Shares of electric vehicle industry pioneer Tesla Inc. (TSLA) are at risk of a downward spiral, according to one team of bears on the Street, citing the latest attack on its Chief Executive Officer (CEO) and founder Elon Musk by the Securities and Exchange Commission (SEC)

(See also: 5 Takeaways From the SEC's Complaint Against Musk.)

Musk at the Helm or Not, Tesla Risk/Reward Titled Negatively

In a note to clients on Friday, Citigroup downgraded the Palo Alto-based automaker from neutral to sell on the back of news that the SEC filed a fraud lawsuit against Musk, as outlined by CNBC. The complaint against the serial entrepreneur and engineer regarding a tweet concerning a potential take-private deal when Tesla stock hit $420, could result in his removal from Tesla as a public director, wrote the investment firm. Now, the future of Tesla is up in the air as regulators hope to see him removed as the leader of his company. Analysts at Citigroup view both scenarios as weighing on Tesla shares. 

"There's little question that Mr. Musk's departure would likely cause harm to Tesla's brand, stakeholder confidence, and fundraising," wrote Citi analyst Itay Michaeli. 

Michaeli noted that Tesla, which has yet to turn a profit and has been criticized for its massive cash burn, could face issues raising capital and up the risk of a "downward confidence spiral" on a weakened balance sheet. While some analysts view new leadership as a positive for Tesla, Citi expects even a smooth departure to carry some downside.

Meanwhile, "if Mr. Musk ends up staying on, the reputational harm from this might still prevent the stock from immediately returning to 'normal," stated the analyst. 

Ultimately, Citi views the risk/reward profile for Tesla as still tilted negatively, even despite the stock's recent pullback. Tesla stock is down nearly 13% in pre-market on Friday at $268.47. Michaeli's new price target, slashed from $356 to $225, implies a more than 25% downside from Thursday close. 

As for Musk, the CEO continues to assure shareholders that Tesla will not need to raise new cash and is on track to reach profitability and sustain production rates for its first mass-market vehicle, the Model 3 sedan. In a statement, he called the SEC action "unjustified," leaving him "deeply saddened and disappointed," as he has "always taken action in the best interest of truth, transparency and investors." 

(See also: Tesla Seen Facing Wild 20% Swings Amid Uncertainty.)