Tesla Inc. (TSLA) shares fell a shocking 13.9% in Friday's trading following Thursday night's 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."
Am considering taking Tesla private at $420. Funding secured.— Elon Musk (@elonmusk) August 7, 2018
Musk's infamous tweet on Aug. 7 suggested he had funding to take the company private at $420 per share.
That price would represent an almost 40% premium on today's closing price. 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.
Shorts piled on Tesla amidst the bad news, making it the most shorted stock in the country according to Ihor Dusaniwsky Managing Director at S3 Partners Financial Technology and Analytics Firm S3 Partners.
"Tesla regained the top spot on the U.S. most shorted equity leaderboard as short selling in the stock has grown slowly but steadily over the last two weeks and Apple's (AAPL) short interest took a dramatic hit when the iPhone XS/XS Max went on sale last week," Dusaniwsky said in his report.
Tesla shorts now represent over a quarter of the company's float.
The report adds that short-sellers are up $1.27 billion in mark-to-market gains as of Friday morning, which has completely offset the difficult year thus far for these speculators, leaving them up $643 million for the year.
Dusaniwsky told Real Money Friday afternoon that short-sellers are brimming with confidence at the moment.
"There's $10.2 billion saying this is going to continue," he said. "That's a lot of conviction and people betting Tesla is going to drop some more."
On that confidence, S3 Partners is forecasting short-selling to continue if the stock continues its slide.
"We expect shares shorted to increase in the near term," the report concludes. "If Tesla's stock price continues to drop we could see shares shorted climb towards the 39-41 million share levels we saw in May.
Two notable celebrants on Friday were former Kase Capital managing partner Whitney Tilson and current Stanphyl Capital managing member Mark Spiegel.
In an online video discussion, the two did not hold back with these criticisms.
"I've been comparing [Tesla] to Valeant," Tilson said. "The odds that Tesla goes the way of Valeant, the ultimate cult stock, the ultimate cult CEO, the ultimate bull-bear debate. The odds just went to 50%, you could easily see this thing spiral down."
Tilson estimated that the stock could quickly fall below even $100 per share. "There's a 50/50 chance that we will look back today down about 10% in the same way that Valeant, it turns out, underreacted," Tilson said.
Spiegel, a noted short-seller of Tesla, added that "Enron people saw problems, but Enron had a very small short interest right to the very end, so it made it a lot easier to go down," Spiegel said. "This is the first thing that I've ever shorted that had a massive short interest. To me it was just so obvious and checked every box."
Spiegel said that he has been short the stock through different methods for four years and feels he might be finally reaching a profitable position.
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.
"This begs the question as to what Elon Musk's incremental value is compared to the distraction he provides," Consumer Edge Research senior analyst James Albertine told Real Money. "The world needs Steve Jobs types, visionaries, but at this stage Tesla might benefit from a [Home Depot Inc. (HD) CEO] Frank Blake or [former Ford Motor Company (F) CEO] Alan Mullaly-type. A smoother operator."
Albertine said he believes Tesla is "a strong and accelerating fundamental growth story in the automobile business," but that the distraction from Musk is weighing on shares and the board must act to protect shareholder value.
"We credit Musk with incredible vision and the drive to lay a foundation for TSLA's still bright future," Albertine wrote in a note provided alongside his interview. "But we believe there are CEOs or COOs available better suited to managing large, public companies at this stage.
Amid the uncertainty at the moment, Albertine's firm reduced its price target for Tesla to $285 from $300 per share and remained "equalweight."
Albertine's take echoes that of RBC Capital Markets senior analyst Joe Spak.
"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," the firm wrote in a note explaining the situation to clients last night.
RBC suggested that current chief technology officer JB Straubel might be the man for the job, as he is one of the few mainstays in the revolving door that is Tesla's C-Suite.
Musk has since responded in a statement defending himself and tried to solidify his place at the top.
"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."
What's absolutely incredible to me is that the Tesla bulls are cheering that Musk is fighting . they should be angry that could have had such a sweetheart deal and, erratically, turned it down... What terrible judgment for shareholders..But they don;'t seem to care!!!— Jim Cramer (@jimcramer) September 28, 2018
Time to Trade?
Given the tumultuous nature of the stock, some experts think a trading opportunity might be available if that charts look right.
Now Tesla reports huge numbers coming next week and the stock is getting hammered after hours. Tough decision for people selling their stock. Not like the SEC will work this out anytime soon. $TSLA— Ross Gerber (@GerberKawasaki) September 27, 2018
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 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."
Analysts likewise urged caution.
"This situation puts the company in a precarious position as it risks shifting investor sentiment on the company," Brad Meikle, senior analyst at Williams Trading told Real Money today. "I think the activity around that tweet and since has triggered an investor crisis."