SEC wrong to sue Elon Musk for fraud: Lawyer

Media playback is unsupported on your device                  Media captionTesla's Elon Musk'mislead investors SEC alleges

Elon Musk found himself in hot water Thursday when the US federal securities regulator filed a complaint against the Tesla CEO in Manhattan federal court for "false and misleading" tweets about taking the company private.

The SEC launched its probe in part to ascertain if Musk tweeted about taking the company private in order to hurt investors with short positions in the company's shares.

In the court filing, the SEC claims that "Musk knew or was reckless in not knowing that each of these statements was false and/or misleading because he did not have an adequate basis in fact for his assertions".

Musk, 47, is the public face of Tesla and JP Morgan analyst Ryan Brinkman questioned how easy it would be for the $50-billion manufacturer, which is still losing money, to raise funds at affordable rates without him. They are also seeking to prohibit him from heading any other publicly traded firm in the future.

The charges against Musk all stem from his decision on August 7 to tweet in the middle of day trading that Tesla was set to undergo a major change, writing: 'Am considering taking Tesla private at $420'. Musk said he was "deeply saddened and disappointed" by this "unjustified action".

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"His ego is so clearly tied to the company, so what would be best for Tesla's investors would be for him to realize the company is more important than his ego", Munster said. By August 25 Tesla announced it wouldn't go private, with Musk stating although shareholders broadly supported the move, there was "no proven path for most retail investors to own shares if we were private".

Barclays has warned that if Musk is forced to leave, it will send Tesla shares down another $130 - or 48 per cent from their current level.

"Elon's presence at the top of the company isn't required to maintain Tesla's brand equity", he said.

The complaint "alleges that Musk violated antifraud provisions of the federal securities laws, and seeks a permanent injunction, disgorgement, civil penalties, and a bar prohibiting Musk from serving as an officer or director of a public company", the SEC said in a statement. In its lawsuit, the SEC alleges he proposed the per-share valuation by assuming a 20-percent premium and rounding up to $420 "because he had recently learned about the number's significance in marijuana culture and thought his girlfriend 'would find it amusing, which admittedly is not a great reason to pick a price.'" Musk at the time was dating pop musician Grimes.

Shares in Tesla are expected to plummet following the announcement.

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The Department of Justice is now investigating whether to file criminal charges as well.

Tesla laid off 9 percent of its workforce this summer and has endured a mass exodus of executives, including heads of engineering, sales, supply-chain management, human resources and finance. A Tesla bond issue due in 2025 yields more than 8%, against 6% for the average junk bond, reflecting investor concerns about the company.

But extracting Musk from the company he has become synonymous with could devastate Tesla.

All of this suggests that investors may want to steer clear of Tesla shares. Despite this, we think the company will survive.

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