A federal judge on Tuesday ordered Tesla CEO Elon Musk to explain by March 11 why he should not be held in contempt for violating the terms of a recent settlement deal, dragging the automaker once again into legal jeopardy and unnerving some of the company’s biggest fans.
The Securities and Exchange Commission has accused Musk of not seeking preapproval of any potentially market-moving tweets about the car company as he promised. Early Tuesday, a day after the SEC asked that he be held in contempt, Musk hit back at the commission. “Something is broken with SEC oversight," he said on Twitter.
The latest grudge match between the powerful regulator and the eccentric billionaire could be an expensive one for Musk and is frustrating even Tesla’s true believers, who blame the company’s new turmoil on Musk’s incorrigible public swagger and compulsion to poke the bear. Some said it may be time to resort to defense tactics employed by members of President Trump’s inner circle — including suggesting, only half jokingly, that the company should take Musk’s phone away.
Investors are getting sick of Musk acting like “a manchild on Twitter” and inviting the SEC’s wrath, said Ross Gerber, a longtime Tesla booster whose Gerber Kawasaki investment firm owns roughly $10 million in Tesla shares.
“He’s hurting the shareholders, his company — and for what? Twitter isn’t that important!” Gerber said. “That’s the part that’s starting to bother me. It’s like, enough of this crap.”
It comes at a time when Tesla faces existential crises on nearly every front — including demand doubts, growing debts, competitive pressures and the ballooning costs of expanding into new cars and countries — but Tesla investors say the company is instead having to deal with the self-inflicted chaos of Musk’s social-media accounts.
At the center of the SEC’s current complaints are tweets Musk sent last week about the production levels at the company. On Feb. 19, Musk said on Twitter that Tesla would make about 500,000 cars this year. Four hours later, Musk sent another tweet that clarified that he “meant to say” the company’s weekly production rate would equal up to about 500,000 on an annual basis but that the total car deliveries this year would be closer to about 400,000.
The initial tweet was not preapproved and contained misleading information, as well as violations of a settlement agreement reached with Musk and the company last year, the SEC said in a motion filed in the U.S. District Court for the Southern District of New York.
Tesla told the SEC that Musk’s initial tweet was in line with what the company had told investors during a January 2019 call and “intended to recapitulate” that information. “SEC forgot to read Tesla earnings transcript. ... How embarrassing,” Musk said in a tweet late Monday.
U.S. District Judge Alison J. Nathan has ordered Musk to prove he didn’t violate the settlement agreement he reached with the SEC last September. The settlement came after the commission accused him of lying to investors when he tweeted that he had “funding secured” to take Tesla private.
Several investors said they thought the SEC settlement was actually quite light on Musk — Musk agreed to pay a $20 million fine, step down as chairman and have his tweets preapproved by a Tesla lawyer — and are furious that Musk’s taunts may push regulators to drop the hammer with much more force.
Regulators last year suggested that Musk could face severe consequences, including being barred from running a public company — a move that could send shock waves through a company best known for its celebrity boss and rewrite the balance of power at Tesla overnight.
“There’s been all this good news and the stock has gone nowhere, 100 percent because of Elon,” Gerber said. “That’s how it always happens: The stock is building momentum, and then this."
Prem Kalevar, a Tesla investor in Toronto, said that he had long enjoyed Musk’s sarcasm and impulsiveness, but that Musk now seemed to be just picking pointless battles for fun without considering the potentially dire consequences. The SEC, he added, had a point in calling Musk out: As an investor, he said, he was confused about the truth of the production numbers Musk had tweeted.
Kalevar said he sold a significant portion of his “six-figure position” in the stock last week after Tesla’s top lawyer quit, for fear the company’s stock could plunge. One day after Musk’s tweet, Tesla said its general counsel Dane Butswinkas, an experienced trial lawyer hired in the wake of the SEC settlement, was leaving the company after only two months on the job.
“I can understand [Musk] wanting to freely tweet about these businesses as he goes about his life,” Kalevar said. But "flouting regulatory bodies like that can have a major impact on how Tesla is run. It’s just unnecessary. It’s not even smart.”
Tesla stock stayed relatively flat Tuesday. But investment analysts sounded the alarm in notes to clients that the uncertainty of potential penalties or SEC action could damage Tesla’s share price in the coming weeks. Cowen analysts called it a “negative distraction for a company that needs to execute at this critical juncture.”
“Another boxing match with the SEC is the last thing investors wanted to see,” Wedbush Securities analysts said.
The upstart automaker’s biggest test has been to build lots of complicated cars without substantial financial loss — a challenge demanding a level of engineering wizardry and technical expertise that bigger automakers have spent decades trying to achieve.
The SEC’s motion also comes as Musk grapples with growing troubles at one of his other companies, SpaceX. The Air Force is reviewing the certification it granted the California space company to launch national security satellites and SpaceX announced last month that it was laying off 10 percent of its workforce. It is also challenging a nearly $150 million contract that NASA recently granted to one of its rivals.