When Tesla CEO Elon Musk tweeted last month that funding had been secured for a $70 billion go-private effort, it appeared he may have just pulled off a huge coup — or would soon be facing an SEC investigation.  

It turned out to be the latter.

Musk decided to settle with the Securities and Exchange Commission on Saturday, according to reports.

He'll step down as chairman for three years and pay a $20 million fine. Tesla will also pay a $20 million fine, get some new governance rules and the addition of two independent directors. Musk will stay on as CEO and keep a seat on the board.

Musk's decision comes two days after declaring that he would not settle with the SEC — although he paid the price with a slightly harsher punishment, according to The New York Times. As per the settlement, Musk "neither admitted nor denied misleading investors under the civil fraud charge," which suggests he can't deny wrongdoing at a later time.

The majority of SEC civil actions result in settlement — and regulatory ousters are rare. 

Tesla stock has dropped 13 percent since the SEC lawsuit.   

The $420 "funding secured" tweet 

This was a civil fraud charge that focused solely on Musk's "funding secured" go-private tweet from last month and whether it misled investors.  

The SEC suit showed that no formal offer at any specific price was ever made to Musk or the board.

According to Musk in the SEC document, the $420 price is based on a 20 percent premium over that day’s closing share price (that would be $419), rounded up to $420 because Musk "had recently learned about the number’s significance in marijuana culture." According to the SEC document, Musk believed his girlfriend would find the 420 figure "funny, which admittedly is not a great reason to pick a price.”

It's that amateur level of criminality that allowed the SEC to get this narrowly focused fraud claim filed in a relatively quick two months. It was a straightforward case.

Board supports Musk

Tesla's board of directors issued a statement on Thursday evening supporting Musk: “Tesla and the board of directors are fully confident in Elon, his integrity, and his leadership of the company, which has resulted in the most successful U.S. auto company in over a century. Our focus remains on the continued ramp of Model 3 production and delivering for our customers, shareholders and employees.”

A board of directors' foremost fiduciary responsibility is to act in the best interest of its shareholders. Tesla's board members are Brad Buss, Robyn Denholm, Ira Ehrenpreis, Antonio Gracias, James Rupert Murdoch, the CEO of Twenty-First Century Fox, and Linda Johnson Rice, chairman and CEO of Johnson Publishing Company.

The company was not charged with fraud.

The officer and director bar (sounds better than it is)

The SEC suit sought relief against Musk in the form of "orders of disgorgement, along with prejudgment interest, civil penalties, and an officer and director bar against Musk."

The standard for an O&D bar is when an officer or director of any publicly held firm exhibits “unfitness” to serve. 

Typically, the SEC seeks permanent O&D bars or five-year durations and has expanded the punishment to include outside directors "with substantially less involvement in the company’s day-to-day operations." In other words, board members can be barred for ignoring red flags in governance.   

Luis Aguilar, a commissioner at the SEC, noted in a 2012 speech, "I've noticed how hard defendants fight to avoid officer and director bars. It is one of the sanctions that they fear the most, which is what precisely makes it one of the most effective sanctions available." 

What now? 

Expect fewer tweets from Musk.

This suit was a civil claim and leaves open the possibility that the SEC is launching other investigations on more complicated issues or that the Department of Justice will get involved. Other Musk activities the SEC might possibly investigate include the SolarCity acquisition, solar roof tiles and Model 3 run rates.    

Tesla is going to need capital to grow. SEC investigations inhibit the ability to raise capital in public markets.

Robert Mueller, back when he was director of the FBI in 2012, stated that securities fraud "poses a great challenge, because our free market economy and, indeed, our whole way of life, are built on trust — trust in the markets, and trust in our fellow citizens. Financial fraud undermines that trust, with severe consequences: consequences such as wasted taxpayer dollars, higher insurance premiums, and increased business costs — to say nothing of the harm to the victims themselves."   


Read a summary of the SEC charges against Musk here.

Read a timeline of Tesla's privatization saga here.