SEC Sues Tesla CEO Elon Musk: What Happens Next?

Elon Musk’s controversial tweet about taking Tesla Inc. (TSLA) private could force him to step down as the CEO and chairman of the electric-car maker, throwing the company that he helped to build into disarray.

On Thursday, the tech entrepreneur was accused by federal regulators of committing fraud after he tweeted last month that he had “funding secured” to buy out the stock. In a lawsuit, the Securities and Exchange Commission (SEC) said Musk “knew that he had never discussed a going-private transaction at $420 per share with any potential funding source,” adding that the statements and omissions of fact misled and harmed investors.

Settlement and Potential Criminal Case

Most experts believe that a settlement is the most likely outcome of such charges. On Thursday night The Wall Street Journal citing unnamed sources reported that the SEC initially sought to reach an early settlement, but Musk and his lawyers made a last-minute decision to fight the case. That’s when federal regulators hurriedly composed and filed the complaint threatening to prevent him for serving as an executive or director of publicly traded companies, one of the most serious punishments the agency can impose against a corporate executive.

Musk could now be forced to negotiate a settlement and possibly agree to step down, remain at the firm in a less powerful position or take a leave of absence.

“He can face a number of penalties … he can have fines imposed against him, he can effectively be barred for a period of time or permanently from serving as a principal officer or a director of a public company,” former SEC Chairman Harvey Pitt told CNBC’s “Closing Bell”.

Pitt added that Musk could also face jail time and additional fines if he is found guilty in a second case recently opened by the Department of Justice. While the SEC investigations are civil, the DOJ files criminal charges and the two often work in tandem. The New York Times’ James Stewart told CNBC that the emphasis on Musk’s obsession with short sellers in the SEC’s complaint “is laying the groundwork for a motive and a potential criminal case.” (See also: Tesla is Facing a Criminal Investigation. What Does it Mean?)

Tesla Hurting

Though Tesla was not named as a defendant in the case, news that its leader risks being ousted from the company represents a serious blow. As the Journal reported, many analysts agree that Tesla’s $53 billion market value has been driven by Wall Street’s appreciation of Musk as a visionary and innovator.

Should Musk be forced to step down, Tesla could soon find itself out of favor with investors. According to David Whiston, an analyst for Morningstar Research Services, the tech giant might also find it harder to raise much-needed funds. “Without Musk, Tesla is just an auto maker burning too much cash and holding too much debt,” Whiston told the Journal.

Reuters columnists Antony Currie and Gina Chon noted that Tesla shareholders may soon find out what their company is really worth. “Tesla would be depleted without Musk, but also more rationally valued,” they wrote.

On the other hand, tech investor and Tesla bull Gene Munster said this may be just what the company needs. “We’ve been advocating that Elon has a different role — stays at Tesla but different visionary role, non investor-related focus. I think there’s an opportunity this will pave the way for some of that,” Munster said Thursday on CNBC.

Tesla shares fell 11.92% in pre-market trading. (See also: Tesla Seen Facing Wild 20% Swings Amid Uncertainty.)

How Long Could Musk Be Banned for?

In its filing, the SEC did not provide a specific time frame on how long it wants to prevent Musk from running a public company. Though unlikely, John Coffee, a professor at Columbia Law School, told CNN Money that a judge could issue Musk with a “lifetime” ban.

Charles Whitehead, a professor at Cornell Law School, offered a more positive scenario. Speaking to CNN Money, he said that Musk could reach a settlement that enables him to remain at Tesla, albeit in a lesser role. “Why would the SEC want to harm the company more than the tweet itself?” Whitehead added. “That would be like throwing the baby out with the bathwater.”

In a statement distributed by Tesla, Musk said: “This unjustified action by the SEC leaves me deeply saddened and disappointed. I have always taken action in the best interests of truth, transparency and investors. Integrity is the most important value in my life and the facts will show I never compromised this in any way.”

Tesla also issued a statement of its own on Thursday evening in support of Musk. “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 U.S. auto company in over a century. Our focus remains on the continued ramp of Model 3 production and delivering for our customers, shareholders and employees.”

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