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Tesla's stock shorts earn $500 million as Elon Musk tweet may endanger deal with SEC, says S3 Partners

Musk and the SEC must justify the deal they reach to settle charges of fraud against the Tesla CEO
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Tesla stock shorts reap millions of dollars off a tweet by Elon Musk attacking the SEC

Short sellers of Tesla Inc (NASDAQ:TSLA) reaped hundreds of millions of dollars when a tweet by company CEO Elon Musk slamming US regulators drove the price of the stock even lower on Friday, a report by S3 Partners said.

Musk dubbed the US Securities and Exchange Commission the "Shortseller Enrichment Commission" in apparent anger at being forced to pay a $20 million fine for his tweet to take Tesla private last month and that funding had been "secured."

Musk and the SEC had reached a settlement on the lawsuit the regulators filed against him for fraud on his now abandoned plan to take the company private. A US district court judge demanded that both Musk and the SEC explain next week why the deal is reasonable and fair.

"His (Musk's) actions could easily put the settlement at risk, depending on the attitude of the federal judge that must approve the deal," Ihor Dusaniwsky, the managing director of Predictive Analytics at S3 Partners, said in a report.

READ: Elon Musk slams SEC as US judge demands explanation for fraud settlement

Punters who are shorting Tesla's stock have had a field day with the stock.

"Since Musk agreed to step down as chairman, Tesla shares have slipped from $310 to $281, netting shorts $941 million, a return of 9.6% in less than a week," Dusaniwsky said.

"Friday’s reaction to the insulting tweet pushed the shares even lower and produced more than half a billion in paper profit for the shorts."

Tesla's stock closed on Friday in New York down 7.05% at $261.95. The stock recovered somewhat in afterhours trade by 0.26% to $262.63.

The shorts have been increasing their positions in the company following strong selling by Tesla longs because Musk has demonstrated a refusal to stay away from controversy.

READ: Greenlight Capital's David Einhorn compares Tesla's difficulties to those faced by Lehman Brothers, says CNBC

"The SEC is in the awkward position of coming up with ways to contain him without permanently damaging the small investors who speculate in the stock," the S3 official added.

The actions by Musk had invited scorn from investors like hedge fund manager David Einhorn, who slammed the Tesla CEO.

Tesla's go-private plan last month unravelled when his claim that funding was secured proved to be not true.

Reporting by Rene Pastor. Contact: [email protected]

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