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Mark Cuban Prodded Tesla's Musk to Settle SEC Charges

The Wall Street Journal. logo The Wall Street Journal. 10/4/2018
a close up of Elon Musk© robyn beck/Agence France-Presse/Getty Images Elon Musk

A 15-minute phone call from billionaire Mark Cuban helped break an impasse between Tesla Inc. Chief Executive Officer Elon Musk and federal securities regulators on charges that he misled investors in an August tweet saying Tesla would go private at $420 a share.

Late last Thursday night—after Mr. Musk initially walked away from an agreement to settle the civil Securities and Exchange Commission charges—one of his lawyers asked Mr. Cuban, owner of the Dallas Mavericks, to prod Mr. Musk to reconsider, people familiar with the call say.

Mr. Cuban, who won a five-year battle with the SEC after it charged him with insider trading a decade ago, told Mr. Musk in the call that he would face a long court fight that would take him away from managing his companies. Based on his own experience, Mr. Cuban told Mr. Musk of the difficulties he had endured during multiyear litigation with the SEC, a person close to the situation said.

Mr. Cuban called at the behest of Chris Clark, one of Mr. Musk’s lawyers who represented Mr. Cuban in his dispute with the SEC. He advised Mr. Musk on the phone that a settlement wouldn’t be as damaging as a court fight with the agency.

“I explained where the SEC used questionable practices in my case, and how he could expect the same,” Mr. Cuban said in an email Wednesday night. “I asked him if he could name five people who had settled with the SEC, knowing he wouldn’t be able to name any.”

The SEC has declined over the years to publicly respond to Mr. Cuban’s attacks on the agency.

The call from Mr. Cuban played a major role in changing Mr. Musk’s attitude and helped persuade him to agree to settle the SEC case, the people familiar with the matter said.

Tesla didn’t have an immediate comment while Mr. Musk didn’t respond to requests for comment.

The insider-trading charges against Mr. Cuban were dropped after a Texas federal jury ruled in his favor in 2013. The SEC had sued Mr. Cuban in November 2008. The SEC said the verdict wouldn’t “deter us from bringing and trying cases where we believe defendants have violated the federal securities laws."

In the past, Mr. Cuban has been vocal in criticizing the SEC. In public statements he has blasted the agency’s tactics, accusing it of “prosecutorial misconduct” and saying the charges against him were politically driven.

The call was a turning point in a dramatic 48-hour roller coaster ride for Tesla investors regarding the SEC charges. At 8 a.m. last Thursday, the SEC was set to announce a settlement with Mr. Musk over the Aug. 7 tweet when one of Mr. Musk’s lawyers, Steven Farina, called the SEC to say Mr. Musk had changed his mind, people close to the situation said. Mr. Farina declined to comment.

It’s far from the first time that an executive has given advice to a peer in a jam. In 1994, Berkshire Hathaway Inc.’s Warren Buffett famously called the newly installed chairman of Kidder Peabody Group Inc. to provide advice about running a troubled securities firm. Mr. Buffett previously had been appointed interim chairman of Salomon Inc. in a bond-trading scandal.

In the Musk matter, the SEC lawyers on the case, who had previously received approval for the settlement from the agency’s five commissioners, pulled together a new complaint and won approval on the action from the commission, which happened to be meeting that day on unrelated matters.

The SEC filed the lawsuit in a New York federal court after the stock market closed last Thursday, accusing Mr. Musk of knowingly making false and misleading statements to investors.

Early Friday morning, after the call from Mr. Cuban, the talks were back on. Mr. Musk’s lawyers emailed the SEC’s enforcement directors to say they wanted to talk again about the deal he had just abandoned, people close to the situation said.

The new agreement called for Mr. Musk to give up his role as Tesla chairman for three, rather than two, years, and to pay a personal $20 million fine, rather than the $10 million fine under the prior settlement. In addition, Tesla itself agreed to pay a $20 million fine.

The settlement must be approved by a judge in the U.S. District Court for the Southern District of New York. On Thursday, U.S. District Judge Alison Nathan asked attorneys for Mr. Musk and the SEC to file a joint letter by Oct. 11 “explaining why the court should approved the proposed consent judgment.” Such settlements are routinely approved by the courts, and the judge said it was her regular practice to request a justification letter.

The SEC had pushed the case with extraordinary speed. The regulator interviewed Mr. Musk on Aug. 29, then called his lawyers with a settlement demand on Sept. 10, the person said.

In between that time, Mr. Musk’s lawyers met with the SEC to try to persuade the agency not to bring a case. The meeting came just hours after Mr. Musk appeared to take a puff from a marijuana cigarette on a live interview broadcast on YouTube.

The SEC’s lawyers routinely said they needed to resolve the case by the end of September, which is when the federal fiscal year closes, according to people familiar with the probe.

Write to Susan Pulliam at susan.pulliam@wsj.com,Dave Michaels at dave.michaels@wsj.com and Tim Higgins at Tim.Higgins@WSJ.com

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