SolarCity’s Liquidity Crisis Reveals Elon Musk’s Nepotism

On October 28, 2019, groundbreaking revelations emerged regarding Tesla’s 2016 acquisition of SolarCity.

Those recently uncovered details spell disaster for Tesla in its ongoing lawsuit against the company’s shareholders.

But more than that, the new information raises serious questions about Musk’s business ethics, casting a dark shadow on whether the government should entrust the billionaire with taxpayer money moving forward.

Newly unveiled emails between Elon Musk and SolarCity executive Brad Buss clearly indicate that the Tesla CEO was well aware SolarCity faced a severe liquidity crisis in the lead up to the company’s merger with Tesla.

During his communication with Buss, Musk stated that “SolarCity solving its liquidity crisis” needed to happen to change investor sentiment toward a potential merger. SolarCity was running out of money, and Musk knew it.

Additionally, Musk later admitted that even as late as June 2019, the company’s glass solar roof tiles remained commercially infeasible.

How, then, did Musk manage to convince the entire Tesla Board to acquire SolarCity — a company that spent $659 million in Q1 of 2016 and had no viable means to turn a profit? According to the plaintiffs in the pending lawsuit — Tesla shareholders — the $2.6 billion acquisition was approved only because Musk misrepresented the financial health of SolarCity.

Essentially, Musk has been accused of deliberately shielding the solar energy company’s myriad financial concerns from the board and falsely claiming SolarCity was closer to fiscal solvency than it actually was.

It’s a damning accusation — and, in light of the recently revealed evidence, it’s becoming ever-increasingly more plausible.

If true, Musk’s decision to mislead the board would be a stunning breach of the CEO’s fiduciary responsibilities toward Tesla investors.

By acquiring SolarCity, Tesla also assumed the nearly $3 billion of the firm’s debt.

That’s an enormous burden for any single company to take on, especially Tesla — a company that has itself struggled mightily in the past to remain profitable. By choosing to acquire SolarCity, the Tesla Board no doubt took an enormous gamble, potentially threatening the future of its own company. And if Musk wasn’t transparent regarding the true nature of SolarCity’s financials, he would have exposed his investors to a greater, unnecessary risk of ruin.

Musk surely recognized the company for what it was — a bad investment. So, why would Musk endanger the financial security of Tesla to save an unprofitable, failing solar energy company like SolarCity?

For that question, there’s a simple answer: blatant nepotism.

When it comes to the success of the solar panel company, the Tesla CEO is anything but unbiased. In fact, SolarCity was founded by Lyndon and Peter Rive — Musk’s cousins. His brother, Kimbal Musk, served on the board of the company. Musk’s good friend, Antonio Gracias, was a prominent investor as well.

A large portion of Musk’s entourage had a vested interest in the success of SolarCity. Yet, Elon’s personal contributions to the firm could only go so far. To save both SolarCity and his friend’s investments, he would have to convince the board to leverage Tesla. And that’s precisely what he managed to do.

In light of these facts, Musk likely recognized that SolarCity was akin to a financial Titanic but decided to place Tesla at risk anyway. Musk was clearly negligent, and his actions bode poorly for his future with Tesla’s investors.

Given his substandard business practices, the government should think again before they subsidize Musk’s adventures — whether they be electric cars, rocket launches, or underground tunnels.

After all, taxpayers can’t be certain if Musk will make more bad business decisions just to protect his personal interests.

Michael Busler, Ph.D., is a public policy analyst and a professor of finance at Stockton University in Galloway, New Jersey, where he teaches undergraduate and graduate courses in finance and economics. He has written op-ed columns in major newspapers for more than 35 years. @mbusler

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