Could SEC Ban Elon Musk as Tesla CEO?

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Among the harshest penalties the U.S. Securities and Exchange Commission (SEC) levies against executives who break federal law is to ban them from being a corporate officer or director of a public company. Often, these bans last for five years. Tesla Inc. (NASDAQ: TSLA) CEO Elon Musk may be at risk for such a penalty as the agency examines a tweet in which he said the car company might go private.

One of the most well-known of these cases was when the former Countrywide Financial CEO Angelo Mozilo, whose company collapsed early in the financial crisis, was banned. Countrywide was charged with hiding deceptive practices when low-income borrowers got mortgages and then defaulted on these high-interest home loans. The SEC will have to decide if Musk’s tweet deserves a similar penalty.

While the details of the SEC investigation of Musk remain secret, the company has admitted it has received a request for documents. With regard to the tweet and its resulting rise in Tesla’s stock, the public corporation’s management said:

We respect the DOJ’s desire to get information about this and believe that the matter should be quickly resolved as they review the information they have received.

Musk’s actions have been characterized in some quarters as illegal, primarily because he, or potentially others, benefitted in the run-up of Tesla shares. Incidentally, Musk’s tweet said capital had been secured for the “take private” venture. That turned out to be untrue.

Musk’s board has not taken action against him. Such a tweet and such erratic behavior would cost many CEOs their jobs. Some outsiders say Musk’s relationship with his board is close enough that they will not sack him. Still others say that as he is the face of Tesla, the board can hardly afford to push him out.

However, the board’s decision about Musk may be taken from its hands. The SEC may make its own decisions about Musk’s behavior. If there are penalties for his behavior, among them may be that he cannot be a corporate officer or director of a public company, whether the board likes it or not.