The US Securities and Exchange Commission asked a judge to hold Musk in contempt for violating a settlement that required him to get Tesla’s approval for social media posts and other writings that could be material to investors.
He breached that deal with a February 19 tweet that said Tesla would make about half a million cars in 2019, the agency claims. The CEO posted a few hours later that deliveries would only reach about 400,000.
The SEC’s move puts Musk in fresh legal peril less than five months after he settles claims that he misled the public with tweets about taking the electric-car maker private. He could face a variety of penalties, with the stiffest being that he’ll be barred from running Tesla or any other public company for a period of time, stated Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware.
“Having your CEO in contempt of an SEC action is a pretty bad thing,” Elson stated in a phone interview. “They settled with him and within a few months he’s back to doing similar things. It’s unbelievable.”
Calls to Tesla and emails to Musk and his representative weren’t immediately returned. In a tweet after the filing, Musk said the SEC overlooked a comment he made on the company’s January 30 earnings call that Tesla may make as many as 500,000 of its Model 3 sedans this year.
US District Judge Alison Nathan, who is handling the case, hasn’t scheduled a hearing to weigh the contempt request or set a date for Musk or Tesla to respond to the filing. The news sent Tesla shares plunging as much as 5.4% after hours. The stock was already down 10% this year through the close of regular trading.
Losing Musk, the principal architect of Tesla’s vision of a future where electric vehicles and solar power reduce humanity’s dependence on greenhouse gases, would be gutting for the company. The automaker has relied on its CEO not just for technology leadership but for its bold, anti-establishment image. But the cult of personality has also had a downside for Tesla, with Musk sending the stock into a tailspin with antics such as smoking pot on a web video or insulting an analyst on a conference call.
“Musk continues to be reckless with Twitter,” stated Gene Munster, a managing partner at venture capital firm Loup Ventures.
“If you were hoping for him to change, it’s clear that it’s not going to happen. It’s unfortunate because it’s a needless distraction from the company’s world-class product line.” Muster added.
Musk’s initial round of regulatory scrutiny came in August, when he posted on Twitter that he was considering taking the company private at $420 and had funding secured. In its September lawsuit, the SEC said Musk hadn’t discussed any specific deal terms with any funding partners and knew the potential transaction was uncertain.
The accord required Musk and the company to each pay a $20 million penalty and also barred him from serving as chairman for at least three years.
The SEC “has to view the conduct as akin to another violation of securities laws to take this step,” said Brad Bennett, a former SEC enforcement attorney. “It’s a very novel situation where someone is running an enterprise with this kind of market cap and gives the SEC cause for concern that the person is not capable of following the securities laws.”
In its defense, Tesla lawyers said Musk was trying to “recapitulate” a pre-approved statement from the company’s earnings call stating that the company would get production to 10,000 vehicles a week by the end of the year, according to the attorneys’ Feb. 22 letter to the SEC included in court filings Monday. Tesla attorneys stressed that the company and Musk take their settlement with the SEC seriously.
Since agreeing to the settlement, Musk has antagonized Wall Street’s main regulator. A few days after the Sept. 29 agreement, he dubbed the SEC as the “Shortseller Enrichment Commission” in a tweet. In December, Musk told Lesley Stahl of “60 Minutes” that he didn’t respect the agency.
“It’s very clear that the SEC is not happy with Musk,” said Stephen Diamond, an associate professor of law at Santa Clara University who specializes in corporate governance. “Musk is on a self-destructive path. He’s the controlling stockholder but he’s not respecting the rights of other shareholders.”