A federal judge gave Elon Musk until March 11 to explain why it should not be considered a contempt. The Securities and Exchange Commission asked the judge a decision Monday, saying that a recent tweet about Tesla's production plans for 2019 was inaccurate and constituted a violation of a settlement signed by Musk in September.
But Musk does not show any signs of decline. "Something is broken with SEC surveillance" he tweeted on Tuesday.
Musk could finally regret taking such a provocative tone.
"The SEC takes this very seriously," said Stephen Diamond, a lawyer at the University of Santa Clara. More importantly, he said, the judge in charge, Alison Nathan, is likely to take it seriously.
"This judge has authority over this deal," said Diamond. "She is the supervisor of knowing how he respects the terms."
According to Diamond, the judge will have wide discretion to decide how to react. "Fines, injunctions, [and] Governance reforms are all on the table, "Diamond said Musk could lose his seat on the Tesla board, or even his job as Tesla's CEO.
Musk settled a lawsuit for SEC fraud in September
The battle between Musk and the SEC goes back to August 7, when Musk tweeted that he had "secured funding" for Tesla to be privatized at $ 420 per share. Tesla's stock price soared, but within days, it became clear that Musk's tweet was at best misleading. Musk had had preliminary talks with the sovereign wealth fund of Saudi Arabia, but he was far from getting any formal commitment to fund a buyout.
And it was a problem because federal securities laws prohibit the dissemination of false or misleading information about a company in a way that affects its stock price. The SEC pays special attention to the statements of public company executives, as their statements are particularly likely to be taken seriously by the market.
The SEC began investigating the case and in September, the agency offered Musk a settlement to prevent litigation. Musk rejected the initial settlement offer of the SEC, which has therefore sued for securities fraud.
In addition to seeking monetary penalties, the SEC has also requested that Musk be prevented from acting as an officer or director of a publicly traded company, which would mean that he should relinquish his seat on the board of directors. Tesla and his position as CEO of the company.
But shortly after filing the complaint by the SEC, Musk surrendered. Musk agreed to pay $ 20 million in fines, while Tesla would pay another $ 20 million. Musk has agreed to resign as chairman of Tesla's board of directors. Most importantly, he retained his seat on the board of directors and remained the general manager of Tesla.
Musk caused the SEC
To make sure Musk stays on top of its behavior, the SEC has asked Tesla to develop a new Musk tweet verification process. Under the new rules, before Musk releases information that could affect Tesla's stock price, he must send a draft to Tesla's appointed officials for approval.
But Musk showed only contempt for the SEC and the rules it tried to impose on it.
"I do not respect the SEC," Musk said in an interview with journalist Lesley Stahl in December. 60 minutes.
When Stahl asked Musk if he planned to get his tweets approved before they were sent, he said he would only seek approval for tweets "likely to cause movement in the stock" .
"How do they know if this will move the market if they do not read them all?" Stahl asked.
"I suppose we could make mistakes," he said. "Nobody is perfect."
According to the SEC, Musk made a mistake last week. he tweeted that "Tesla manufactured 0 cars in 2011, but will manufacture about 500,000 in 2019." A few hours later, he clarified that he "intended to say at the end of the year 2019 an annualized production rate probably of about 500 000 tons, that is to say 10 000 cars / week.The deliveries for the year are still estimated at approximately $ 400,000 ".
The first tweet was created at 7:15 pm ET, and the follow-up tweet just before midnight on the same day. This is well outside normal trading hours. It is therefore likely that few people exchanged Tesla's shares on the basis of Musk's false claim.
But in the opinion of the SEC, this is not relevant. Musk had promised to follow a set of procedures designed to prevent him from tweeting inaccurate information. Musk did not follow these procedures and therefore created an incorrect tweet. Combined with the provocative tone of his 60 minutes interview, it appeared to the SEC that Musk was not making a good faith effort to comply with the terms of the settlement.
On Monday, the SEC asked Judge Nathan to despise Musk. Musk has until March 11 to explain his actions. Nathan will decide how to react.
Contempt can have serious consequences
The SEC's lawsuit on Monday related to charges of contempt of court against Musk, but she was not asking for specific sanctions. Securities lawyer Sam Israel told Ars that if Judge Nathan decided to hold Musk in contempt, his next step would be to ask the SEC to propose corrective measures.
"The SEC would come up with the kind of relief it wants," Israel said. "The courts are very reluctant about what the SEC is asking for, I would not say they are endorsing what the SEC is asking for, but they are carefully considering it."
The range of possible punishments is wide. While the case originated in securities fraud litigation, it is now a question of whether Musk has broken its commitment to the SEC – and, more importantly, to the judge to oversee the settlement. The law gives a judge wide latitude to decide on the discipline to be taken by parties who, in his opinion, defy his authority.
The SEC could ask the judge to impose new fines on Musk. Judge Nathan could also order Musk and Tesla to develop a more rigorous process for monitoring Musk's social media activity to ensure that he respects the letter and the letter. 39 spirit of the regulation in the future.
But more severe sanctions could also be considered. The SEC "may seek an order barring Musk from serving on the board and the CEO position," Diamond told Ars. In extreme cases, a finding of contempt can even lead to a prison sentence, Diamond said.
"In this case, I do not see the SEC asking for anything extreme," Israel told Ars. He predicts that the SEC will likely ask for a financial penalty "with the threat of an officer and barrister" if Musk behaves badly again.
"The fact that he is so eccentric prevents him from being punished so severely," added Israel. "Our society finds excuses for weird people."
Judges and regulators must take into account all the consequences of strong measures like this one.
"They will be concerned about the impact on the job and the future of the company," Diamond told Ars. Losing Musk as CEO could be a blow for Tesla, although a new CEO may also be advantageous for the automaker in the long run.
At the same time, Musk's provocative tone in recent months puts the SEC in a dilemma. The agency had already given Musk a halt – with a $ 20 million fine and the loss of its chairman of the board – last September. It is hard to imagine that another fine will hold Musk's attention or change his behavior over the next few months.
And asking Tesla to reinforce his monitoring of Musk's tweets is useless if Musk ignores the rules set by Tesla. The SEC may therefore feel compelled to seek stronger solutions to ensure that its authority is not compromised.
An underlying problem, said Diamond, is that Tesla's board of directors still seems subordinate to Musk. The settlement in September forced Tesla to appoint two new independent directors of Musk. But, in Diamond's opinion, Musk's recent behavior suggests that Tesla's board of directors is still too weak. A strong and independent Tesla board of directors would not tolerate Musk 's defiance of the SEC on national television, nor would it allow Musk to ignore the rules requiring his tweets to be controlled by Tesla prior to his release. to be published.
"Shareholders have no protection other than the SEC and the federal courts," Diamond said. "I think it's a pretty serious situation."