk for Fraud: Analyst Reaction

As the US regulator accuses Elon Musk of fraud, Morningstar analysts look at the possible future for the electric carmaker without its controversial founder

Dave Whiston 28 September, 2018 | 6:10PM

Tesla Elon MuskShares in Tesla (TSLA) slumped on news that US regulator SEC filed a civil complaint against Tesla CEO Elon Musk alleging securities fraud related to his 7 August "funding secured" tweet about taking Tesla private. The Justice Department is also investigating this tweet as a criminal matter but has not filed charges. The SEC is seeking civil penalties, disgorgement of any ill-gotten gains, and wants to bar Musk from serving as a director or officer of any US public company.

The latter item is most significant for investors in our opinion because as we said in our 26 August note: "We think for now Musk is effectively Tesla and without him Tesla is just a capital-intensive automaker burning cash with too much debt due soon." If Musk were not allowed to be a key decision-maker at Tesla, or if we grow more uncomfortable with the legal risk surrounding Tesla in the future, then we would likely raise our weighted average cost of capital to nearly 12% from about 10%. This change, holding all else equal in our model, would lower our fair value estimate to about $126 from $179, but for now we are maintaining our fair value estimate while we see how this complaint plays out over time in the courts or via litigation.

The SEC held a short press conference and we also read its complaint. The agency believes that at the time of the 7 August tweet, Musk knew he had never discussed going private at $420 per share with any potential funding source and had done nothing to research if all current shareholders could remain owners if Tesla went private. This issue was a key reason Musk eventually abandoned his plan to go private as announced via a late night 24 August blog. The complaint does say Musk met on 31 Julywith a sovereign investment fund, which Musk said in a 13 August blog post was from Saudi Arabia.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Tesla Inc410.75 USD-3.28

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Dave Whiston  is a guest author

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