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US Regulator Asks Court to Hold Tesla Chief Elon Musk in Contempt of Violating Deal

Musk, Tesla and the SEC last year settled a lawsuit filed by the federal agency over misleading tweets Must made in August that he planned to take the company private.

Reuters

Updated:February 26, 2019, 8:31 AM IST
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US Regulator Asks Court to Hold Tesla Chief Elon Musk in Contempt of Violating Deal
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San Francisco: The U.S. Securities and Exchange Commission on Monday said a federal court should hold Tesla Inc Chief Executive Officer Elon Musk in contempt for violating last year's settlement with the federal regulatory agency due to new statements made on Twitter, sending shares of the electric carmaker down 5 percent in extended trade.

Musk, Tesla and the SEC last year settled a lawsuit filed by the federal agency over misleading tweets Must made in August that he planned to take the company private. As part of that settlement, any material statements made by Musk on social media were to be vetted in advance by the company.

The regulator pointed to Musk's Feb. 19 tweet: "Tesla made 0 cars in 2011, but will make around 500k in 2019," noting that Musk did not seek or receive preapproval before publishing this tweet, which was inaccurate and disseminated to over 24 million people.

"Musk has thus violated the court's final judgment by engaging in the very conduct that the preapproval provision of the final judgment was designed to prevent," the SEC wrote in its motion filed on Monday in federal court in Manhattan.

Musk subsequently clarified his tweet to say that the "annualised production rate" at year-end 2019 would probably be about 500,000, with deliveries expected to be about 400,000.

The motion asks the judge to issue an order that would put the onus on Musk to show why he should not be held in contempt for violating the settlement.

Tesla did not immediately respond to a request for comment.

Tesla and Musk agreed in September to pay $20 million each to the SEC, and the billionaire stepped down as the company's chairman but remained as chief executive. In the settlement, the agency pulled back from its original demand that Musk, who is synonymous with the Tesla brand, be barred from running Tesla, a sanction many investors said would be disastrous.

The settlement was approved by a U.S. judge in October, who can now decide whether its terms have been violated.

In a response to the SEC's demand for information regarding the Feb. 19 tweet, a lawyer for Tesla and Musk said the CEO's tweet was meant to reiterate information already approved, then disseminated when the company released fourth-quarter earnings results in January.

Although the tweet was not pre-approved, the lawyer wrote, Musk believed its substance had been "appropriately vetted, pre-approved and publicly disseminated." Moreover, the lawyer said, the statement was made outside of market trading hours.

It was not immediately clear what the repercussions would be were Musk to be found in contempt, as such a citation does not necessarily mean the original agreement is now null and void.

The SEC could seek a so-called bar order, removing him from Tesla’s board, or could ask for a lesser penalty, like a monetary fine, said Stephen Diamond, a professor of corporate governance at Santa Clara University.

The SEC could also ask the court to reopen the original settlement for renegotiation, he said, perhaps asking that the original charges be reinstated.

"It’s a pretty unusual situation," Diamond said, adding that "all bets are off."
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