(this is a continuation in a series, read Part 1 here)

On Thursday, Elon lashed out against the SEC calling it the “Shortseller Enrichment Commission”.  And on Friday we learned that Elon had hired a top Washington litigation firm to represent him against the SEC (presumably the hire was done earlier than Friday), https://www.bloomberg.com/news/articles/2018-10-05/musk-hires-williams-connolly-chairman-butswinkas-in-sec-case.

Further, earlier in the week we found out that the judge reviewing the Elon/SEC settlement has asked for a joint letter (no longer than 10 pages) from Elon and the SEC the justifies the settlement.  I would appear that discussions between Elon and the SEC in drafting a joint letter have perhaps fallen apart or are at least in great tension.  In Elon’s view, he most likely think he has done no wrong.  In fact, Elon believes he acted in full integrity fully believing funding was secured and also he was acting in the best interests of shareholders to fully disclose his intentions to consider going private.  The SEC was probably pushing for Elon to admit some kind of guilt in the joint letter, but Elon was not going to have any of that.  For Elon, I’d imagine that he is settling purely because not settling would be a bigger distraction and harm to his company, employees and shareholders.  The SEC is likely playing hardball with the joint letter, and thus Elon being pushed into a corner has hired some top litigators.

If the settlement between Elon and the SEC falls apart, which there appears a growing possibility that it does, then things can get very messy.

Elon has made it clear that he has done nothing wrong, and if Elon chooses to fight the SEC, then the SEC will fight back.  And they will fight back hard.

The reason the SEC will fight back hard is because they feel it’s their moral obligation to do so.  The SEC believes they are commissioned with the responsibility to protect shareholders and the public.  And they’ve concluded that Elon is a dangerous CEO, who tweets out harmful things and isn’t held accountable.  As I shared in Part 1, the tipping point incident was Elon’s pedo tweets where he accused Vernon Unsworth of being a “pedo”, later apologized somewhat, but then went after Vernon again.  I have yet to meet a Elon fan and supporter who’s been able to successfully defend Elon’s actions with those tweets.

The problem for the SEC is that they can’t go after Elon for calling some guy a “pedo”.  Or for lashing out against someone on Twitter.  That’s beyond the SEC’s scope of duty.  However, all that plays into the SEC’s conclusion that Elon needs to be reigned in.

The SEC does however have legal jurisdiction to prosecute material information shared by officers of public companies.  And so the SEC has decided to go after Elon, not purely because of his “funding secured” tweet, but more so because they are trying to accomplish a much larger objective, which is to control what they have deemed to be a CEO out of control.

The problem with this approach is that the SEC really is stepping out of their bounds by allowing other information to impact and affect their view of the situation.  However, there’s a larger problem at hand.  The world is so hyper-connected that with big news it seems like everyone, everywhere knows what’s going on.  In other words, Elon has been big news, big enough to be on the cover of all the major new sites in the world.  For example, for a period of 6 months, I can recall Elon was on the front page of cnn.com practically every week, and 95% of the coverage was negative (this is my recollection but I didn’t keep track).  in fact, I remember a period of one week where Elon was portrayed negatively on the front page of Drudge Report, CNN, NY Times, Breitbart, WSJ, CNBC, Bloomberg, and many more.  What’s interesting was the liberal and conservative news outlets were all ganging up on Elon.

(Now, some will blame shortsellers and the media for this, but in Part 3 I’ll share why I take a different perspective and what Tesla can do about it.)

The point being is that the negativity around Elon permeated all circles of society, where basically everyone and anyone knew about Elon… and if shifted their view of him toward being cynical and negative of him.

You might think that the SEC is immune to this, but they aren’t.  The SEC is just made up of people who also browse the Internet, news sites and social media.  They are impacted by the same negative stories as everyone else.  Thus, the same shift of public opinion that shifted people’s view against Elon also likely impacted those at the SEC.

It’s in that context that Elon tweeted “funding secured”, and it’s in that context that the SEC started their investigation.  The SEC was likely already biased against Elon before the investigation started.  And the investigation just gave them the opportunity to do what they knew they ought to do, which was to try to reign in Elon.

Now it’s true the SEC could have been influenced by others or even directed to look into Elon’s tweet.  This could have been from shortsellers, media, or even politicians in high places.  However, I believe it’s the existing bias of the SEC against Elon that ultimately influenced the investigation and led the SEC to go after overly harsh penalties against Elon.  In other words, the SEC wasn’t necessarily trying to fix the “funding secured” tweet, they wanted assurance that Elon would be put under control.  That’s why they demanded him to step down from Chairman and also for Tesla to add two independent board members.

However, from Elon’s perspective all this seems like an unjust attack.  Elon knows that he can justify his “funding secured” tweet.  When Elon met multiple times with the head of the Saudi fund, it was clear that the meetings were between two top decision makers.  It’s kind of like two Presidents of two countries coming together, knowing that the decisions they make they can execute.  In that sense, when the Saudi fund head made multiple approaches to help take Tesla private and that they would be help fund, Elon knew that this was not some low level fund rep.  Rather, this was a top decision maker who was speaking on behalf of the fund, and thus Elon was more than justified (at least in his view) to view this as the Saudi fund offering funding.  On top of this, it was very clear to Elon that only 1/3 or so of shareholders would need to sell.  And it could be much less.  So, in Elon’s mind he didn’t think he needed that much funding to take Tesla private.  All this factors into Elon’s conclusion that he had funding secured.  And I think Elon thinks he can more than defend this conclusion as well.

To further make things complicated, I think Elon is rightfully enraged at how overbearing and unreasonable the SEC is being toward Elon.  For the SEC to file a case seeking to bar Elon from ever being an officer of a public company is completely ridiculous.  Elon didn’t make a maliciously deceitful statement.  He didn’t profit from anything he said.  He said what he did because he wanted to be forthright and he only said what he truly believed.  There’s no part of this where Elon tried to trick people or deceive people intentionally.  The SEC should go after those people harshly.  But for some reason, the SEC is going after Elon like he’s some criminal.  This is completely uncalled for and baffling, at least in Elon’s perspective.  This is why what the SEC is doing is so outraging for Elon.  And thus, why Elon calls them the “Shortseller Enrichment Commission.”  In other words, he sees them as being completely unreasonable, crooked and corrupt.

In my view, the SEC would never seek the extreme type of punishment it’s seeking if it was just about the “funding secured” tweet.  That tweet does not deserve a lifetime ban from being an officer in a public company.  It’s like sending a guy to jail for a lifetime with no chance of parole for smoking a joint.  Completely insane.

The reason the SEC is seeking such extreme punishment is not solely because of the “funding secured” tweet, but it’s because of the entire picture of Elon’s behavior on Twitter this year.  And most of the tweets the SEC knows it can’t do anything about, but Elon’s behavior is unacceptable for the SEC, so thus the SEC cracks down using the “funding secured” tweet as an excuse to lay a hammer down on Elon.  This is because ultimately, the SEC strongly believes that the extreme punishment it’s seeking is going to resolve the bigger problem it’s trying to solve, which is to reign in a CEO out of control.

In the next part of this series, I’ll go into why I think blaming shortsellers and the media is counterproductive and I’ll lay the foundation for what I think Elon and Tesla need to do.

Note: I’d love to hear your thoughts and discuss.  Feel free to comment below.