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Elon Musk, Tesla and the SEC: How we got here, and what happens next

What a long, strange trip it's been, and there's still plenty of it left.

Thursday, the US Securities and Exchange Commission (SEC) filed a lawsuit against Tesla CEO Elon Musk for alleged securities fraud. It was the culmination of a tumultuous two months that started with a single tweet on Aug. 7.

How did it get to this point, and where does the whole situation go from here? Let's take a look.

Two little words

"Funding secured."

That's all it took to launch an investigation (or two). Musk's tweet on Aug. 7 claimed that he wanted to take Tesla private once again at a price of $420 per share, and he claimed he had secured the funding to do so.

Why did he want to do that? In an email to employees, which was later posted on Tesla's blog, the CEO said that "wild swings" in the stock price can "be a major distraction for everyone working at Tesla." Going private would eliminate concerns about share prices, and perhaps more importantly, it would stick it to the "shorts," investors who bet against Tesla's future success for profit. This would free the company from its quarterly shackles and allow it to focus purely on long-term thinking, which might come at the expense of short-term balance sheets.

If every public shareholder were to be bought out, it would cost Musk tens of billions of dollars, so whatever funding source Musk was referring to clearly needed deep pockets. Initially, Musk didn't say who had offered up the funding, but a follow-up blog post on Tesla's site appeared to refer to Saudi Arabia's sovereign wealth fund, the PIF, which had already acquired a 5 percent stake in the company. However, sources from Reuters contradicted that claim. In a separate statement, Tesla's board confirmed that Musk had initiated talks about going private earlier in August, prior to his tweet.

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The SEC reportedly became involved just one day after the now-infamous "funding secured" tweet. Not only was the SEC interested in whether or not the funding was actually secure, it wanted to determine whether or not Musk's tweet constituted sufficient disclosure to investors, which is required before making the type announcement he did.

"I'm not at all surprised at the speed with which this has happened, because so much of the evidence was already out in public," said Sam Abuelsamid, senior research analyst at Navigant Research, in an email to Roadshow. "Normally, regulators have to spend months investigating before they get enough evidence to make a case. In this situation, Musk basically handed them the case on a Twitter timeline."

The following week, it was reported that the SEC slapped Tesla with a subpoena, requiring the company to provide documents related to Musk's tweet about going private. At that point, neither Tesla nor the SEC would either confirm or deny that an investigation was taking place.

On Aug. 25, 18 days after the tweet heard 'round the internet, Musk published a blog post on Tesla's site that said he had chosen to keep the company public. He admitted that going private would be "challenging" and "distracting," and that "most of Tesla's existing shareholders believe we are better off as a public company."

Yesterday, approximately one month after Musk's decision to stay public, the SEC filed suit against Musk himself, alleging securities fraud and requesting that Musk receive a lifetime ban from acting as an officer of any public company, which is an especially strong request.

"They have suggested some extremely harsh measures," said Michelle Krebs, executive analyst for Autotrader, in a phone call with Roadshow.

What happens next?

"A lifetime bar is very onerous... and has limited precedent," wrote analysts from AllianceBernstein, led by senior technology research analyst Toni Sacconaghi, in a report following the SEC's announcement of its lawsuit. "We note that lifetime bans for executives are unusual, though several high-profile executives have received temporary bans. Moreover, others have simply paid fines ... or were acquitted of wrong-doing."

Musk might have been able to avoid this lawsuit entirely, but now that it's happening, all bets are off. The SEC allegedly reached a settlement with Musk, The Wall Street Journal reports, but just before it was filed, Musk's lawyers said they no longer wanted to pursue the settlement. The WSJ says that the SEC prepared its lawsuit for Musk shortly thereafter.

"It is unclear what the terms of the settlement were, but the speed at which an initial settlement was reached, and the immediate response by the SEC yesterday, underscore the seriousness in which it is approaching charges against Musk," AllianceBernstein's analysts wrote in their report.

It seems that Musk will see this lawsuit through to the end, regardless of outcome, although there is always the chance that he can settle early. Tesla's board has put its full weight behind its CEO, according to a joint statement sent to Roadshow. "Tesla and the board of directors are fully confident in Elon, his integrity, and his leadership of the company, which has resulted in the most successful US auto company in over a century," the statement reads.

Right now, it's impossible to know whether or not Musk will stay at Tesla or depart. But there's also a middle ground that could theoretically work, in the sense that it would allow him to stay at Tesla and continue his contributions, while not being held to the requirements of a chief executive.

"I have long said that Elon is an incredible visionary but a terrible manager, and he shouldn't be running a large company as CEO," Abuelsamid wrote via email. "He should have stepped aside as CEO and named himself Chief Vision Officer and then hired an experienced management team to execute on [his] vision. If that were to happen, they could scale back some of the near term ambitions and make sure that everything was done correctly."

"I think the board has to step up and take some responsibility here," Krebs said over the phone. "There's been talk for some time that Musk's role should change. I think the board is populated with people that are Musk-friendly, and [Tesla needs] a diverse board that will provide support, but in a way that improves the performance of the company."

What makes matters worse for Musk and Tesla is that this is only half of the company's issues with the federal government. On Sept. 18, it was reported that the Justice Department was also looking into Musk's funding claims. Tesla admitted that the Justice Department had asked the company for documents, and that it was complying. But while the SEC may only levy civil penalties, things could get much darker with the DOJ involved.

"[The Justice Department investigation] could ultimately result in formal charges against Musk and jail time, irrespective of the outcome of the SEC suit filed yesterday," AllianceBernstein's analysts said in their report.

Once the lawsuit goes to trial, it could be years before a resolution is reached, which means all these potential end results will remain potential for some time. Musk is free to settle at any point, but his desire to remain in control is evident and will likely factor into any sort of middle ground he tries to reach with the government.

Musk has stated in the past that his ultimate goal is to turn the world toward electric cars and away from the internal combustion engine. His efforts at Tesla have already pushed the world in that direction, as automakers from Chevrolet to Volkswagen begin to focus on electrification. But where his company goes next, and how it gets there, is entirely up to Musk and his lawyers now.

"At some point, it's a business, and it needs to be run like one," Krebs said. "Investors aren't going to hold out forever."

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