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John Engle
John Engle
Articles (208) 

Tesla: Elon Musk Pelts His Glass House With Stones

A tirade against short sellers exposes the CEO’s own dubious market behavior

October 11, 2018 | About:

The saying “People who live in a glass house shouldn’t throw stones” has resonated down through the generations thanks to its inherent truth. It is fundamentally unwise for a person to criticize others for acts they too are guilty of committing.

Elon Musk, CEO of Tesla Inc. (NASDAQ:TSLA), would be wise to heed that age-old advice. A recent Twitter tirade against short selling, in which he called for the practice to be outlawed, has exposed the temperamental entrepreneur to further legal problems of his own, and shines a light on his own history as a bad actor in the market.

Tweetstorm of the century

Musk is no stranger to the tweetstorm. He has frequently resorted to them to excoriate critics and laud his own achievements. Last week, he embarked on his latest Twitter rant, targeting a group that has long provoked his ire: short sellers.

Across a series of tweets, Musk accused short sellers of being “value destroyers” and of having a negative impact on economic growth. He even claimed, entirely without evidence, that short sellers contribute to the wealth divide by scaring private companies off going public.

Of course, Musk’s Twitter tantrum attracted a lot of attention, and not of the kind he was apparently hoping for. Indeed, even some of his most ardent boosters within the investment community, such as ARK Invest’s Cathie Wood, challenged Musk’s view of short selling, pointing out correctly (and uncontroversially) that “shorts and longs make the market for stocks.”

The simple fact is Musk is dead wrong about short selling.

A house made of glass

Musk’s tirade only served to worry the market further, sending shares tumbling. It sparked fears that Musk might not abide by the terms of the settlement he made with the Securities and Exchange Commission, which some worried might be jeopardized by his insulting them directly, calling them the “Short Seller Enrichment Commission” during his tweetstorm.

We opined in a recent research note that the SEC would likely take a dim view of such behavior, and might even be tempted to throw out the settlement deal. After all, the SEC’s securities fraud complaint alleged that Musk’s abortive take-private effort had been precipitated by a desire to burn the shorts. In the end, discretion won out and the SEC filed its joint letter with Musk in support of the deal. Now it is up to the presiding federal judge to decide whether to accept it.

With friends like these

Musk’s glass house took another pelting this week when CleanTechnica published a poorly researched article on Tesla short sellers. The article alleges that short sellers may be resorting to illegal (or highly questionable) trading tactics to drive Tesla shares down. One market-moving tactic highlighted involves using the thinly traded premarket session as an opportunity to put downward pressure on the share price.

It is ironic that this tactic should get a mention, considering it has been proven Musk himself has used premarket buying to push Tesla’s share price upward. Musk, blissfully ignorant of the perilous state of his glass house, was happy to throw yet another stone, “liking” the highly questionable CleanTechnica article when it was posted to Twitter.

Other dubious dealings

Musk’s choice to go after supposedly bad market actors makes even less sense in light of other past actions of his. While the Department of Justice and SEC continue their investigations of Musk and Tesla for acts that may be outright illegal, it is also worth considering the gray areas Musk has trod in the recent past.

From exaggerations to outright lies, Musk has used his public reach and reputation to pump up Tesla shares. He has “debuted” products such as solar roof tiles to great fanfare, despite the fact these products do not actually exist. And he has marketed services such as battery swapping that he knew in advance would never be practical.

If short sellers are to be damned for criticizing and a attacking a company, then perhaps pumping stock by means of flimflam should also be illegal.

Verdict

Tesla is in a lot of trouble. Its CEO is in even more trouble. The current SEC settlement will likely stick, but we doubt Musk will be able to resist breaking its terms ere long. In the meantime, the company he leads faces ever-greater operational and financial stresses.

Investors should not bet on this stock, this company or this CEO.

Disclosure: Short TSLA via long-dated put options.

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About the author:

John Engle
John Engle is President of Almington Capital - Merchant Bankers. John specializes in value and special situation strategies. He holds a bachelor's degree in economics from Trinity College Dublin and an MBA from the University of Oxford.

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