By Gene Munster and Doug Clinton of Loup Ventures

The SEC charged Elon Musk with securities fraud related to the go-private statements made on Twitter last month. This is a negative, given it adds further distraction at a critical 6-month juncture in the company’s viability. Despite this, we think the company will survive.

• Given shares are down ~12% in after-market trading, the consensus appears to be that Elon will be removed as CEO and chairman and may be removed from the company entirely. We think this is an overreaction and believe there is a 50-50 chance Musk remains CEO after this SEC matter is resolved and an even greater chance he remains involved somehow with Tesla in any case.
• As demonstrated by the stock’s reaction, investors believe the removal of Musk from Tesla would be negative for the prospects of the company, despite his recklessness in the go-private tweets. If the SEC is granted its request to remove Musk, there’s a question as to whether they’re doing more to harm continuing shareholders or protecting them, at least in the eyes of the market.
• For this reason, we would have assumed a settlement with Musk to punish him financially but keep him as an officer/director would be the best outcome to avoid further damage to shareholders. However, according to the WSJ, Musk’s lawyers backed out of a settlement with the SEC prior to the filing the complaint. This could be read as a positive signal that the SEC is willing to settle or a negative signal that Musk and his team may not be.
• Without a settlement, we’d expect the complaint may take 6-12 months or more to resolve.
• No matter what happens, we expect Musk to deservedly pay a substantial financial penalty, and he may be open to further legal action from other aggrieved investors.

Given the scenario now and focusing on Tesla rather than Musk, we think the company will survive beyond this action for three reasons:

1. If Musk is barred from being an officer and director of Tesla, we believe he will find a way to continue to be involved with the company in some sort of product/visionary capacity, a role that he has suggested in the past he would prefer. It would be hard for any party to argue that this would not be in the best interest of shareholders.
2. We recently wrote about the need for Elon to surrender his position as chairman of the board because the current power structure, as well as the board’s make up, are not conducive to influencing Musk. If Musk is removed as a chairman and CEO, the issue of board influence on the CEO may be mitigated in some ways. If he’s not, the legal action may be enough of a justification to force changes at the board level, which could start with Musk stepping down as Chairman.
3. Given comments from Musk on September 7th related to production, we believe the trajectory of the business is improving at a level that can support servicing its upcoming debt obligations and eventually generate cash.

Disclaimer: We actively write about the themes in which we invest or may invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we may write about companies that are in our portfolio. As managers of the portfolio, we may earn carried interest, management fees or other compensation from such portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making any investment decisions and provided solely for informational purposes. We hold no obligation to update any of our projections and the content on this site should not be relied upon. We express no warranties about any estimates or opinions we make.

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