Musk Crosses The Line Again

This is a guest post by permission from the Credit Strategist March 1 issue.

Tesla’s February 28th conference call to announce it is closing all of its retail stores and launching a $35,000 version of its Model 3 was another failed attempt by Elon Musk to create excitement around his flailing company. At this point, however, the story at Tesla is shifting away from its business problems to its rising legal risks. Last week, the company’s General Counsel, Dane Butswinkas, resigned on the morning after Elon Musk published and then retracted a tweet filled with false information about Tesla’s production numbers. At that time, however, Mr. Butswinkas announced that he would continue to represent the company at his Williams & Connolly. That didn’t last long, however, as Williams & Connolly resigned last night as well. No reason was given, but it may have something to do with the firm’s discomfort with representing a client that seems intent on violating the securities laws because Tesla was at it again last night.

Not content to try to make a proper public announcement after market hours last night, Tesla in its infinite wisdom decided to conduct a highly unusual conference call for select members of the media and investment community. Such a call is improper because it provides selective disclosure of material information to a favored group of people who can then invest based on what they learn. Those invited to the call were asked not to publish the recording or transcript of the call and were asked not to forward or share the call-in number in a blatant effort by the company to restrict the information discussed. To my knowledge, this conduct violates the securities laws on fair disclosure.

During this private call, Musk discussed material information (that is, information that would affect an investor’s decision whether to buy or sell the stock) including informing people that the company will not be profitable in the first quarter of the year but expects to be profitable in the second quarter and that he could not give a good estimate of Model 3 demand. We only know this because one of the participants on the call tweeted this information, which no doubt means he will not be invited to the next illegal get-together. Musk refused to answer questions about margins and other material topics on the call. The fact that the company’s management (ex-Musk, of course, who already made it abundantly clear the he believes he is above the law) or board of directors thought it was remotely acceptable to hold such a call speaks to a level of arrogance and willful defiance of the norms of corporate of governance and respect for the rule of law that is nothing short of breathtaking. It is clear that Robyn Denholm, the newly appointed Chairwoman of Tesla’s Board of Directors, is an empty suit, and that Larry Ellison and Kathleen Wilson-Thompson, Tesla’s new outside directors, are doing nothing to protect shareholders or the public (and in this respect Ellison is continuing his bleak record as a director of Theranos, Inc.)

Last week, the SEC filed a motion to hold Musk in contempt for violating his consent decree with the SEC. That filing only prompted more outbursts from Musk flaunting his disdain for securities regulators. But this private conference call is a whole new level of nose-thumbing. At this point, the SEC needs to vindicate its own dignity. It should file for an emergency injunction to prevent Tesla from any further violations of the securities laws and asking Tesla and Musk to show cause why Musk should not be removed immediately as CEO and barred from serving as an officer or director of any public company for a period of at least five years.

Musk’s defenders will argue that such a severe remedy will damage Tesla’s shareholders, but they do not deserve protection from their decision to own the most egregiously overvalued stock in the market. They have been given more than adequate warning that Tesla stock is not worth remotely where it is trading and the company is run by an individual who consistently acts in a reckless and lawless manner. The SEC’s job is to protect investors from fraud but not to protect investors from themselves. Nor is it their job to prop up a company whose board of directors is unwilling to do its job. Anyone who decides to own the stock in the face of mounting evidence that the company’s business is flailing coupled and its CEO repeatedly violating the securities laws it acting recklessly with his or her money.

Disclosure: I have no position in Tesla stock and have not had any position for months.

End Credit Strategist

I no longer have a position in Tesla either, but I do have an appropriate set of videos, one from September, the other a musical tribute.

Musical Tribute

Addendum

Well, that didn't take long: Tesla’s Elon Musk, facing contempt charges, says semi-secret meeting was a mistake

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Mike "Mish" Shedlock

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