Weeks of speculation are over. The Securities and Exchange Commission is suing Tesla for online comments made last month by founder Elon Musk about possibly taking the publicly traded company private, and is seeking to oust Musk as CEO.

As the news broke on Thursday afternoon, Tesla’s share place plummeted nearly 10 percent in after-market trading.

At the heart of the controversy is this Aug. 7 Twitter post from Musk: “Am considering taking Tesla private at $420. Funding secured.”

After weeks of backtracking and explanations by the company, many involving claimed Saudi investors and interest from a sovereign wealth fund, rumors emerged that both the SEC and Department of Justice were considering actions against the company. For the SEC, those details emerged this week in a filing with the U.S. District Court for the Southern District of New York (Civil Action No. 1:18-cv-8865).

“Musk’s statements, disseminated via Twitter, falsely indicated that, should he so choose, it was virtually certain that he could take Tesla private at a purchase price that reflected a substantial premium over Tesla stock’s then-current share price, that funding for this multi-billion dollar transaction had been secured, and that the only contingency was a shareholder vote,” the SEC court filing explains. “In truth and in fact, Musk had not even discussed, much less confirmed, key deal terms, including price, with any potential funding source.”

The statement “funding secured,” the SEC further alleges, “was false and misleading.”

If Musk is found to have violated the provisions of the federal securities laws as alleged in the court filing, the SEC seeks to:

Order that Musk be prohibited from acting as an officer or director of any issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act, or that is required to file reports pursuant to Section 15(d) of the Exchange Act.

Permanently restrain and enjoin him from, directly or indirectly, engaging in conduct in violation of Section 10(b) of the Exchange Act;

Disgorge, with prejudgment interest, any ill-gotten gains received as a result of the violations alleged herein;

Impose civil penalties;

The case against Musk

Over the three hours following that Aug. 7 tweet, according to the filing, Musk made a series of additional “materially false and misleading statements via Twitter,” including:

“My hope is all current investors remain with Tesla even if we’re private. Would create special purpose fund enabling anyone to stay with Tesla.”

“Shareholders could either to [sic] sell at 420 or hold shares & go private.”

“Investor support is confirmed. Only reason why this is not certain is that it’s contingent on a shareholder vote.”

“When he made these statements, Musk knew that he had never discussed a going-private transaction at $420 per share with any potential funding source, had done nothing to investigate whether it would be possible for all current investors to remain with Tesla as a private company via a ‘special purpose fund,’ and had not confirmed support of Tesla’s investors for a potential going-private transaction,” the SEC alleges. “He also knew that he had not satisfied numerous additional contingencies, the resolution of which was highly uncertain, when he unequivocally declared, ‘Only reason why this is not certain is that it’s contingent on a shareholder vote.’”

Musk’s public statements and omissions “created the misleading impression that taking Tesla private was subject only to Musk choosing to do so and a shareholder vote,” the complaint says.

The SEC adds that: “Musk’s false and misleading public statements and omissions caused significant confusion and disruption in the market for Tesla’s stock and resulting harm to investors.”

Musk, 47, resides in Los Angeles, California. He co-founded Tesla in 2003 and, since that time, has been the Chairman of its board of directors and largest stockholder. He was named chief executive officer in 2008 and oversees all product development, engineering, and design of Tesla’s products.

Tesla, best known as a manufacturer of electric cars, conducted an initial public offering in 2010. It trades on the Nasdaq Global Select Market under the ticker symbol TSLA.

Nasdaq rules specify that listed companies must notify it at least 10 minutes prior to publicly releasing material information about corporate events like a proposed going-private action.

Musk did not notify Nasdaq prior to publishing his Aug. 7 tweets.

Although there was a July 31 meeting with potential foreign investors, it “lacked discussion of even the most fundamental terms of a proposed going-private transaction,” the SEC says. “There was no discussion of any dollar amount or specific ownership percentage for the Fund’s investment in a going-private transaction; any acquisition premium to be offered to current Tesla shareholders; any restrictions on foreign ownership of a significant stake in Tesla; the Fund’s available liquid capital; whether the Fund had any past experience participating in a going-private transaction; any regulatory hurdles to completion of a going-private transaction; or the board approval process necessary to take Tesla private.”

Musk did not communicate with representatives of the Fund again about a going-private transaction until Aug. 10, three days after his controversial tweets.

On Aug. 2, after markets closed, Musk sent an e-mail with the subject, “Offer to Take Tesla Private at $420,” to the Board of Directors, his Chief Financial Officer, and General Counsel. In it, he explained his reasons for wanting to take Tesla private, including that being public “[s]ubjects Tesla to constant defamatory attacks by the short-selling community, resulting in great harm to our valuable brand.” He asked that the “matter be put to a shareholder vote at the earliest opportunity” and stated that the “offer expires in 30 days.”

According to Musk, he calculated the $420 price per share based on a 20 percent premium over that day’s closing share price because he thought 20 percent was a “standard premium” in going-private transactions. This calculation resulted in a price of $419, and Musk allegedly stated that he rounded the price up to $420 because he had recently learned about the number’s significance in marijuana culture and thought his girlfriend, performance artist Grimes, “would find it funny, which admittedly is not a great reason to pick a price.”

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