Elon Musk is a believer. In space travel, in clean energy, in massive engineering solutions to human problems. So the naysayers who don’t believe in the future of Tesla—which has struggled with production, labor, and debt issues—have always bugged him. On August 7, he announced a possible solution: Withdrawing from the public market and the scrutiny it brings. “Am considering taking Tesla private at $420. Funding secured,” he tweeted. The post confused analysts, reporters, investors, and Musk aficionados alike. $420 represented a substantial premium over the stock’s price that day—not to mention a bizarre connection with marijuana culture. Was he serious, or was it a joke?
It wasn’t a joke. Musk affirmed his plans in subsequent tweets and blog posts, suggesting that the deal was done pending a board vote and that individual investors would be able to retain their ownership. But according to the Securities and Exchange Commission, no legitimate plan ever existed. After an investigation into the matter, the SEC has charged Musk with securities fraud for misleading investors about the leveraged buyout.
The SEC filing contends that almost everything in the tweets was false or misleading. Musk had had casual discussions with a sovereign investment fund, which had already made a substantial purchase of Tesla shares. But the details had never been established, let alone solidified. Funding had not, in fact, been secured. According to documents described in the complaint, Tesla’s board and investor-relations team knew nothing about the matter before Musk had announced it. (The marijuana joke, however, was apparently real: Musk rounded up a 20 percent price-per-share premium to $420 because his girlfriend, the singer Grimes, “would find it funny, which admittedly is not a great reason to pick a price.”)
The consequences for Musk could be severe. The SEC’s lawsuit seeks to force Musk to relinquish gains from the alleged violations, to face civil penalties, and—most dire—to be prohibited from serving as an officer or director of a publicly-traded company. The last penalty may force Musk out of Tesla altogether.
If the facts in the SEC’s filing are true, it’s hard to imagine motives for actions this reckless. Whatever Elon Musk was thinking when he went public about taking Tesla private, perhaps there was a truth to the assertion, just not the one he intended: Despite his ambition and vision, Musk might not have the experience, or the temperament, to run a public company in the first place.
Apple, Amazon, Facebook, and Google are among the biggest companies in the world. That’s remarkable, but also a little disappointing. These companies make phones, ship retail goods, and hawk ads by mining your personal data. That’s not quite the future anyone dreamed of living—let alone the one that would conquer the world.
That’s part of the reason that Elon Musk has developed such a large following as a business leader. Instead of making smartphones somewhat larger, he made electric cars commercially viable. He commercialized reusable rockets and hopes to use them to send humans to the moon and to Mars. He wants to bore tunnels under cities to end traffic and to transport cargo supersonically in above-ground tubes. These are the dreams worth dreaming.
The way Musk dreams them is what got him into trouble with the SEC. With 22 million Twitter followers, he has a direct line to his fans. In December 2016, Musk tweeted, “Traffic is driving me nuts. Am going to build a tunnel boring machine and just start digging ...” Who doesn’t feel that way? The difference is, Musk actually followed through on the promise. “I am actually going to do this,” he added a few hours later. The Boring Company, a (still nascent) underground transit play, was the result. It currently has plans to dig and operate electric-sled tunnels in Los Angeles, Baltimore, and Chicago.
Moves like these have earned Musk a mythic persona, one that blends inventor-visionary with magnate-madman. That’s also why he’s often compared to Tony Stark, the industrialist alter-ego of Iron Man in the Marvel comics and movies.
The only problem is, Tony Stark is a fictional character. The playboy inventor turned selfless philanthropist is a fantasy for newsprint and silver screens, not a leadership strategy for executives. But if people start comparing you to a pop-culture hero who can fly, cheat death, and save the world through miracle machinery fashioned by his own hand, who couldn’t let it go to their head?
Finance Law Isn’t Ready for Elon Musk
In reality, Musk’s successes have been somewhat more modest, and far simpler to manage and operate than Tesla, let alone Stark Industries. Musk’s first company, the local advertising dotcom Zip2, was sold to Compaq in 1999; Musk pocketed $22 million from the sale. His next venture, PayPal, would eventually go public and then be sold to eBay in 2002 for $1.5 billion—of which Musk walked away with $165 million. But he wasn’t there for the IPO or the sale, having been ousted two years earlier over management disagreements. Peter Thiel took his place. SpaceX remains private. The Boring Company is a SpaceX subsidiary. That makes Tesla Musk’s only experience actively leading and managing a public company.
It’s been a rocky road. There’s no doubt that Tesla is largely responsible for transforming electric vehicles from a hibernating futurist’s dream into a reality. But the company has also faced serious challenges. It has had difficulty producing automobiles in the quantities common to legacy manufacturers, despite having exceeded the market capitalization of companies like GM and Ford. Those problems have also hampered its subsidiary solar-energy business. The company is burning through cash and awash in debt. It’s also faced labor and worker-safety issues in its manufacturing facilities.
Because Tesla is public, those struggles have been laid bare in a way that they wouldn’t have at a private firm like SpaceX. That appears to make Musk furious, an emotion he shows more than most CEOs: He bickers with the media who cover Tesla’s problems; he behaves combatively on Tesla earnings calls; he chalks his failures up to excruciating personal pain.
But perhaps most of all, Musk seems to get enraged by investors who bet against his company. The SEC filing alleges that much of Musk’s motivation for the hypothetical leveraged buy-out came from his rage at short sellers—investors who sell shares of a company they don’t own in the hopes that the price will drop, allowing them to buy the shares at a lower price and make a profit. “Ends negative propaganda from shorts,” Musk tweeted to a follower asking after the plan to go private. “Being public means there are large numbers of people who have incentive to attack the company,” he wrote in a company-wide email.
Musk’s irritation isn’t without ground. All companies endure short sellers, but by late spring of this year, Tesla’s short positions far exceeded those of even much larger companies—$10 billion worth for its roughly $50 billion market capitalization. The next highest short position was held in Apple, at $9.4 billion, but the company was worth more than 16 times Tesla’s value.
That circumstance would perturb any CEO. But Musk doesn’t seem capable of dealing with the matter like other chief executives. He stews and lashes out. He taunts short-sellers on Twitter. Some might wonder if that energy wouldn’t have been better spent fixing Tesla’s production and debt issues. Others could note that the SEC complaint only proves the shorts right—as I write this, Tesla stock has fallen 30 percent from its August 7 high, when Musk promised the $420 premium to take the company private.
Nobody can guess what Musk is really thinking, but I wonder if his commitment to the future isn’t incompatible with his job as the CEO of a publicly traded company. For an investor, a short sale isn’t a personal matter, really. It’s a financial instrument, grounded in a belief about the underlying security’s fundamentals. But Musk doesn’t appear able to see it that way. He can’t separate the company’s performance, and investors’ reaction to it, from his own aspirations for a future his enterprises help realize.
There’s a scene in the HBO drama Billions, a show about a U.S. attorney’s standoff with a fictional hedge fund, in which a trader and his boss watch a test flight run by a private space-travel company called Farpoint. Farpoint is fictional, but it is clearly modeled after Elon Musk’s SpaceX. Farpoint’s winsome CEO is aboard the test flight, and the hedge fund has shorted the company big.
“I’m rooting for him to get there,” the trader says. The countdown wanes and the rocket engines rumble promisingly. “I am too,” the cool-headed chief investment officer responds. “My bet is against his business model, not his vision.”
The launch explodes catastrophically, ending Farpoint’s ambitions—and its CEO’s life. Musk hasn’t crewed his own spacecraft (yet) but some of his ambitions might be equally hampered, even if his life remains secure and his fortune prodigious. Musk probably doesn’t see himself as above the law, but rather hampered by stupid statutes that stand in the way of the future. That might explain why the complaint speculates that, unless he is enjoined, Musk will violate again. In a press conference held yesterday, SEC representatives emphasized the matter, saying that “Neither celebrity status nor a reputation as a technological innovator provides an exemption from federal-securities laws.”
Most people aren’t fond of finance, but it serves a purpose. Securities markets decouple the ambitions, promises, and feelings of companies and their officers from the reality of their performance. They allow people to place bets for or against those promises, solely in order to profit on the results, rather than to reap the benefits of its success or suffer the ramifications of its failure. Say what you want about investment bankers and hedgies, but they’ll never crow at you about “changing the world” like the techies will. They just want to make money. That doesn’t make financiers noble, but it does align their actions with their intentions.
By contrast, today’s technology companies often buy in to their future visions to the point of blinkered obsession. Writing about the departure of Instagram’s founders from Facebook this week, Bloomberg’s Matt Levine observes that mission-driven corporate faith actually seems more sociopathic than good, old-fashioned shareholder value.
Elon Musk’s conviction feels similarly blinkered, but tragically worse. It’s not just that Musk believes in his vision to the point of frenzy, but that he can’t seem to wrap his head around the idea that anyone wouldn’t sign up for his cause. Startlingly, the Wall Street Journal reports that the SEC was close to reaching a settlement on the fraud charge, until Musk unexpectedly withdrew from the deal.
Theologizing technology might explain part of that conviction, but inexperience plays a part too. Before Tesla became successful, Musk never had to face the public crucible. He never led or managed a public firm. And he just can’t seem to decouple Tesla the business from the solar-and-electric future it promises. He doesn’t see short sellers as a bet against his business model, but against his vision. Who can imagine betting against the future of clean energy, self-driving cars, solar-powered homes?
The terrible irony is, that vision is indeed sound. Mercedes will make its entire line of vehicles electric by 2022. Ford is investing $11 billion in doing the same. VW will spend $25 billion on batteries in the coming years. Tesla proved that electric cars are desirable and viable. It’s just that Tesla itself might not realize that future. And now, thanks to his foolish commitment to vision over operation, Musk might not realize Tesla’s future either.
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