Tesla (TSLA): The Stock Selloff Is an Overreaction - Here’s Why

Elon Musk smoking weed on

Tesla shares plunged Friday in the first session since U.S. securities regulators sued chief Elon Musk for fraud, with the company shedding more than 10 per cent as USA stocks retreated.

The SEC is suing Musk for allegedly misleading investors when he wrote in an August 7 tweet that he had "funding secured" to take Tesla private at $420 per share.

Elon Musk was of the belief that he would be able to take Tesla private at the time he posted his now infamous $420-a-share tweet back in August, according to a new report.

The SEC claims Musk had not lined up backers and that he predicted the $420-per-share price based on a 20 per cent premium to the previous day's closing rate, because he thought this would be the typical uplift paid by a bidder taking a firm private.

The regulator charged that Musk "knew or was reckless in not knowing" that his tweets were false and misleading and that the chief executive officer tweeted the figure to impress his girlfriend, the rapper Grimes.

- Tesla investors have taken a wild ride as Wall Street values the promise of one of the world's leading electric auto makers, the hurdles the company faces as it tries to become a world-class manufacturer, and a mercurial CEO who can get the market buzzing with a single tweet. More seriously for Musk, and Tesla, they can ban a director from serving as an officer in a public company - a measure they are pursuing against Musk.

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Tesla investors probably would have welcomed such a pact because it would have left him in place as CEO. Musk said he was "deeply saddened and disappointed" by this "unjustified action". "Integrity is the most important value in my life and the facts will show I never compromised this in any way".

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

There were bumps in the road, like when Musk snapped at analysts during a company conference call and when he attacked a British diver who had helped rescue children who were trapped in a cave in Thailand.

Tesla's lofty stock valuation exceeding that of much larger automakers owes to investor faith in Mr. Musk's supposed magic. The SEC's civil complaint made a pretty "straightforward" case that Musk violated securities law, according to Lee Richards, a former securities law prosecutor and founding partner of Richards Kibbe & Orbe LLP.

'Despite this, we think the company will survive, ' he said. Ultimately, Musk took the blame, explaining that the company relied too heavily upon automation. One prominent Silicon Valley investor, who spoke on condition of anonymity to offer his candid assessment of the company, said Tesla faced a "total vacuum" of capability and confidence if Musk was kicked out.

Analysts and experts told CNN the SEC lawsuit brings a scourge of uncertainties to Tesla (TSLA), which is already grappling with intense business pressure.

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