The Securities and Exchange Commission reached a settlement of fraud charges on Saturday with Tesla Inc. and Elon Musk that forces Musk’s removal as chairman of the Tesla board and the payment of $40 million in penalties.
Musk will pay $20 million of the penalty personally, and will be ineligible to be re-elected chairman for three years. Tesla will pay the rest and must name two new independent directors, one of which can be the new chair.
The SEC filed a complaint against Musk on Friday that alleged when he tweeted on Aug. 7 that he could take Tesla TSLA, -13.90% private at $420 per share — a substantial premium to its trading price at the time — he knew that the potential transaction was uncertain and subject to numerous contingencies. Instead Musk tweeted that funding for the transaction was “secured,” and that the only remaining uncertainty was a shareholder vote.
According to the SEC, Musk had not discussed specific deal terms, including price, with any potential financing partners, and his statements about the prospective transaction lacked an adequate basis in fact. Musk’s misleading tweets caused Tesla’s stock price to jump by more than 6% on Aug. 7, and led to significant market disruption, including hundreds of pages of complaints filed with the SEC, according to reporting by The Outline, whose reporters said they had obtained 147 pages of complaints about Musk from investors in Tesla.
See: Tesla investors complained to the SEC — and here’s what they said
Read also: Why legal experts say the SEC has a strong case against Musk
The SEC also charged Tesla on Saturday with failing to have in place the required disclosure controls and procedures relating to Musk’s tweets, a charge that Tesla also has agreed to settle and which will result in comprehensive corporate-governance modifications and other reforms at Tesla. In addition to Musk’s removal as chairman of the Tesla board, to be replaced by an independent chairman, Tesla will also be required to appoint two new independent directors to its board. If one of the new directors is also chairman, it could be only two new board members total.
Musk was expected to remain a member of the board of directors under terms of the settlement, which are subject to court approval. A Tesla spokeswoman did not immediately respond to a request for comment late Saturday.
Musk and Tesla agreed to settle the charges against them without admitting to nor denying the SEC’s allegations.
Joshua Mitts, an associate professor at Columbia Law School, told MarketWatch that the Saturday settlement was a “win-win.”
“The SEC,” he said, “achieves its goal of punishing and deterring securities fraud. Elon is only required to step down as chairman of Tesla’s board. And, most importantly, Tesla’s shareholders are better off [with] the appointment of two independent directors and the new committee of independent directors. That is really a key step, which shows the SEC is putting shareholders first.”
See also: The SEC vs. Elon Musk: What the lawsuit means right now for Tesla investors