Judge urges Elon Musk, SEC to end dispute

07 April 2019 - 00:00 By BRENDAN PIERSON and JONATHAN STEMPEL in New York


Elon Musk's job as Tesla CEO appeared safe this week as a Manhattan judge urged the billionaire to settle contempt allegations by the US Securities and Exchange Commission (SEC) over his use of Twitter.
At a hearing in Manhattan federal court, US district judge Alison Nathan gave both sides two weeks to work out their differences, and said she could rule on whether Musk violated his recent fraud settlement with the regulator if they failed.
"Take a deep breath, put your reasonableness pants on, and work this out," the judge said.
The hearing appeared to lift a cloud hanging over Tesla, as the SEC stopped well short of recommending Musk's removal as CEO or even as a member of the electric car company's board.
Instead, the regulator suggested that greater oversight of Musk's communications, including the threat of new fines if he backslides, is punishment enough.
"What this is to the SEC is strike two, and if there is another transgression they might seek a director and officer bar," said Peter Henning, a law professor at Wayne State University in Detroit and a former SEC lawyer. "They are just trying to send a message: be more careful."
The court had been asked to hold Musk in contempt over a February 19 tweet in which, the SEC said, he improperly posted material information about Tesla's vehicle production outlook without first seeking approval from SEC lawyers.
The SEC said pre-approval was a core element of the October 2018 settlement, which resolved a lawsuit over a tweet on August 7 last year in which Musk said he had "funding secured" to take Tesla private at $420 (R5,900) a share.
That settlement called for Musk to step down as Tesla's chair, and levied $20m civil fines each on Musk and the company.
Musk declined to discuss the hearing as he left the courthouse on Thursday, surrounded by a horde of journalists, but said: "I feel very loved here."
In a statement provided later by Tesla, Musk said: "I have great respect for judge Nathan, and I'm pleased with her decision today. The tweet in question was true, immaterial to shareholders, and in no way a violation of my agreement."
Tesla's share price tumbled 8.2% on Thursday, after the company on Wednesday night reported lower-than-expected vehicle deliveries, but recouped some early losses once Musk's job no longer appeared imperilled.
The company has faced several production challenges with its Model 3 sedan, which it hopes will reach a mass audience.
"Elon Musk was very well composed in the court today, which means he's taking it seriously," said Craig Irwin, a Roth Capital Partners analyst, who attended the hearing.
He called Nathan's order "a good outcome for Tesla investors".
The battle concerned 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 annualised production would be "probably around" 500,000 by year-end, with full-year deliveries totalling about 400,000.
The SEC said the earlier tweet conflicted with Tesla's January 30 outlook, when it targeted annualised 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 contained nothing new, and that the SEC had conceded during settlement talks that Musk did not need pre-approval for all tweets about Tesla.
At the hearing, SEC lawyer Cheryl Crumpton said a contempt finding could require Musk to file regular reports about how Tesla lawyers oversee his tweets.
Noting that Musk had called his $20m fine "worth it", Crumpton said the threat of higher potential fines might also be needed to show that further violations would be "not worth it". Musk is worth $20.7bn, according to Forbes magazine.
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.
Tesla was not accused of contempt.
Musk's lawyer, John Hueston, countered that the "ambiguity" of the settlement made "the hard penalty of contempt" unfair.
The "funding secured" tweet had sent Tesla's share price up as much as 13.3%. Musk's privatisation plan was at best in an early stage, however, and financing was not in place.
SEC chair Jay Clayton has said he does not favour draconian penalties that could harm investors, saying when Musk settled that "the skills and support of certain individuals may be important to the future success of a company". Musk remains an outspoken critic of the SEC.
Since the case began, he has dubbed the regulator the "Shortseller Enrichment Commission", recalling his attacks on investors who sell Tesla stock short.
And in the early morning of February 26, after the SEC filed its contempt motion, Musk tweeted: "Something is broken with SEC oversight." As he prepared to enter the court, Musk told reporters: "I have a great respect for the justice system." Asked if he also respected the SEC, Musk laughed, before turning to go inside.
Reuters

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