Elon Musk vs. the SEC (how we got here)

I was a Tesla shareholder from 2012 until August 2017. My reasons for selling were very simple: I loved the company because they made great cars that combined technological futurism, environmental safety and performance. Insane, Apple level great, cars. But over the years, I had seen the CEO wreck the balance sheet by piling on too much debt, making over ambitious promises to wall street, make an ill advised decision to acquire solar city and generally put the company in a situation where it’s capital structure, production targets and its very survival were at risk. Product remained great, but one of the lessons I have learned over my years both in school and as a consultant is that engineers tend to heavily discount the importance of the business function, believing that as long as they deliver insanely good products, the company will succeed. Not so. All those numbers, business thinking, corporate finance, balance sheet optimization stuff, they add up to a mass of things that are vital to the success, health and growth of a company and just because you don’t see them reflected in the product does not make them any less important. Or worse, just because you’re a really smart engineer, does not mean all you have to do is google the other stuff and you’ll be fine.

It’s one of the more fundamental problems I had with Tesla, and coupled with the high debt, cash burn and terrible balance sheet situation, I sold my shares. They already made me a ton of money too, so it’s not like I was hurting but I could see the train wreck coming.

This year, it all started to go south. First, Tesla’s debt started to mature, and since there wasn’t enough revenue, and even barely enough production to bring in cash to pay it down, it became a race to hit production targets before the company ran out of cash. The shorts started piling in, and being short tesla became the story of 2018. At some point, the short position in Tesla was up to $13 billion (short is when investors sell a stock ahead of time, betting that it’s going to fall in the future). All that short selling of course, lowers the share price. And Elon Musk could not endure that. Part of the reason is that a high share price and the momentum made the company more attractive the investors, making it easier to raise the sorely needed capital. But secondly, about $400 million of debt was due by second quarter, and Elon had the option where, rather than pay back that amount, they could convert into equity (Stock) but only if the stock price was higher than $320 at the time (keep this in mind). Now, Elon knew that paying $400M to creditors would make it damn near impossible to meet his production targets without raising more money, and now that the narrative was falling apart, raising money would come with high interest rates and conditions, if he was even able to raise at all. So he needed his stock price to stay above $360. And for a time, it did. It even hit $380 at one point.

However, with the shorts piling on, production issues and quality control issues also came a ton of executives leaving the building. Now for a while, Tesla had not had a good business person to support Elon’s production genius, but soon CFOs, HR managers, engineers and what have you were leaving. Shares kept sliding, and Elon’s desperation kept growing. (Some think this might be when he and his girlfriend started doing drugs and hanging with the likes of Azealia Banks but no one knows for sure). One thing was certain, Elon had to find a way to get the shorts, and all of Wall Street pretty much, off his back. And when you cannot raise money from detail obsessed Western investors, who do you go to? As Manchester City and Donald Trump know very well, you go to the guys who don’t care about numbers as much as they care about owning a piece of credible Western connected brands: the Arabians. Arab money is one of the least demanding money there is, cos these guys have loads of it and don’t always have interesting things to do with it, so who better to give Tesla a desperately needed cash infusion or even take the entire company private? So Elon sent out feelers, and of course, the Arabians came calling.

The thing was, after a few meetings, even the Arabians didn’t have the stomach for it. They did accumulate a 5% stake but they realized that if what they wanted was a Western connected futuristic company to brag about in their portfolio, there were way easier ways to do it than with a potential landmine like Tesla. So the talks never went anywhere, and shortly after, they even announced a series of investments in some Tesla competitors like Lucid Motors, Uber, even some Chinese EV makers.

By this time, Tesla’s stock had fallen to $298 and Elon’s desperation was starting to show. He started openly warring with the Short sellers, threatening to go after them with a flamethrower and warning them that the mother of all short squeezes was coming (A short squeeze is when you sell a stock short, betting of course that it was going down so you can buy it cheaper, but instead it goes up causing you to buy it back at higher prices, leading to losses). The mother of short squeezes meant the stock price would go up A LOT, which would be massively hurtful to the shorts. Elon was basically telling them, you’re going to be burned. Months passed by, and sometimes they did get burned and other times, Tesla got burned both figuratively and literally, as in some Teslas actually caught fire.

Well, in August, with Tesla stock still below $360, (apparently it was around $348 or so) Elon was apparently feeling the heat too much that he had a heat stroke. That is the only explanation for the tweet he sent out saying “considering taking tesla private at $420. funding secured.” That tweet was sent in the middle of the trading day, which led investors to rush the stock up over 10% in one day. And that began the journey to where we are now.

As Elon tweeted further about the plans, and people started asking questions generally revolving around “this isn’t how you announce a take-private deal” and more information started to spill out, it turns out there was no funding secured nor was any deal announced to shareholders until way after that tweet had gone out. It turns out that Elon had simply tweeted that to artificially boost the stock price, burn the shorters and take it over the price he needed for the debt to convert. He chose the $420 price because it was roughly 20% higher than the stock price at the time he tweeted it, plus he thought his girlfriend would find the marijuana (420) reference, funny.

Well, the SEC didn’t find it funny and they started an investigation to get to the root of what exactly happened, which only ended up sending the stock down. And now, today, they’ve announced that, based on their findings, Elon’s tweet was truly actually bullshit, and so they’re suing him for breaking the rules of publicly traded companies and the stock is currently down 13.18% in after hours trading and is trading at $267.

If found guilty, Elon may be banned from being CEO and director of any public company. But it’s not guaranteed that they may necessarily find him guilty, sometimes these things need a strong lawyer and are hard to prove. What is sure is that this is bad news for the company, and it might get worse.

And that’s sad because I really love Tesla both as a car, and a company. And I think Musk is brilliant. It’s just, the skills it takes to run a company is not always the same as the one it takes to build a product. Especially, when that company goes public.

All the same, we are watching the situation with popcorn on the side.

Are you not entertained?

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