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Tesla hit by flurry of downgrades after Elon Musk sued by SEC for fraud

Wall Street took Tesla's CEO to task as the go-private plan last month ignited a controversy that will now go before the courts
Elon Musk
Musk last month said he would take the company private and that funding had been 'secured'

Electric-car maker Tesla Inc (NASDAQ:TSLA) was hit by several downgrades on Friday after controversial CEO Elon Musk was sued by the US Securities and Exchange Commission for fraud over his now-abandoned plan to take the company private.

The controversy was triggered by a tweet from Musk last month about his go-private plan and that funding for the move had been "secured".

Musk responded to the SEC's suit by saying "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".

The tweet on his reaction appears to have since been removed.

Tesla itself was not named in the suit as a defendant, but its board issued a statement that they were “fully confident in Elon, his integrity, and his leadership of the company.”

The Wall Street Journal reported the SEC had crafted a deal for Musk, but his lawyers turned it down and they filed the case less than two months after his tweet.

Shares of Tesla were down 12.7% in the premarket to $269 after closing on Thursday 0.67% lower to $307.52.

READ: Tesla faces criminal probe by US over Elon Musk's statements on aborted go-private plan - Bloomberg

The cavalcade of reactions burst forth Friday.

Citi analyst Itay Michaeli downgraded Tesla to Sell from Neutral and lowered his price target to $225 from $356. "We think even after the post-close stock pullback (to $274), risk/reward is still tilted negatively," Citi said in a note to clients.

JP Morgan sees a "number of negative implications" for Tesla shares from the SEC suit. Analyst Ryan Brinkman reiterated an Underweight rating on Tesla with a $195 price target.

He wrote that the most significant negative relates to the SEC's request that the court prohibit Musk from serving as an officer or director of any public company, including Tesla. Such a move "could hasten the inevitable transition" of Tesla shares toward being valued based upon fundamentals alone, Brinkman informed investors in a research note.

Brinkman reiterated his belief that the Tesla's fundamentals "do not support a value close to the current trading price." Further, beyond this "key man risk" concern, which he believes "is of vital importance," he also see a number of other risks, including the potential for decreased confidence in the company on the part of investors, consumers and suppliers.

READ: Nomura Instinet downgrades Tesla shares and slashes price target by 25%

Tesla shares could lose $130 of 'Musk premium' if the SEC wins, Barclays said.The premium shareholders have been willing to pay for "future founder-driven business optionality" is likely to dissipate, Barclays analyst Brian Johnson said in a research note entitled "Lawsuit Secured."

The analyst reiterated an Underweight rating on the shares with a $210 price target. He believes that should the SEC be successful in barring Musk from serving as an officer or director, investors would focus back on the value of Tesla "as a niche automaker, rather than a founder-led likely disrupter of multiple industries."

The charges diminish the credibility of Musk as Tesla CEO, says Needham Needham analyst Rajvindra Gill, who kept his Underperform rating on Tesla, saying the downside in its stock is likely to continue.

The analyst contends that the latest charges by the SEC against Elon Musk for making "false and/or misleading statements" about taking the company private "all but eliminate" his credibility as a competent CEO.

Gill adds that the premium in the stock, which has been based on the "elusive" first mover advantage in electric vehicles is "rapidly shrinking" and that the hit to the company's brand cache linked with Musk may affect sales.

READ: Tesla chief Elon Musk faces lawsuit from short-seller Andrew Left of Citron Research

Oppenheimer analyst Colin Rusch was more cautious, telling investors in a research note that he believes two major variables are at play: How valuable is Musk to Tesla? And how much cash does the company need?

Rusch said next week's production and delivery numbers should provide insight into cash needs and the analyst also expects strong deliveries could help support its shares, noting legal worries will likely cap stock movement. Rusch has an Outperform rating on the shares.

The plan to go private was later dropped by Musk and investors have since filed a lawsuit over claims he misled investors.

The Justice Department is also investigating Musk over the issue.

Tesla is the world's biggest electric-car maker.

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