FILE PHOTO: Tesla and SpaceX CEO Elon Musk participates in a “fireside chat” at the National League of Cities (NLC) 2018 City Summit in Los Angeles, California, U.S. November 8, 2018. REUTERS/Kyle Grillot/File Photo
April 4, 2019
By Brendan Pierson and Jonathan Stempel
NEW YORK (Reuters) – A federal judge in Manhattan began considering on Thursday whether Tesla Inc Chief Executive Elon Musk should be held in contempt for violating a fraud agreement, the latest battle the government has waged over the billionaire’s tweets.
Musk’s fight with the U.S. Securities and Exchange Commission has raised investor worries that it could lead to restrictions on his activities or even his removal from Tesla, while distracting him at a pivotal point in the electric car maker’s expansion.
Tesla, which built its reputation on luxury cars, has faced several production challenges with its Model 3 sedan, which it is counting on to reach the mass market, recently offering a version starting at $35,000.
Wearing a dark suit and tie, Musk sat quietly with his lawyers, sometimes staring down at paperwork, during oral arguments inside U.S. District Judge Alison Nathan’s packed courtroom.
The SEC on Feb. 25 accused Musk of posting material information about Tesla’s vehicle production outlook on Twitter six days earlier without first seeking approval from company lawyers, violating his October settlement.
According to the SEC, pre-approval had been a core element of the settlement, which resolved a lawsuit over Musk’s tweet last Aug. 7 that he had “funding secured” to take Tesla private at $420 per share.
SEC lawyer Cheryl Crumpton told Nathan that Musk had not submitted a single tweet for review in the four months between the settlement and the contempt motion, and it was no excuse that Musk might have been merely repeating Tesla’s outlook.
“Sometimes merely repeating prior guidance later in time shows that the company is still on track,” she told the judge.
Crumpton also faulted what she called Tesla’s “troubling” conduct. “Tesla still appears to be unwilling to exercise any meaningful control over the conduct of its CEO,” she said.
Musk has countered that the information in his Feb. 25 tweet was not material, and did not need to be vetted. The SEC has not accused Tesla of contempt.
SEC CALLS TWEET “OBVIOUSLY DIFFERENT”
The battle concerns a tweet that Musk sent to his more than 24 million Twitter followers: “Tesla made 0 cars in 2011, but will make around 500k in 2019,” meaning 500,000 vehicles.
Four hours later, Musk corrected himself, saying annualized production would be “probably around” 500,000 by year end, with full-year deliveries totaling about 400,000.
The SEC called the earlier tweet “obviously different” from Tesla’s Jan. 30 outlook, when it targeted annualized Model 3 production exceeding 500,000 as soon as the fourth quarter, and projected 360,000 to 400,000 vehicle deliveries this year.
Musk’s lawyers countered that the earlier tweet merely restated a forecast he had given on Jan. 30, when he said Model 3 production could total 350,000 to 500,000 vehicles.
They have also said the SEC had conceded during settlement talks that Musk did not need pre-approval for all tweets about his Palo Alto, California-based company.
On Wednesday night, Tesla repeated its Jan. 30 vehicle delivery forecast, but said first-quarter deliveries had fallen 31 percent from the prior three months to about 63,000.
Its share price was down more than 8 percent on Thursday afternoon, after earlier falling as much as 10.7 percent.
It is rare for the SEC to seek a contempt finding, though some legal experts said the regulator has a strong case over Musk’s earlier tweet.
MUSK SAYS SEC ‘BROKEN’
Legal experts said a contempt finding could subject Musk to new sanctions such as a higher fine or removal from Tesla’s board or as chief executive.
In the October 2018 settlement, Musk agreed to step down as chairman of Tesla, which agreed to adopt procedures to oversee his communications and pre-approve written communications that could be material to the company.
Musk and Tesla agreed to each pay $20 million civil fines.
James Cox, a Duke University law professor, said Musk’s importance to Tesla could be a factor in how Nathan rules.
“Tesla is at a very important point in its history, and I don’t think any judge would want to be viewed in hindsight as the cause of the demise of Tesla,” Cox said.
“She could give him a good tongue-lashing, and tell him this is it, and next time she’s not going to be so nice,” Cox added.
The “funding secured” tweet sent Tesla’s share price up as much as 13.3 percent. Musk’s privatization plan was at best in an early stage, however, and financing was not in place.
The legal battle has not stopped Musk from being an outspoken critic of the SEC.
Since it began last September, he has labeled the SEC the “Shortseller Enrichment Commission,” recalling his attacks on investors who sell Tesla stock short, and told CBS’s “60 Minutes” he did not have respect for the SEC.
And in the early morning of Feb. 26, after the SEC filed its contempt motion, Musk tweeted: “Something is broken with SEC oversight.”
(Reporting by Brendan Pierson and Jonathan Stempel in New York; Editing by Lisa Shumaker)
