The Securities and Exchange Commission (SEC) says Elon Musk hasn’t made a “good faith” effort to comply with the settlement the two sides reached last year over fraud charges related to his attempt to take Tesla private, according to a new court filing. The SEC reiterated its request Monday to have Musk held in contempt of court over a February 19th tweet that the commission says is a “blatant violation” of the settlement.
Last week, Musk called the SEC’s contempt request an “unconstitutional power grab” and said that the tweet in question didn’t contain information that affected Tesla’s stock price. The two sides and the court have until March 26th to decide whether to hold a hearing to air out their differences. The SEC said Monday that it believes no such hearing is necessary because the facts of the case are not in dispute.
At the heart of the SEC’s argument is that Musk was supposed to have his public communications about Tesla — tweets included — pre-approved by a designated in-house lawyer as part of the settlement agreement signed last September.
The SEC asked the court on February 25th to hold Musk in contempt for the February 19th tweet where he said Tesla will make “around 500,000” cars in 2019. The commission says this was “demonstrably material and inaccurate” because it went against Tesla’s own predictions for 2019, which were issued in late January. But the commission also learned from Tesla that Musk’s tweet had not been pre-approved by the in-house counsel in charge of reviewing his public communications, which it argues violates the terms of the settlement.
Meant to say annualized production rate at end of 2019 probably around 500k, ie 10k cars/week. Deliveries for year still estimated to be about 400k.— Elon Musk (@elonmusk) February 20, 2019
In its filing on Monday, the SEC points to the fact that Tesla admitted, following the publication of that tweet, that the unnamed lawyer took “immediate response” to work with Musk to issue a correction — implying both that it was wrong and that Musk hadn’t followed the rules of the settlement.
“Had Musk simply complied with the Court’s order and Tesla’s Court-ordered Senior Executives Communications Policy, the Designated Securities Counsel presumably would have caught his misstatement on the front end, and Musk would not have again disseminated inaccurate information about Tesla to 25 million people,” the SEC wrote Monday.
The whole point of including this language in the settlement was to prevent Musk from tweeting off-the-cuff remarks that affected Tesla’s stock price, like he did last August when he said he had “funding secured” to take Tesla private at a share price of $420. A subsequent investigation by the SEC found that Musk had only held cursory talks with Saudi Arabia’s Sovereign Wealth Fund about putting up the billions of dollars necessary to pull off such a feat, and therefore was far from having any funding secured when he published that tweet.
Musk eventually abandoned the go-private attempt in late august. But the announcement temporarily boosted the company’s value in the stock market, and also cost traders who bet against Tesla’s stock price thousands of dollars. The SEC sued him for securities fraud, and the two sides quickly reached a settlement.
In addition to a $20 million fine, and the removal of Musk from his post as chairman of Tesla, the SEC’s settlement dictated that any of his public communications that could impact the company’s stock had to be approved. On Monday, the SEC said it wasn’t just the February 19th tweet that Musk didn’t get approved — it was every other tweet he’s published about Tesla since the settlement went into effect in mid-December, including ones about everything from Tesla’s refund policies, to the company’s pricing, to its plans for the Gigafactory in China, and more.
“Musk’s unchecked and misleading tweets about Tesla are what precipitated the SEC’s charges, and the pre-approval requirement was designed to protect against reckless conduct by Musk going forward,” the commission wrote in its response Monday. “It is therefore stunning to learn that, at the time of filing [the request to hold Musk in contempt], Musk had not sought pre-approval for a single one of the numerous tweets about Tesla he published in the months since the Court-ordered pre-approval policy went into effect.”
The SEC isn’t just taking a stab in the dark here, either. Before it originally asked the court to hold Musk in contempt, the commission had asked Tesla to explain what happened before and after the February 19th tweet. It learned from Tesla that the in-house lawyer in charge of reviewing his communications was not pre-approving any of his tweets, and was only attempting to work with Musk to correct potentially material statements after the fact.
The SEC tried to shoot down on Monday other arguments Musk has made against being held in contempt. In his response filed last week, Musk argued that there was room in the language of the settlement for him to use his own discretion as to what information was material or not to Tesla’s stock price. On Monday, the SEC said Musk never specifically identified “any language in the order or the Tesla Policy that grants him such discretion.”
And as for Musk’s claim that the SEC settlement could be seen as a restriction on his right to free speech — a point he made during a December interview with 60 Minutes, where he also said he does “not respect the SEC” — the commission argued Monday that submitting written statements for pre-approval doesn’t mean Musk is prohibited from speaking.
“As long as a statement submitted for pre-approval is not false or misleading, Tesla would presumably approve its publication without any restraint on Musk,” the SEC wrote. “And if the proposed statement is false or misleading, then any restraint on Musk’s speech would be constitutional even if it involved state action.”