Last week, Musk said the SEC was trying for an “unconstitutional power grab” that “smacks of retaliation and censorship” and would violate his rights to freely tweet.
SEC officials, in a lengthy response Monday, showed they were not backing down, calling again for Musk to be found in contempt of court.
“Musk’s contention — that the potential size of a car company’s production for the year could not reasonably be material — borders on the ridiculous,” SEC officials wrote. “Musk’s shifting justifications suggest that there was never any good faith effort to comply with the Court’s order and the Tesla Policy. Rather, Musk has simply elected to ignore them.”
The spiraling conflict could throw the $50 billion car company further into uncertainty and imperil Musk’s ability to remain as company chief. But it will also pose a major challenge to the SEC, which Musk has said he “does not respect” and which will be widely scrutinized for how it attempts to bring a defiant executive to heel.
In September, after the SEC had accused him of misleading investors by tweeting that he had “funding secured” to take Tesla private, Musk reached a deal certifying he would gain pre-approval for his tweets from an internal company overseer some began calling a “Twitter sitter.” He also was fined $20 million and agreed to step down as Tesla’s chairman.
The SEC asked a federal judge to hold Musk in contempt after he tweeted an estimate last month for Tesla’s car-making abilities that was both inaccurate and not pre-approved. Then last week, Musk’s attorney wrote that Musk himself had determined the tweet did not require pre-approval because it was “celebratory” —and also that no tweets had been pre-reviewed. Musk had exercised “self-censorship,” the attorney wrote: He was tweeting half as often as before.
In its response Monday, the SEC said it was unmoved by Musk’s legal defense. “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 SEC attorneys wrote. “It is therefore stunning to learn that, at the time of filing of the instant motion, Musk had not sought pre-approval for a single one of the numerous tweets.”
SEC attorneys noted that requests to hold an executive in contempt are “relatively rare,” but that Musk’s shifting explanations, “lack of judgment” and failure to abide by the deal compelled them to act. “Such brazen disregard of this Court’s order is unacceptable and unworkable going forward,” the attorneys wrote.
The SEC attorneys included a bulleted list of 10 other topics Musk tweeted about that would have violated the deal, as well as printouts of Musk’s tweets. They also worked to dismantle Musk’s argument that the SEC is muzzling his First Amendment right to free speech: “Submitting his written statements for pre-approval does not, as Musk baldly asserts, mean that he is prohibited from speaking.”
Representatives for Tesla and Musk did not respond to requests for comment. But late Monday, Musk’s attorney John C. Hueston wrote to judge Alison J. Nathan asking for permission to file another reply by Friday that would cover the “negotiation history” between the two warring parties and undermine the SEC’s arguments. Hueston, the former prosecutor of the executives of the fraudulent energy giant Enron, is also defending the Tesla chief against a defamation suit filed by a British cave explorer Musk called a “pedo guy."
Musk has for years been known for his rebellious combativeness, but his tussling with the country’s top financial cops has started to unnerve even some of Tesla’s biggest investors and most die-hard fans. Corporate-governance experts said the SEC could push for starker penalties for Musk, Tesla or its directors — including an outright ban blocking him from running a public company — if they determine he is not fulfilling his end of the deal.
Wall Street analysts have begun counseling clients to reconsider investing in the company amid Musk’s ongoing legal brawls. “Another slap on the wrist (i.e. a larger fine) appears unlikely” because of Musk’s “ongoing public belligerence” toward the SEC, JPMorgan Chase analysts wrote in a note to clients early Monday. “The once impenetrable Tesla narrative appears to be eroding. ... Tesla remains a story of vision, steered, for better or for worse, by Elon Musk.”