Tesla Inc. TSLA shares are falling by 12.3% in premarket trading following announced fraud charges from the Securities and Exchange Commission against the company's founder, Elon Musk.
The complaint, which has been filed in Manhattan District Court, states that the case includes "a series of false and misleading statements made by Elon Musk" regarding taking Tesla private.
"Musk's statements, disseminated via Twitter, falsely indicated that, should he so choose, it was virtually certain that he could take Tesla private at purchase price that reflected a substantial premium over Tesla stock's then-current share price."
Musk's infamous tweet on Aug. 7 suggested he had funding to take the company private at $420 per share.
Am considering taking Tesla private at $420. Funding secured.— Elon Musk (@elonmusk) August 7, 2018
That price would represent a 35% premium on Thursday's closing price and and a roughly 50% premium on this morning's price levels. Tesla's shares were $379.57 at close on Aug. 7.
What Are you Smoking?
Per the complaint, Musk's tweet was an unfortunate marijuana-related joke.
"He rounded the price up to $420 because he had recently learned about the number's significance in marijuana culture and thought his girlfriend 'would find it funny, which admittedly is not a great reason to pick a price,'" the complaint reads.
Musk has been hounded by fraud accusations since the tweet, which was accused of being a fabrication to inflate the stock price and crush shorts.
Oh and uh short burn of the century comin soon. Flamethrowers should arrive just in time.— Elon Musk (@elonmusk) May 4, 2018
In the short term, it's those very shorts that stand to benefit from the debacle.
End of the Road for Musk?
The complaint could mean the end of the road for Elon Musk, as the suit calls for his ousting from the driver's seat at the company.
"Ordering that defendant be prohibited from acting as an officer or director of any issuer that has a class of securities registered pursuant to section 12 of the Exchange Act," it lays out as a sought punishment.
In plain English, Musk would be out of the company he built.
Some don't see this as a necessarily bad thing.
"With the news, investors may begin to think about Tesla's bench in the event Musk is no longer able to serve as an officer," RBC Capital Markets analyst Joseph Spak wrote in a note updating his coverage on Thursday. "This thought experiment also reinforces our view that a COO or other executives, preferably some with strong manufacturing and execution experience, is needed."
Spak suggested current CTO JB Straubel, who he noted investors have eyed as the possible successor.
"We have written before and continue to believe that while Elon may have been the right CEO to get Tesla to where they are today, a new leader focused on operating and executing the vision may be preferable from here," he explained. "That's not to say that Elon's involvement in Tesla isn't critical, we think it is, but that involvement may be as its visionary."
Real Money's Jim Cramer suggested at least a short-term removal of Musk from his position based on his "erratic" behavior.
"This calls into question the thing that people love most about the stock, not that they love the car obviously, it's this man himself," Cramer told CNBC last night. "If the SEC pursues this successfully, this stock will finally get what the bears have been saying will happen all along. It will take a real, real swoon."
Musk has since responded in a statement defending himself.
"This unjustified action by the SEC leaves me deeply saddened and disappointed," Musk replied in a statement. "Integrity is the most important value in my life and the facts will show I never compromised this in any way."
CNBC has reported that Musk was close to reaching an agreement with the regulatory body, but pulled the plug on the idea as the deal was being brokered.
The broadcaster reports that the deal would have required Musk and Tesla to pay a fine and would specifically not remove Musk as an officer.
CNBC sources say that Musk refused to sign as "he wouldn't have been able to live with the idea that he agreed to accept a settlement and any blemish associated with that."
Time to Trade?
Given the tumultuous nature of the stock, some experts think a trading opportunity might be available if that charts look right.
Dan Botti is a Principal at Peregrine Asset Advisers, a Seattle-based asset management firm that held 15,023 shares of Tesla as of June 30.
Botti said the firm has since exited the stock. However, he did not eschew the stock's opportunity entirely on the basis of the news this evening.
"I would like to wait and see if it does make a low on the news today," he said. "The feeling on the street is that this quarter that they are in is great, so I'd wait for a bottom and trade on the rumors."
He explained that finding the bottom is the hardest part.
"You have to wait and look at the formation of the charts," he said.
Botti added that the news is not yet celebratory for shorts yet, as the drop to the high 260 range is still not even as low as the stock traded earlier this month.
When asked if he might be taking his own advice and jump in on the stock again based on the bottom, Botti joked that the volatility is reminiscent of the cannabis stock sector.
"Would I personally be investing in Tesla right now?" he asked. "Would I rather invest in Tesla or Tilray? I'd rather invest in a company that has a more stable upside."