Securities and Exchange Commission officials were understandably taken aback on Thursday morning when Tesla's board — and its chairman, Elon Musk — abruptly pulled out of a carefully crafted settlement.
After the S.E.C. responded by accusing Mr. Musk, but not the company that he had co-founded, of securities fraud, the board further defied regulators, issuing a provocative statement saying that the directors were "fully confident in Elon, his integrity, and his leadership of the company."
It was a stunning reversal: The board had rejected a settlement that was extraordinarily generous — it would have allowed Mr. Musk to remain as chief executive, and required him to step down as chairman for only two years. Now, the company was at risk of losing Mr. Musk as chairman and chief executive if regulators prevailed in court.
More from The New York Times:
"What it tells us is this board, as a strategic plan, must be using the Jim Jones-Jonestown suicide pact," Jeffrey Sonnenfeld, a professor at the Yale School of Management, said Friday on CNBC. "They are drinking the Kool-Aid of the founder. It is completely as self-destructive as Musk is."
But Mr. Musk had given the board little choice: In a phone call with directors before their lawyers went back to federal regulators with a final decision, Mr. Musk threatened to resign on the spot if the board insisted that he and the company enter into the settlement. Not only that, he demanded the board publicly extol his integrity.
Threatened with the abrupt departure of the man who is arguably Tesla's single most important asset, the board caved to his demands, according to three people familiar with the board's decision.
The next day, Tesla's lawyers were back at the S.E.C., all but groveling for a second chance — this time with Mr. Musk's grudging approval.
One factor in Mr. Musk's change of heart: Tesla's stock plunged Friday morning as investors absorbed news of the rejected settlement and the possibility that the S.E.C. would force Mr. Musk to step down. It would finish down almost 14 percent on Friday.