"I
can't imagine that the enforcement division hasn't opened a
file, that they are not calling his counsel or him and
saying 'we would like whatever papers you have about this,
if you have written anything down, if you have talked to
lenders, if you have materials about that we would like to
see them,'" said Tom Gorman, a former senior enforcement
attorney with the SEC and a partner at Dorsey & Whitney
in Washington, D.C. "'And right after we have finished
seeing all that stuff, we would like to talk to you.'"
Investors
aren't so convinced that Musk has actually secured funding.
If not, that would spell big trouble for both Musk and his
company.
"There
is skepticism as to where this money comes from. It doesn't
make sense," Efraim Levy, an analyst at CFRA, told CNBC.
"The reason it is trading at a discount is because of
uncertainty as to whether the deal will come to fruition. If
it doesn't come through, the stock is going to crater."
The
SEC's rule 14e-8 basically prohibits publicly traded
companies from announcing plans to buy or sell securities if
executives don't intend to follow through, don't have the
means to complete the deal or are flat out trying to
manipulate the stock price.
§
240.14e-8 Prohibited conduct in connection with
pre-commencement communications.
It
is a fraudulent, deceptive or manipulative act or practice
within the meaning of section 14(e) of the Act ( 15 U.S.C.
78n) for any person to publicly announce that the person
(or a party on whose behalf the person is acting) plans to
make a tender offer that has not yet been commenced, if
the person:
(a)
Is making the announcement of a potential tender offer
without the intention to commence the offer within a
reasonable time and complete the offer;
(b)
Intends, directly or indirectly, for the announcement to
manipulate the market price of the stock of the bidder or
subject company; or
(c)
Does not have the reasonable belief that the person will
have the means to purchase securities to complete the
offer.
"He
is claiming there is a specific source of the funding so
that had better be true. He has also claimed there is a
specific amount available for funding. That has to be true.
Otherwise, even if it's not manipulation it would be fraud,
so he's got two potential areas of difficulty right there,"
former SEC Chairman Harvey Pitt told CNBC.
Tesla still
hasn't said where it's getting the
more than $71 billion it would cost to take the company
private. Wall Street bankers also don't know, suggesting
Musk has secured financing elsewhere. But that seems
implausible given the size of the deal, which would require
multiple banks, and cult-like interest in Musk and Tesla,
dealmakers and analysts say.
"News
of the deal would have leaked had Tesla already held
discussions to secure funding," UBS analyst Colin Langan
wrote in a research note Tuesday.
Musk's
first tweet at 12:48 p.m. — "Am considering taking Tesla
private at $420. Funding secured" — started a trading frenzy
that drove shares to an intraday high of $387.49 — $45.47
above Monday's closing price. That comes to $7.72 billion
with its 169.8 million shares outstanding, more than enough
to squeeze short sellers who bet the price would fall.
Musk's
frequent complaints about "relentless attacks from short
sellers" have raised questions about whether or not he was
intentionally trying to drive the shares higher, which would
meet the definition of market manipulation and carry
possible criminal penalties, securities lawyers say.
The
comments also might ease
some financial pressure on the
carmaker by moving an important convertible bond above its
conversion price. If Tesla's shares are above $359.87 when
the debt matures Dec. 1, the bondholders can decide to
convert the debt into stock rather than triggering a cash
payout of $920 million when the debt is due come March.
Moody's
specifically cited that bond issuance and the company's cash
burn rate as reasons for downgrading Tesla's credit rating
in March.
Tesla's
skeptics have called into question the state of the
company's financial position. It lost nearly $2 billion last
year, and so far this year it burned through about $1.8
billion in cash after capital investments through two
quarters. The company had $2.2 billion in cash at the end of
the June quarter.
"If
his comments were issued for the purpose of moving the price
of the stock, that could be manipulation. It could also be
securities fraud," Pitt, now CEO of consulting firm Kalorama
Partners, told CNBC's "Squawk
Box." "The use of the specific price for a potential
going private transaction is highly unprecedented. And
therefore raises significant questions about what his intent
was."
If
Musk's statements weren't true, he runs the risk of paying
damages to investors who lost money on his tweets as well as
criminal prosecution, Pitt said.
Peter
Henning, a law professor at Wayne State University, called
it "backwards corporate governance."
"You
don't announce a price and then negotiate. There are a lot
steps left in this," he said. "There is a whole process they
have to go through or they are going to get the daylights
sued out of them."
Investors,
meanwhile, are still confused.
Tesla's
stock price is a good gauge of how much investors believe
Musk. In general, if investors are confident in a deal,
shares will rise close to whatever offering price is
announced, which would be $420 in this case.
"However,
if investors think there''s a 50/50 chance the deal with go
through, the price will walk up halfway, between $340 and
$420, which would be $380," Yale University finance
professor Jacob Thomas told CNBC. "Given a post-tweet price
of $380, roughly speaking, investors think the probability
is about 50 percent."
As
investors confidence fluctuates, so does the price, rising
toward $420 the more convinced they are or back to $340 if
they are skeptical, he said.
Tesla's
stock fell 2.4 percent Wednesday to close at $370.34 a
share.
— CNBC's
Berkeley Lovelace, Tae Kim, Alex Sherman and Hugh Son
contributed to this article.