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Elon Musk’s Settlement With The SEC Is A Warning Shot For CEOs

October 5, 2018 In The News

Perhaps the biggest complaint by investors following the 2008 financial crisis was that not a single Wall Street executive was held accountable for their misdeeds. People were upset, angry and annoyed. After all, Wall Street banks nearly led to the  collapse of the global financial system.

Indeed, the fall of Lehman Brothers, Bear Stearns and other financial institutions, which caused deep losses in the retirement accounts of Mom and Pop investors, did not result in a single prosecution of the wrongdoers who misled investors and hurt their own firms and shareholders. It’s unfathomable.

The recent high-profile Securities and Exchange settlement with Elon Musk, however, may be an indication of a more aggressive effort to hold individuals accountable.

As Business Insider noted: “The SEC sued Musk last Thursday, and he and the agency reached a settlement on Saturday. Under its terms, Musk doesn’t admit or deny the allegations in the agency’s lawsuit but will step down as the chairman of Tesla’s board of directors for three years and pay a $20 million fine.”

The latest drama around Musk started in August, when he said he wanted to take Tesla private and declared in a Tweet that he had “funding secured” for $420 per share. The company’s stock price soared. Making matters worse, Musk later indicated that he had a verbal agreement with the Saudi Wealth Fund regarding that deal, but no specifics were ever reported.

To call this type of behavior from a CEO irresponsible would be an understatement.

Musk got the attention of federal watchdogs. As noted, the SEC sued Musk for investment fraud, claiming that Musk misled investors with that tweet. In its lawsuit, the SEC charged that when Musk made the August 7 tweet, he “knew” that he had never discussed going private at $420 per share with any potential funding source.

Just as Musk’s tweet buoyed Tesla’s stock price, the report of the SEC’s action resulted in a 14% decline.

A recent Reuter’s article reported that, in addition to the Musk SEC settlement, the SEC has recently brought cases against other corporate individuals.

“A high-profile settlement with Tesla Inc Chief Executive Elon Musk exemplifies a recent push by the U.S. Securities and Exchange Commission to go after executives and not just their companies,” according to Reuters.

The SEC brought action last week against the former president and chief financial officer of LendingClub Asset Management, Renaud Laplanche and Carrie Dolan, and the former CEO and CFO of Walgreens Boots Alliance, Gregory Wasson and Wade Miquelon.

It may be that the SEC is sending a shot across the bow of corporate America that company officers who mislead investors or engage in other wrongdoing will be held accountable.

Recent high-level departures at CBS, following Les Moonves’ alleged sexual harassment scandal, and the John Schnatter ouster from Papa John’s Pizza for insensitive racial remarks show that corporate leaders will be held accountable if they violate norms and hurt shareholders.

Despite the settlement, Musk apparently is unhappy with the SEC. Business Insider reported late Thursday afternoon that Musk seemed to take aim at the SEC in a tweet, calling it the “Shortseller Enrichment Commission.”

“Just want to say that the Shortseller Enrichment Commission is doing incredible work,” he said. “And the name change is so on point!”

Some executives, it seems, may never learn. We hope, however, that these cases represent a trend which could finally lead to corporate accountability.  And the next shot should be at Wall Street when high level corporate officers mislead investors or hurt their own shareholders.

Zamansky LLC is a New York law firm which represents investors in court and arbitration cases against securities brokerage firms and issuers.  The firm may represent investors in cases against companies mentioned in this blog.  Zamansky LLC also represents investors in arbitration cases against UBS and other brokerage firms regarding Puerto Rico bonds and UBS closed end bond funds and other investments.