Having stoically resisted the barrage of news over the past 9 days following Elon Musk’s infamous “going private” tweet, Tesla is suddenly sliding, down more than 4%, on a tweet by Fox Business News’ Charlie Gasparino, who reports that the “SEC ramps up investigation into Tesla privatization plans; sends subpoenas to Tesla regarding privatization plans and Musk’s statements involving “funding secured.” He adds that the “subpoenas signal investigation has reached the “formal” stages.”
SCOOP: SEC ramps up investigation into Tesla privatization plans; sends subpoenas to Tesla regarding privatization plans and Musk’s statements involving “funding secured”–sources Subpoenas signal investigation has reached the “formal” stages — sources more now @FoxBusiness
— Charles Gasparino (@CGasparino) August 15, 2018
The stock is sliding.
So what happens next, and is a quick resolution imminent? Hardly.
As Bloomberg lays out the next steps in a potential enforcement process, the SEC’s average inquiry takes about two years and adds that “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.”
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.
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.
Still, 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.”
But the biggest headache facing Musk is whether a formal subpoena will kill the going private deal:
“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.”
As for now, the only question is whether Tesla still has to file an 8-K if/when it receives a Wells Notice from the SEC, or if it will merely tweet about it…