• A Tweet’s Effect on Stock Price

    Author : White Collar Firm February 1, 2019

    Twitter has been dominating the headlines lately, but not really for anything the company itself has done. More frequently, it has to do with the things that its users have published online. From the president to businessmen, it seems no one can resist the temptation of 140 (or is it 280 now?) characters within which to speak their mind. One of the latest Twitter gaffes was done by Paypal and Tesla founder, Elon Musk. 

    Mr. Musk is a disruptor at heart, creating new technologies and business models that shift the paradigm for multiple businesses. His unorthodox management style (sleeping on a factory floor to meet an unrealistic deadline (which was successful); smoking pot while being interviewed on the podcast, the Joe Rogan Experience), has both endeared him to and enraged his investors.

    In September 2018, regulators from the Securities and Exchange Commission filed a lawsuit against Musk after one of his Tweets. The regulators claimed that he had misled investors when one of his tweets asserted that he had ‘secured’ funding to take Tesla private at a whopping rate of $420.00 per share – a significant mark-up over the company’s then-current trading price. In fact, Musk had not locked down anything close to this kind of financing for such a deal.

    As a result of his tweet (which was sent out to over 20 million followers) the stock price of the company skyrocketed, which upset multiple short sellers. The SEC, feeling this was a calculated manipulation of the company’s stock price, and also an attempt to mislead investors, filed its lawsuit.

    In reality, Musk had had some casual conversations with a sovereign investment fund which had already purchased a fair number of shares from Tesla – but the details were never finalized, let alone established. The price itself (420) was a reference to marijuana that Elon thought would be funny. In hindsight, he agreed it was probably not a great reason to pick a price for shares.

    He reached a settlement in October, agreeing to pay two separate fines around $20 million dollars and resign as Tesla's chairman. As part of the deal, it was agreed that Tesla would create more robust oversight for Mr. Musk’s use of social media, pre-approving posts that might be material to Tesla’s shareholders. That said, he remains the largest shareholder of the company, meaning that in spite of his resignation, he still holds a great deal of power in the decision-making process.

    So what can companies do when dealing with a brilliant, if erratic (and risk-averse) founder? Musk’s other company, SpaceX, is a good example of how a company can protect itself from unnecessary litigation and prosecution. The company hired a strong chief operating officer, Gwynne Shotwell, who cannot be fired by Musk, and who reports to the board.

    Granted, SpaceX remains a private company, which is inherently less exposed to regulatory infractions under the SEC. The main takeaway is for businesses to try to wrest control (where possible) from its headstrong captains of industry, by restructuring the business or board, creating more oversight, and developing comprehensive controls. Wherever innovation lies, though, someone is bound to go rogue. Continue Reading →

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