Holy cow, was yesterday afternoon absolutely insane. It all began with this tweet from Tesla CEO Elon Musk.
Am considering taking Tesla private at $420. Funding secured.— Elon Musk (@elonmusk) August 7, 2018
The number $420 refers to the price per share that a private investor had supposedly offered him to take Tesla off the stock market and make it a private company again. This was about 20% higher than Tesla's stock price at the time. If you're familiar at all with market dynamics, you can probably guess what happened next.
DEVELOPING: Tesla's stock jumped as high as $371.15 and then came back down as traders began to question the legitimacy of an unverified Elon Musk tweet about taking the company private. https://t.co/AsfmnqiGlDpic.twitter.com/ILWIPN8vrw— CNBC (@CNBC) August 7, 2018
Elon Musk made about $850 million in the trading period after that tweet. The Securities and Exchange Commission defines market manipulation as such:
Manipulation is intentional conduct designed to deceive investors by controlling or artificially affecting the market for a security. Manipulation can involve a number of techniques to affect the supply of, or demand for, a stock. They include: spreading false or misleading information about a company; improperly limiting the number of publicly-available shares; or rigging quotes, prices or trades to create a false or deceptive picture of the demand for a security. Those who engage in manipulation are subject to various civil and criminal sanctions.
There is a serious question as to who would purchase Tesla right now, let alone at a valuation significantly higher than current market prices, as Charley Grant of the Wall Street Journal detailed:
But what would seem like great news for its shareholders comes with plenty of unanswered questions. This would be twice the size of the biggest buyout in history, one that ended in bankruptcy. And Tesla is the exact opposite of the type of company buyout firms want: It burns rather than generates cash and it is already neck deep in liabilities. If Mr. Musk hasn't lined up the financing he claimed, he could be accused of trying to drive up Tesla's stock to make the company's many naysayers suffer. Tesla didn't respond to questions about the nature of this committed financing.
That's not to say that this is definite market manipulation. Honestly, no one is quite sure what the hell is going on. CNBC's array of experts yesterday afternoon all confirmed that they had heard of no Wall Street firms about to take on that large of an investment, which is not normal. Any acquisition that large inevitably leaks to those in the know ahead of the announcement, and there is an established order to how these types of deals go down. Once you rule out Wall Street on something that expensive, there just aren't many possible buyers remaining (one prospect is the $250 billion public Saudi sovereign fund, who recently purchased a 5% stake in Tesla).
Thanks to all this confusion, NASDAQ halted all trading on Tesla stock for about an hour and a half. It restarted trading after Musk confirmed the news in his original tweet.
The problem with the statement released by Musk on Tesla's blog is that it does nothing to buttress his assertion that Tesla has a buyer lined up. He doesn't even allude to it, he simply writes “Earlier today, I announced that I'm considering taking Tesla private at a price of $420/share.” In fact, the more you read this statement, the more Musk's personal animosity towards Tesla's detractors comes to the fore. He specifically singles out short-sellers (people who bet that Tesla's stock price will go down) in the opening paragraph of this letter:
First, a final decision has not yet been made, but the reason for doing this is all about creating the environment for Tesla to operate best. As a public company, we are subject to wild swings in our stock price that can be a major distraction for everyone working at Tesla, all of whom are shareholders. Being public also subjects us to the quarterly earnings cycle that puts enormous pressure on Tesla to make decisions that may be right for a given quarter, but not necessarily right for the long-term. Finally, as the most shorted stock in the history of the stock market, being public means that there are large numbers of people who have the incentive to attack the company.
As easy as it is to dunk on Musk for being a petulant child (remember when he accused one of the divers who rescued the boys in the Thailand cave of being a pedophile after the rescuer said that Musk's sub to save the boys wouldn't work?), he has a point here. Tesla is working on long-term technology that doesn't fit neatly into the cult of perpetual quarterly gains espoused by the stock market. It probably would be better off for Tesla to go private, but the problem is that so long as his assertion that he has a buyer at 20% above market value remains dubious, this just looks like straight market manipulation—not to mention Musk's possible trolling by using 420, which is the marijuana number.
Former SEC chair Harvey Pitt told CNBC that Musk's initial tweet was “highly unprecedented… and raises significant questions about what his intent was.” It doesn't help that after Musk's initial salvo rocked the markets, he continued to post things like this.
Def no forced sales. Hope all shareholders remain. Will be way smoother & less disruptive as a private company. Ends negative propaganda from shorts.— Elon Musk (@elonmusk) August 7, 2018
People who short Tesla stock do have an incentive to attack the company, and there are a lot of Tesla short-sellers. However, that doesn’t give Musk license to manipulate the market to reduce their profits. Let’s go back to the SEC’s definition of market manipulation (emphasis mine):
Manipulation is intentional conduct designed to deceive investors by controlling or artificially affecting the market for a security.
Talk to any lawyer, and they’ll tell you how difficult it is to prove intent. If the SEC wanted to make the case that Musk tweeted this out solely to obliterate short sellers’ positions, they would use that tweet above as one crucial piece of evidence. If this were almost any other executive, this would be less of an ordeal, but thanks to Musk’s mercurial past, tweeting out the weed number to get Tesla in the ballpark of a $69 billion valuation in order to obliterate short-sellers’ portfolios is a real possibility. If you’re skeptical that one of the world’s most famous billionaires would do something this patently absurd, don’t forget: Donald Trump is president and we clearly live in the dumbest timeline.
Paste’s politics editor Shane Ryan brought up a good point yesterday: are we sure that even if Musk did troll Wall Street into making him $850 million in an afternoon, that he will get punished by the SEC for market manipulation? This is America, after all. Rich folks have a completely separate justice system, and it’s hard to see anyone facing any consequence for financial crimes after no one responsible for the 2008 crisis did.
However, if Musk did manipulate the market, his victims are other rich folks. Blowing up Tesla short-sellers’ bank accounts doesn’t affect your average Joe one bit—it hurts hedge fund managers. Musk better have an investor lined up in the neighborhood of $420 per share, otherwise, his rich-on-rich financial violence could lead him to pay an astronomical fine(s), or at the absolute worst, place him in prison for up to five years.
Jacob Weindling is a staff writer for Paste politics. Follow him on Twitter at @Jakeweindling.