Stephanie Avakian, the US Securities and Exchange Commission’s co-director of Enforcement, announces their decision to sue Tesla CEO Elon Musk. Image Credit: AFP

New York: Shares of Tesla Inc dived 13 per cent in early trading on Friday as Wall Street worried a lawsuit from US regulators could force Chief Executive Elon Musk to step down and make it difficult for the loss-making carmaker to raise more capital.

The US Securities and Exchange Commission on Thursday accused Musk of fraud and sought to remove him from his role saying he made a series of “false and misleading” tweets about potentially taking the company private.

At least five research firms said Musk might have to resign following the lawsuit.

Some analysts said SEC’s action was the beginning of a legal battle with authorities, short sellers and other investors over Musk’s actions that could cost Tesla heavily.

There’s a 50-50 chance Musk gets removed as CEO but there’s a 95 per cent chance that he stays at the company. This may give the board the backbone to put Musk in a visionary role.”

 - Gene Munster | Managing partner, Loup Ventures

“The SEC civil action may lead to Musk’s exit from Tesla (either permanently or temporarily) and the Musk premium in the shares dissipating,” Barclays analyst Brian Johnson said.

Musk, 47, is the public face of Tesla, and has driven the company to the verge of profitability with a costly ramp-up of production of its Model 3 sedan over the past year.

The Silicon Valley billionaire, who within three weeks of the tweets had abandoned the plan to delist Tesla, said overnight he had done nothing wrong and the company’s board reiterated its support for him.

The lawsuit was filed after a proposed settlement with the SEC fell apart, media reports said.

Musk refused to pay a nominal fine and give up the chairman role for two years as part of a settlement offered by the SEC, CNBC reported.

“It will be too damaging to Tesla for him to be removed fully,” analyst Ivan Fienseth from Tigress said.

“In order for Tesla to raise money I think investors will want Musk to stay involved but have more controls in place.” Shares were last down 12.4 pct at $269.12 in early trading, which would wipe about $7 billion off Tesla’s market value.

Gene Munster, managing partner at venture capital firm Loup Ventures, said the lawsuit adds further distraction at a critical 6-month juncture in the company’s viability.

“Despite this, we think the company will survive,” he said.

The SEC’s lawsuit, filed in Manhattan federal court, caps a tumultuous two months set in motion on Aug. 7 when Musk told his more than 22 million Twitter followers that he might take Tesla private at $420 per share, with “funding secured”.

The regulator charged that Musk “knew or was reckless in not knowing” that his tweets were false and misleading.

Jeffrey Osborne, an analyst at brokerage Cowen, said investing in Tesla equity and bonds over the past few weeks had been “a game of choose your own adventure”.

“The ball is in the Board’s court now and it remains to be seen what will happen next,” he said.