Shares of Tesla (TSLA) dropped in morning trading following news that the U.S. Securities and Exchange Commission is suing Chief Executive Officer Elon Musk for fraud. The suit is related to Musk's August tweet that stated he was "considering taking Tesla private at $420" and already had "funding secured." The SEC said in its suit that "Musk knew or was reckless in not knowing that each of these statements was false and/or misleading."

SEC FILES SUIT: On Thursday, the SEC filed a civil action against Elon Musk, accusing the Tesla CEO of misleading investors when he tweeted that he was "virtually certain" he could take the carmaker private. The complaint filed in New York claims Musk issued "false and misleading" statements and failed to properly notify regulators of material company events. The filing claims Musk "knew or was reckless in not knowing that each of these statements was false and/or misleading" by tweeting on August 7 that he had "funding secured" for a takeover of the company at $420 per share and that he caused Tesla's stock price to jump by over 6% on August 7, leading to "significant market disruption." The SEC said at a press conference that Musk's statements "had no basis in fact" and that Tesla's investor relations took Musk's tweets at face value and that Musk chose the $420 price "because of the significance of that number in marijuana culture and his belief that his girlfriend would be amused by it." The commission also wants to ban Musk from serving as an officer or director of a public company.

MUSK TURNED DOWN SETTLEMENT: The complaint filed by the SEC came after a last-minute decision by Musk and his lawyers to fight the case rather than settle the charges, people familiar with the matter told The Wall Street Journal. Under the terms of the deal learned by CNBC's Andrew Ross Sorkin, Tesla and the CEO were close to a "no-guilt" settlement, under which Musk and Tesla would have had to pay a "nominal" fine and Musk would not have had to admit any guilt. The settlement, however, would have banned Musk as chairman for two years, and would have required Tesla to appoint two new independent directors, CNBC's David Faber said. According to sources, Musk refused to sign the deal because he felt that by settling "he would not be truthful to himself."

MUSK'S STATEMENT, TESLA BOARD STATEMENT: In his own statement, Musk responded to the SEC charges, 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." Meanwhile, Tesla's board of directors stated that the company and board are "fully confident" in Musk, "his integrity, and his leadership of the company, which has resulted in the most successful U.S. auto company in over a century. Our focus remains on the continued ramp of Model 3 production and delivering for our customers, shareholders, and employees."

'NUMBER OF NEGATIVE IMPLICATIONS' FOR TESLA: JPMorgan analyst Ryan Brinkman said he sees a "number of negative implications" for Tesla shares stemming from the suit, the most significant of which 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 which "could hasten the inevitable transition" of Tesla shares toward being valued based upon fundamentals alone, Brinkman said, reiterating his belief that the Tesla's fundamentals "do not support a value close to the current trading price." If the SEC succeeds in its lawsuit against Tesla's CEO, the premium shareholders have been willing to pay for "future founder-driven business optionality" is likely to dissipate, Barclays analyst Brian Johnson said. Needham analyst Rajvindra Gill said that the latest charges by the SEC against Musk "all but eliminate" his credibility as a competent CEO. In a scenario where the suit leads to Musk's exit, Citi analyst Itay Michaeli, who downgraded Tesla to Sell, said there is "little question" that the departure would likely cause harm to Tesla's brand, stakeholder confidence, and fundraising. This would increase the risk of triggering a "downward confidence spiral" given the state of Tesla's balance sheet, Michaeli contended.

PRICE ACTION: Shares of Tesla are down about 11% in early trading to $273.14.