The SEC describes stock manipulation as “intentional conduct designed to deceive investors by artificially affecting the market for a security by spreading false or misleading information about a company. Those who engage in manipulation are subject to various civil and criminal sanctions.”
Credit Leads Equity, Watch the Tesla Capital Structure Carefully
Tesla equity investors obsessed with the stock price are measuring risk-reward with just a piece of the picture. Those you are NOT on top of the entire capital structure are sadly mistaken. In early April, with Tesla junk bonds (5.3% due 2025) near 87 3/8 the equity was trading at $252, today the relationship is 87 3/8 vs. $319, that’s a $70 premium in the equity vs. the credit. After just one-quarter of positive free cash flow since the fourth quarter of 2013, Tesla has $1.3B in debt maturity wall over the next 12 months. After the ferocious burn, cash in the bank is down to $1.3 after backing out $942 million of customer deposits on cars.
Is there no better example of such stock price manipulation than Elon Musk’s recent tweetstorm? Around mid-day on August 7, the sleep-deprived CEO of Tesla tweeted that he was considering taking Tesla private, with the compelling byline “funding secured”. Immediately following his tweet, Tesla surged higher but the company itself remained quiet. After three hours Musk sent an email to Tesla employees, clarifying his tweet. Tesla stock ended the day 31.6 dollar (+10.7%) higher, and just above $387 per share. His tweet had boosted the Tesla market cap by $5.3bl that day. The board appeared to have been completely blindsided as were Tesla’s junk-bond selling investment bankers. They confessed that they had no idea the company was working on anything like this.
Musk justification, in his email to employees, for privatizing Tesla was because “wild swings in our stock price [ ] can be a major distraction for everyone working at Tesla.“ He also blamed the shorts, which always seem to be the bane of Musk’sexistence. Musk noted that “as the most shorted stock in the history of the stock market, being public means that there are large numbers of people who have the incentive to attack the company.”
In the weekend following this tweet, and the stock still around$350 per share, Musk was allegedly on the phone non-stop, frantically soliciting investors for his privatization. This was based on the dubious claims from Azalea Banks who stayed at the Musk residence that weekend. On Sunday night Tesla released a cryptic blog statement in defense of Musk’s ill-fated “funding secured” tweet.
According to the statement, Musk had several going private talks with the Saudi wealth fund over the years. After his tweet, the Saudi manager of the fund expressed support for proceeding with a privatization subject to financial due diligence and their internal review process for obtaining approvals.” In other words, The Saudi manager had not seen Tesla’s books nor did he know if the fund’s Board would even approve funding such privatization. By then the market started to realize Musk’s initial claim was based on hope rather than an actual commitment. In the meantime, the SEC had announced an investiga
But the real bombshell came on Thursday night when the NY Times published an interview with Musk that demonstrated the mercurial state of Tesla’s beleaguered Chairman/CEO. Musk claims that he typed the fateful tweet while driving to the airport and no one had seen or reviewed it before he posted it. Moreover, the article claimed that funding was anything but secured because the Saudi fund had not committed to providing any cash, according to people briefed on the discussions. The article also noted that the Tesla’s board and Musk had received SEC subpoenas, and preparing to meet with SEC officials in coming weeks.
The following day, the stock dropped 8%, erasing all the gains from the go-private speculation. Investors’
A frantic week followed, with Tesla in full damage control. The company named the line-up of investment banks that would advise the go-private transaction. But by the end of the week, the company threw in the towel. In a dramatic U-turn, issued at 11pm on a summer Friday, Musk claimed that it behooved Tesla stay public, never mind the claims to the contrary two weeks prior.
In hind site, this entire saga appears to be a giant ruse to squeeze the Musk-reviled short sellers out of the stock. Elon Musk had gone out of his way in recent months to attack critics, going as far as trying to get a Tesla provocateur on Twitter fired by threatening his boss. In addition, Musk tweeted a meme
The SEC has a history of pursuing many cases of insider stock manipulation. The focus of the latest investigation into Tesla is whether Musk violated the critical anti-fraud SEC rule 10b-5. This rule specifically prohibits any scheme to defraud by misstating material information that affects the value of the stock. Among the penalties would be the SEC barring Musk to be a director or officer of a public company. A violation is not limited to prior intent, the SEC could penalize Musk based on actions that are “a significant departure of a proper standard of conduct”. To add insult to injury, with Tesla now in receipt of multiple Wells Notices (SEC enforcement letter), it’ll be increasingly difficult to raise badly needed capital. In general, companies that are under undisclosed SEC investigations do not raise capital.
We are eager to see whether the SEC succeeds in its investigation and pursues legal action against Musk. The SEC has punished many CEO’s for lesser violations but Musk thus far has demonstrated to be above the law. Numerous NTSB investigations into self-driving vehicle accidents have amounted to nothing. The SEC is already investigating Tesla about its disclosure of production issues while whistleblowers are alleging spying of employees and drug dealing on the factory floor.