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Criminal probe of Musk's tweet could lead to deeper troubles

Under securities fraud laws, prosecutors could go back at least 5 years if they find proof of a conspiracy

The initial scrutiny surrounds Mr Musk's tweet that he had money lined up to take the company private. Later, he and his board said there was no formal proposal for the funding and the plan was dropped.

New York

ALL it took to draw the US Justice Department into investigating Tesla Inc was a single tweet by its chairman Elon Musk. But now that prosecutors have a toehold, they can dig in to look for other signs of misconduct at the electric-car maker.

The investigation is in its very early stages and where it leads is anyone's guess. Many securities fraud probes over the years have started with a bang like the one that knocked as much as 6.6 per cent off Tesla's shares with Bloomberg's report of the probe on Tuesday. Some of those are flash news reports that trickle off without charges. At the other extreme are companies such as Theranos Inc, which pumped up its valuation with what the government said were false promises, leading to charges against founder Elizabeth Holmes and another senior executive.

"Criminal investigations are never good if you're a public company because they open up a Pandora's box and prosecutors will follow threads wherever they lead," said Paul Pelletier, a former Justice Department prosecutor. Tesla said it's cooperating with the Justice Department, noting that it received queries but no subpoena. The initial scrutiny surrounds Mr Musk's tweet on Aug 7 that he had money lined up to take the company private. Shares jumped. Later, he and his board said there was no formal proposal for the funding and they abandoned the plan. The Securities and Exchange Commission (SEC) quickly opened a civil investigation into the tweet and issued a subpoena for information, people familiar with the matter told Bloomberg. That was followed by the Justice Department probe. Neither the SEC nor federal prosecutors have accused Mr Musk of any wrongdoing.

To prove criminal securities fraud, prosecutors would have to show not only that Mr Musk's statements were false, but that they were made wilfully. That would require establishing that he purposely planned to inappropriately drive the shares higher or prevent them from going lower.

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One area investigators would look for such evidence is in emails or other internal documents, according to former federal prosecutors. Mr Musk has often vented his frustrations with short-sellers on social media.

In May, he tweeted that he was expecting the "short burn of the century" and suggested that investors who were betting against the company start "tiptoeing quietly to the exit …"

The "funding secured" tweet did in fact trip up bearish sellers when the company's shares rallied more than 10 per cent. Government investigators will be trying to determine whether there was any connection to that statement and his desire to hurt short-sellers.

Once federal prosecutors begin looking into Mr Musk's comments, they may also examine other things, including why the company's new chief accountant packed up and left after just a month on the job - though he said at the time he had "no disagreements with Tesla's leadership or its financial reporting".

Under securities fraud laws, prosecutors could go back five years and more if they find evidence of a conspiracy. Very often, what starts out as an investigation of one subject takes a completely different turn, said Michael Koenig, who prosecuted former Qwest CEO Joseph Nacchio for insider trading.

"When we were investigating Qwest, we initially thought there were accounting fraud and revenue recognition type issues," said Mr Koenig, now a partner at Hinckley, Allen & Snyder. "As we started digging into it, however, we realised, 'Wait a minute. Joe Nacchio is selling large amounts of his stock at the same time he's telling the general public that the company is doing great, when he knew it was not.'"

The SEC already was investigating whether Mr Musk's vehicle production forecasts misled investors before the regulator started scrutinising whether he had secured funding for a Tesla buyout, Bloomberg reported on Aug 9. Some of his predictions have been way off. Mr Musk said during a May 2016 earnings call that, during the second half of 2017, he expected Tesla would produce 100,000 to 200,000 Model 3 sedans - the lower-priced car that's pivotal to the company generating profit. Tesla ended up building fewer than 3,000 Model 3s in the second half of last year.

If Mr Musk's conduct at Tesla is deemed to be a case where the CEO's unregulated passion led him to hyperbolic claims, the resulting penalties are likely to be serious, but measured. But if evidence emerges that a win-at-all-costs mentality from the top led some executives to cook the books, the penalties could be severe. BLOOMBERG

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