There is no shortage of people who believe in Elon Musk and his master plan(s). The CEO of Tesla (NASDAQ:TSLA) has been very aggressive in expansion and is trying to make his mark on history. Unfortunately, some of the things he does should frighten investors. It appears that Elon could be close to being investigated by the SEC, acting like the guy on the highway with a police car in the rear view mirror, trying to see how fast he can go before he gets pulled over.
As August came to a close, Elon Musk sent an e-mail out to all Tesla employees, basically trying to rally the troops. Normally, this wouldn't appear to be a big deal, but take a look at some of what was said in this message, detailed by Bloomberg:
"The simple reality of it is that we will be in a far better position to convince potential investors to bet on us if the headline is not 'Tesla Loses Money Again,' but rather 'Tesla Defies All Expectations and Achieves Profitability.'"
The e-mail says that Tesla is "on the razor's edge of achieving a good Q3, but it requires building and delivering every car we possibly can, while simultaneously trimming any cost that isn't critical, at least for the next 4.5 weeks."
"I thought it was important to write you a note directly to let you know how critical this quarter is," Musk wrote. "The third quarter will be our last chance to show investors that Tesla can be at least slightly positive cash flow and profitable before the Model 3 reaches full production."
Elon is on the record stating that the company will need to raise money in Q4, verified by a recent S-4 filing. So basically, he is trying to get employees to artificially inflate Q3 results so that he can raise capital after the quarterly earnings report. This certainly could catch the eye of the SEC as a stock promotion, trying to get investors to buy into a stock based on misleading results. This could get even messier when you consider that part of the proceeds from any stock sales could be used to pay back SolarCity (SCTY) bonds if the merger goes through - that is solar bonds that Elon Musk and his cousins just bought $100 million worth of.
While we are on the subject of SolarCity, Elon is risking a separate investigation into the whole merger and his personal stock transactions. It was recently learned that Elon held a discussion sometime in February where he suggested to cousin Lyndon Rive, SolarCity CEO, a merger. This was this three months before Tesla sold several million shares of stock, without any mention of a possible acquisition of SolarCity in the prospectus.
This information should have been detailed due to the additional dilution investors would face, along with additional business risk from acquiring a company that's heavy in losses and cash burn. It gets even worse for Elon if it turns out that the merger discussion was before his February 12th purchase of almost 570,000 shares of SolarCity stock, as that could be considered insider trading.
If that isn't enough for Elon to worry about, his wallet has taken a hit lately. Since the official merger announcement, Tesla shares are down 15.8%, while SolarCity shares are down nearly double that, 30.8%. The original proposal was for an exchange ratio of 0.122 to 0.131 shares, which based on Tesla's high a few months ago could have fetched $31 a share for SolarCity. The official agreement was for a ratio of 0.11 shares, but with SolarCity closing Friday at $18.48, the current trading ratio is down to 0.0934.
Recent analyst comments that suggest another offer won't come during the go-shop provision seems rather obvious, given SolarCity shares should be trading $3.28 higher than they are. Tesla appears to be in a lose-lose situation here as a result. When Tesla shares decline, SolarCity shares become less valuable and fall as well. When SolarCity shares decline, they drag down Tesla because if investors believe SolarCity is in more and more trouble, that means more trouble for Tesla should the acquisition go through.
Last week was not a good one for Elon Musk, as he lost a lot of money in the market and one of his SpaceX rockets blew up. However, he should be even more worried that the SEC might choose to start an investigation into some of his curious decisions surrounding Tesla and SolarCity stock. Elon Musk's e-mail to employees trying to inflate Q3 results ahead of a planned stock sale could be seen as promotional. His lack of disclosure of a SolarCity merger possibility ahead of a previous Tesla sale and SolarCity share purchase could also be questioned. While the SEC may not ever do anything here, Elon is certainly guilty of bad judgment. Investors be warned.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.