Tesla-SEC Settlement will Soothe Investors - Experts

Tesla Inc’s settlement with US regulators will help soothe investors calling for more oversight of Chief Executive Elon Musk, according to experts, even as it gives more ammo to short-sellers pursing separate cases and to an investigation by the Justice Department.

Musk and Tesla will pay $20 million each, bring in two independent directors and have the billionaire resign as board chairman to settle US Securities and Exchange Commission charges that Musk misled investors by tweeting he had financing for a go-private deal.

The settlement must still receive approval from court. It also does not end the Justice Department probe disclosed by Tesla into Musk’s tweets or lawsuits by short-sellers and other investors alleging losses and securities law violations.

“The real worry for the company is not the SEC but private actions that follow a settlement like this,” stated Charles M. Elson, who is the director of the Weinberg Center for Corporate Governance at the University of Delaware. “By paying that size fine, it bolsters investors” claims over stock market slips, he explained.

Neither Tesla nor Musk admitted or denied the SEC’s findings as part of the settlement.

Musk settled with the SEC after his advisers persuaded him that the terms were favorable and a lengthy court fight would not be in the best interest of the company, according to a person familiar with the matter.

Musk had wanted to personally pay the fine for the money-losing automaker. However, the SEC had rejected the proposal, according to the source with direct knowledge of the situation.

Tesla shares slipped around 14 percent on Friday, the day after the SEC charged Musk with misleading investors. They were down 30 percent since his August 7 tweet in which he stated that he was considering taking the company private at $420 per share.

Investor claims could result in substantial settlements in cash or equity, according to Elson. An equity settlement could lead to dilution of Musk’s nearly 19 percent stake in Tesla, further diminishing his influence on the board.

Still, Tesla shares could stabilize on Monday over investor relief that the penalties were not higher and that the public face of Tesla will remain in the CEO role under increased oversight, analysts said.

Tesla is expected to publish third-quarter production this week, and investors are watching to see if it reaches the targets for the Model 3, a high-volume car. Whether Tesla made profit likely will not be known until it reports financial results for the quarter.

The settlement disclosed by the SEC on Saturday “is a positive outcome for Elon Musk, Tesla, and ultimately shareholders,” wrote RBC Capital Markets analyst Joseph Spak, who added that he expects Tesla shares to recover some of their losses from the previous week.

A bigger board and new chairman offers hope that “a true check on Elon will emerge and there will be greater accountability” over Musk’s statements and business targets, Spak explained.

Tesla and Musk ended accepting harsher penalties than the SEC initially planned to settle the claims, according to a person familiar with the agreement. The SEC at first was ready to accept a fine of a few million dollars and Musk’s removal as chairman for two years, but raised its demands after Musk rejected that offer, according to the source.

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