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Stock Analyst Update

Tesla's Musk Settles SEC Fraud Charge, Remains CEO

We think the settlement is wise, but Musk is better in a role other than CEO.


As discussed in our Sept. 27 note, the SEC has charged  Tesla (TSLA) CEO Elon Musk with securities fraud in a civil complaint. On Sept. 29, the SEC announced a settlement with Musk and with Tesla. The agency charged Tesla with inadequate controls over Musk’s disclosures. Musk and Tesla will each pay a $20 million fine; Musk is barred from being Tesla’s chairman for three years; Tesla will add two new independent directors; and the company will establish controls over Musk’s communications. As of the morning of Sept. 30, there is no word as to who will be the new independent chairman or new directors.

We think Musk was wise to settle this complaint. The penalties are not severe, in our view, and it puts one legal matter behind the company. The U.S. Department of Justice still has a criminal probe regarding Musk’s Aug. 7 “funding secured” tweet about taking Tesla private. Tesla’s stock fell 13.9% on Sept. 28 as a result of the complaint, which could have resulted in Musk receiving a lifetime ban on being a director or officer of a public company, something Tesla probably cannot afford, in our opinion.

We think Musk is effectively Tesla, and without him, Tesla is just an automaker burning too much cash and holding too much debt. In our view, the company needs Musk in order to remain able to raise capital to fund building many more Gigafactories over time, along with development of new vehicles such as the Model Y crossover, pickup truck, Semi, and a $25,000 vehicle. However, given more than one debacle on Twitter, taking a puff of marijuana on a podcast, and a New York Times interview where Musk sounded very worn out, we think his skills would best serve the company in a creative role around design and product development, rather than as CEO. The problem for Tesla, in our opinion, is finding someone who will be willing to take on the CEO role while effectively working with Musk, who is a known nano-manager and owns about 20% of the company.

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David Whiston does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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