Tesla stock tumbled the most in five years on Friday after a Securities and Exchange Commission lawsuit sought the removal of billionaire Chief Executive Officer Elon Musk, whose reputation as a creative mastermind has buoyed the electric carmaker’s value.
The case, filed Thursday in U.S. District Court in Manhattan, alleged that Musk had no factual basis to support his August statements on Twitter that he had secured funding to take the company private at $420 a share, a substantial premium to its price at the time. The proposal, which was later abandoned, disrupted markets and harmed people who bought the stock based on the CEO’s comments, the agency claimed.
While the suit compounds concerns that Musk’s personal behavior is overshadowing the company’s progress in accomplishing production goals and achieving a profit, it may also damage the carmaker further if the court agrees to bar him from serving as an officer or director of any publicly-traded firm, analysts said Friday.
“The perceived ‘magic’ and ‘mystique’ of Elon Musk on the part of a large contingent of investors is a key reason the stock has commanded the lofty valuation multiples it has in recent years,” JPMorgan analyst Ryan Brinkman said in a report.
“Some sort of settlement with the SEC that would allow Mr. Musk to remain as an officer and director seems ideal, although short of that potential the transition to a still powerful but technically non-officer ‘Chief Product Architect,’ ‘Brand Ambassador,’ or other role may be enough to mollify investors,” he added.
The lawsuit may limit the company’s ability to raise money needed to meet its financial obligations, analysts said, particularly if it fails to meet a goal of producing 5,000 of its broader-market Model 3 vehicles per week in the remainder of the year.
“Historically, Tesla has had easy access to capital markets, largely due to the public’s perception of Musk as a visionary,” said Colin Langan, an analyst with the Swiss lender UBS. “Without Musk, investors may no longer be willing to continue funding a company that has never reported an annual profit.”
Tesla, which lost $2.72 billion in the 12 months through June alone, fell 14 percent to $264.77 at the close of New York trading on Friday.
The drop was the largest since November 2013, and its size is roughly the same as the gain made after Musk’s tweet about going private in the middle of the day on Aug. 7.
At the time, the SEC said, the 47-year-old Musk “had not satisfied numerous additional contingencies” beyond a shareholder vote that he claimed was the only remaining obstacle.
In a July meeting, Musk and representatives for Saudi Arabia’s sovereign wealth fund discussed taking the company private, but the conversation lacked “even the most fundamental terms of a proposing going-private transaction,” the SEC said. No dollar amounts or the availability of liquid capital in the Saudi fund were discussed, according to the agency.
While Musk e-mailed Tesla’s board of directors on Aug. 2 with his rationale for taking the company private, no board members were aware of Musk’s intention to tweet days later that he had secured funding, the agency said.
Musk also told the board that he chose the price of $420 a share because his girlfriend recently explained the number’s significance as a code for smoking cannabis.
A former top official at the U.S. Drug Enforcement Agency has asked Attorney General Jeff Sessions to investigate Musk’s smoking weed on a podcast with U.S. comedian Joe Rogan earlier this year.
Tesla confirmed last week that it had complied with the Justice Department’s request for documents related to the buyout proposal.
Earlier this month, a British diver involved in the July rescue of a Thai soccer team from a flooded underground cave filed a defamation suit against Musk over the billionaire’s description of him as a pedophile.
Vernon Unsworth is demanding $75,000 in damages and a gag order to prevent Musk from making further unfounded accusations, according to a lawsuit filed in U.S. District Court in California.
