The SEC’s Lawsuit Against Elon Musk Explains the Weed Number

Elon Musk is being sued by the Securities and Exchange Commission (SEC) for fraud, according to court documents filed in Manhattan federal court on Thursday afternoon.

The Tesla CEO was being investigated for potentially misleading investors on August 7, 2018. Musk tweeted that he was “considering taking Tesla private at $420,” and had secured funding to do so.

“In truth and in fact, Musk had not even discussed, much less confirmed, key deal terms, including price, with any potential funding source,” the SEC wrote in its complaint.

Musk had claimed that Saudi Arabia’s sovereign wealth fund had offered funding.

“They first met with me at the beginning of 2017 to express this interest because of the important need to diversify away from oil,” Musk wrote in a Tesla blog post last month. “They then held several additional meetings with me over the next year to reiterate this interest and to try to move forward with a going private transaction.”

But according to the SEC’s investigation, “Musk did not communicate with representatives of the Fund again about a going-private transaction until August 10, three days after his August 7 statements.”

On August 2, 2018, Musk emailed Tesla’s board of directors expressing an interest in taking the company private. Being public, he wrote, subjected Tesla to attacks by short-sellers. Musk asked for the matter to be put to a vote within 30 days.

These comments were “false and misleading,” since Musk, according to the SEC, had never secured commitment from anyone to fund the move, nevertheless at a price of $420 per share.

The SEC also painfully explained Musk’s reasoning for setting share prices at $420, the weed number:

According to Musk, he calculated the $420 price per share based on a 20% premium over that day’s closing share price because he thought 20% was a “standard premium” in going-private transactions. This calculation resulted in a price of $419, and Musk stated that he rounded the price up to $420 because he had recently learned about the number’s significance in marijuana culture and thought his girlfriend “would find it funny, which admittedly is not a great reason to pick a price.”

“He did not discuss the content of the statements with anyone else prior to publishing them to his over 22 million Twitter followers and anyone else with access to the Internet,” the SEC wrote. “He also did not inform Nasdaq that he intended to make this public announcement, as Nasdaq rules required.”

Musk commented on the lawsuit in a statement: “This unjustified action by the SEC leaves me deeply saddened and disappointed. I have always taken action in the best interests of truth, transparency and investors. Integrity is the most important value in my life and the facts will show I never compromised this in any way.”