August 15, 2018 12:37 CET
As the Tesla go-private saga enters its ninth day, many are wondering when regulators will decide whether Elon Musk broke the rules by dripping out details so haphazardly.
History suggests it might take a while.
At the center of the Tesla controversy is what Musk meant when he tweeted Aug. 7 that he had secured funding for a buyout without providing any specifics to back up the claim. Almost a week later he said his confidence was based on conversations with a Saudi Arabian sovereign wealth fund, which had long expressed interest in taking the company private.
Securities lawyers have said Musk’s subsequent statement showed funding was anything but secure. So it’s an open-and-shut case of misleading investors that the SEC should be able to bring pretty quickly, right?
The SEC’s average inquiry takes about two years. That kind of time frame would understandably frustrate traders who are reading Musk’s tweets and trying to assess in real-time whether he’s actually lined up bankers and lawyers to advise on a deal. But even though Wall Street might want a quick ruling on whether he’s violated securities laws, Washington regulators may disappoint.
The SEC is deliberative in gathering evidence to prove that executives knew their statements were false. In the Tesla matter that will probably lead to the agency trying to obtain emails, texts and phone records from Musk and the company. Attorneys representing Musk, Tesla’s founder and CEO, would likely push back on some of the SEC’s requests. This back-and-forth can sometimes last weeks. From there, SEC attorneys will go through all the documents they’ve obtained to determine whom they should depose for questioning.
“I don’t think people understand the intensity of the investigation and the volume of documents and other types of evidence,” said Teresa Goody, founder and CEO of The Goody Group who previously worked as an attorney in the SEC’s General Counsel Office.
SEC officials may also be keen to speak with members of the Saudi wealth fund to learn if Musk’s public statements accurately reflect their private conversations. But getting foreign nationals to cooperate can be challenging, and issuing subpoenas to compel testimony doesn’t always work when the targets are overseas.
To be clear, the SEC hasn’t accused Musk or Tesla of any wrongdoing. If the SEC does determine he or the company violated the law, it will submit what’s known as a Wells notice, which notifies investigative targets that the agency’s enforcement division plans to recommend that SEC commissioners approve a lawsuit or sanction against the company.
Defense attorneys typically get a chance to rebut a Wells notice, and if SEC officials think they have a point, they may opt to not bring a case. Final settlements that SEC commissioners vote on whether to approve are also heavily negotiated with defense lawyers, adding more time to the process.
Another factor that could slow things down is that the SEC’s scrutiny of Tesla goes beyond Musk’s recent tweets. The agency’s San Francisco office was already examining the company’s public pronouncements on manufacturing goals and sales targets, Bloomberg reported Aug. 9.
SEC spokeswoman Judith Burns declined to comment and a Tesla spokesman didn’t respond to a request for comment.
A sign of how long SEC probes can take is the Enron Corp. scandal, which is widely seen as one of the clearest examples of corporate wrongdoing ever. The SEC didn’t bring its first enforcement action until almost a year after Enron disclosed it was being investigated, and the case was filed about eight months on from the company’s bankruptcy filing.
Not everyone thinks the SEC-Musk tussle will go on for months and months. Stephen Crimmins, a former SEC enforcement lawyer, said Musk’s high-profile and the fact that his tweets have drawn so much attention will make the inquiry a priority for the regulator.
“The staff is going to want to expedite this,” said Crimmins, who’s now in private practice at Murphy & McGonigle. “There’s a finite amount of information to gather, so it’s possible they could get it done in a couple of months.”
One question that could be near the top of Tesla shareholders’ minds is whether unwanted attention from the SEC might impact Musk’s ability to quickly take the company private. It certainly doesn’t help, said Joseph Grundfest, a former SEC commissioner.
“An active SEC investigation that, in my view, is likely to turn into an enforcement action is not going to make it easier to close this deal,” said Grundfest, who’s now a professor at Stanford Law School. “Musk is apparently thinking of an unprecedented structure that would have Tesla go private with equity-based funding, not debt. That would be hard to do without the additional risk of SEC enforcement action against Musk and Tesla.”
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