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What Elon Can Learn from Mark Cuban About Fighting the SEC



Billionaire entrepreneur, NBA team owner and reality-TV fixture

Mark Cuban

had plenty of advice for Tesla on CNBC recently. He failed to offer counsel on the one subject about which he is uniquely qualified to speak: how to best the Securities and Exchange Commission in a legal battle.

Mr. Cuban, who ended up beating the agency in a jury trial, was happy to spell out one piece of advice at a Texas law-school forum back in 2014: “If you’ve got resources, fight ’em,” he said of the SEC, “because they’re not that smart.”

The two cases are perhaps less different than they seem. Mr. Cuban was accused of insider trading. As a shareholder in the inauspicious search site Mamma.com, he had gotten a heads-up from the CEO about a forthcoming transaction on unattractive terms. He dumped his stock, avoiding what the SEC said was $750,000 in losses.

A question for Mr. Cuban won’t be a question for Mr. Musk: whether he owes a fiduciary duty to fellow shareholders. As CEO, Mr. Musk surely does. Arguably he violated that duty when he tweeted that he had “secured” funding for a Tesla buyout when he hadn’t.

Beyond this, though, both cases involve definitions and rationales precious to the SEC that are less bright line-y than the agency likes to think, and that it has been loath to risk putting in front of a jury. These include, in Mr. Musk’s situation, whether the often flippant tweets of a Twitter-happy CEO should be considered “material” by shareholders—especially after a long run of dubious Musk tweets and statements that haven’t brought discipline from the SEC.

Also, neither defendant is a dentist from Larchmont; they are celebrity businessmen with deep pockets plus a reservoir of public goodwill. And both prosecutions feature an unfortunate dependence on foreign witnesses who can’t be compelled to testify. Mamma.com’s Canadian CEO declined to appear at Mr. Cuban’s trial, though he did submit to a video deposition, which the jury apparently found uncompelling next to testimony from Mr. Cuban in the flesh.

In Mr. Musk’s case, the government would likely seek the testimony of Saudi Arabia’s national sovereign wealth fund, which had discussed a buyout with Mr. Musk. Here’s guessing that high-ranking Saudi officials don’t give a flock about the SEC’s investigation and wouldn’t wish to participate in a prosecution of Mr. Musk.

To some who believe in the importance of the SEC’s mission against insider trading, Mr. Cuban’s acquittal was an example of jury nullification—jurors simply refusing to enforce the law against a celebrity defendant.

Equally salient for Mr. Musk’s lawyers, though, is the nine years that elapsed between Mr. Cuban’s 2004 stock sale and his 2013 acquittal. Nine years is likely to resolve outstanding questions about Tesla. If you are the SEC, stringing up Mr. Musk would have a lot more appeal if there are angry shareholders to assuage than if Mr. Musk is being hailed as this century’s Thomas Edison.

Which brings us to the pressing question of cash. Some believe a Tesla meltdown is a fait accompli because the equity markets won’t supply needed money while an investigation hangs over the company.

The premise is doubtful and Tesla should test it. Mr. Musk recently hired the folks at

Goldman Sachs

to advise on his pie-in-the-sky going-private transaction. They would be better employed beating the shrubbery for credible new investors to provide a couple billion to see the company through its time of troubles.

The Saudis are a place to start.

Warren Buffett

has performed such services in the past for companies under a cloud. Google and

Apple

are obvious candidates. The auto industry features big players who might make an investment and call it a strategic partnership.

Mr. Musk’s bailout of his related company Solar City two years ago with Tesla shareholder money showed that he understands just how much Tesla’s share price rests on his magical reputation as an unfailing capitalist genius. Now is a dangerous moment for the Musk bubble. As Elon himself seems to have understood earlier than others, the bubble is fraying and Tesla needs to scale back its ambitions to make and sell a car that can be sold at a profit, which the mass-market, $35,000 version of the Model 3 isn’t.

Mr. Musk appears to have convinced himself that this must be done without raising fresh capital. When the facts change, smart people change their minds. Right now, nothing would serve Tesla better than finding big-time investors who believe that such a transition is achievable, who aren’t put off by the SEC, and who are wiling to stump up money to help it happen.



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