Wall Street Journal


SEC Sends Subpoena to Tesla in Probe Over Musk Tweets


Subpoena seeks information from each of Tesla’s directors


By Emily Glazer in Los Angeles, Mengqi Sun in New York and Dave Michaels in Washington

August 15, 2018


Federal regulators have subpoenaed Tesla Inc., TSLA -8.94% ramping up an investigation into Chief Executive Elon Musk’s tweet last week that he had secured funding to take the electric-car maker private.


The subpoena from the Securities and Exchange Commission seeks information from each of Tesla’s directors, according to a person familiar with the matter. It isn’t known what information is being sought.


Representatives for the SEC and Tesla declined to comment.


The Wall Street Journal previously reported that the SEC has made preliminary inquires about Mr. Musk’s basis for writing on Twitter last week that he had “funding secured” for a deal.


The subpoena indicates senior SEC officials have authorized a formal investigation of the company, a step up from the initial inquiries the regulator made to Tesla last week. The SEC opens formal investigations when it thinks that a violation of law has occurred and that a probe is justified given the nature of the suspected misconduct and the potential harm to investors.


Under U.S. law, companies and corporate officers can’t give shareholders misleading information about meaningful company events.


SEC probes take months and sometimes years, and can be closed without legal action against a target if the SEC decides the evidence doesn’t merit filing charges.

Fox Business Network earlier reported that Tesla received a subpoena from the SEC.


Mr. Musk surprised investors on Aug. 7 when he tweeted that he was considering taking Tesla private at $420 a share, or $72 billion, about 20% above the stock’s trading price earlier that day. In his tweet, Mr. Musk said the buyout had “funding secured,” without providing any details.


In a blog post on Tesla’s website Monday, he clarified that discussions with Saudi Arabia’s sovereign-wealth fund about funding the deal were the basis for his assertion, and said the fund hadn’t signed off on a deal. The Saudi Public Investment Fund has a nearly 5% stake in Tesla.

Stephen Crimmins, a former SEC lawyer now at Murphy & McGonigle PC, said the regulator probably needed to begin issuing subpoenas because the matter will involve asking questions of the Saudi fund.


“It’s likely that in the Tesla matter the SEC staff needed to ask for a formal order of investigation to get subpoena power as a basis for relying on an international agreement between securities regulators to get help from the Saudis,” he said.


Mr. Musk also outlined an unorthodox setup for a potential deal, saying he expected a significant number of the company’s current shareholders to hold on to their stakes in a take-private deal. He estimated about two-thirds of all shares owned by current investors would be rolled over into a private Tesla.


Mr. Musk and Tesla insiders own about 25% of Tesla, and individual investors hold a little more than 17% of the stock. The rest—nearly 58%—is held by big institutional investors, according to FactSet.


Two of those big shareholders disclosed in regulatory filings Tuesday that they pared their holdings in Tesla before the take-private conversations became public last week.


T. Rowe Price Group Inc. and Fidelity Investments reduced their stakes by more than 20% in the quarter ended June 30, according to FactSet. T. Rowe sold 3.7 million shares and Fidelity sold 3.1 million shares.


The two investors still own more than 20 million shares combined, according to FactSet, and they remain two of Tesla’s five largest institutional holders. It isn’t known why they pared their stakes; representatives for the firms declined to comment.


Six of Tesla’s other top 15 institutional shareholders also sold smaller stakes during the second quarter, according to FactSet. That included funds or accounts controlled by Vanguard Group, BlackRock Inc. and Goldman Sachs Group Inc.


It isn’t known how Mr. Musk would get around regulatory limits on the number of shareholders in a private company.


Companies with more than 500 “nonaccredited” investors—individual investors below certain income and wealth thresholds—are required to register their securities with the SEC. In addition, a public company can’t go private and end its registration or filing obligations with the SEC if it has more than 300 shareholders.


The development shows how Mr. Musk’s erratic behavior and seemingly unfiltered use of Twitter is a risk for Tesla, attracting unwanted drama as it tries to evolve into a more mainstream auto maker.


Mr. Musk has repeatedly used Twitter to chide investors who are betting against his company, sometimes making boastful statements and offering positive outlooks that can boost the stock and hurt short sellers. He has also used Twitter to criticize regulators, scrutinize the media and debate people who target his business interests.


His defiance and frank messaging has won Mr. Musk many fans and gained him more than 22 million followers on Twitter. But his outbursts sometimes get him into trouble, like it did in July when he lashed out at a British cave explorer who helped rescue a youth soccer team in Thailand, suggesting he was a pedophile. Mr. Musk deleted the tweet and apologized.


The investigation adds another distraction for Tesla as the company struggles to ramp up production of the Model 3, the sedan that Mr. Musk bets will bring electric cars to the masses.


The company reached a long-delayed goal of making 5,000 Model 3s in a week at the end of the second quarter.


But some investors and analysts question whether Tesla can sustain production to generate the necessary cash needed to fuel the business and turn a profit. Mr. Musk has little room for error as production delays have pushed cash near dangerously low levels.


—Tim Higgins in San Francisco contributed to this article.

© 2018 by the Natural Gas Vehicle Coalition of California