NEW YORK -- A federal judge Thursday ordered Elon Musk and the Securities and Exchange Commission to meet over the next two weeks to settle their dispute over the Tesla CEO’s use of Twitter.
The SEC had asked the U.S. District Judge Alison Nathan to hold Musk in contempt of its settlement with Tesla over his Feb. 19 tweet claiming the electric vehicle maker would deliver 500,000 vehicles this year. The agency alleged the tweet was misleading and violated the terms of a securities fraud agreement that required Musk to get pre-approval for company news posted on his social media accounts. Tesla has admitted to the agency that it did not do so for the Feb. 19 tweet.
Musk corrected himself hours after his initial tweet to say the company’s pace of production would amount to half a million vehicles over a 12-month span -- but Tesla would produce 400,000 vehicles in the calendar year of 2019.
Thursday’s court hearing came a day after Tesla revealed disappointing delivery figures to investors that at least one analyst said may undercut his case.
The company announced Wednesday that it would deliver 360,000 to 400,000 vehicles this year. That further undermines "a key tenet of CEO Elon Musk’s legal defense against the SEC,” JPMorgan Chase said in an analyst note Thursday.
“The now clear incongruence of CEO outlook statements with official company guidance may hurt the perception of management commentary, eroding investor confidence and potentially placing additional pressure on the shares,” the note said.
Nathan said she had “serious concerns” that no matter how she ruled, there would not be a resolution to the underlying dispute and that both sides should “take a deep breath” and attempt to “work it out."
“Put your reasonableness pants on,” Nathan urged.
The SEC and Musk should submit a joint letter in two weeks confirming they had met for at least an hour, she said.
“It’s not a game," Nathan said, referring to the settlement agreement that had been previously approved by the court.
“Contempt of court is serious business. ... The SEC carries a serious burden here,” Nathan said.
If the SEC and Musk cannot come to an agreement, and Nathan rules Musk is guilty of violating his settlement with the SEC, the judge could increase the $20 million fine he already paid or take other punitive actions.
If he violated the agreement again, Musk should face an even heftier fine, said SEC attorney Cheryl Crumpton. “We would be seeking additional remedies to prevent future violations,” she said. The potential financial penalties should take Musk’s wealth into consideration.
“Tesla conduct is also troubling to the SEC,” Crumpton said. The company was supposed to implement a mandatory pre-approval process, but that doesn’t appear to have been done, she said. “They are apparently fine with Mr. Musk making up his own procedure,” said Crumpton. “Tesla still seems unwilling to exercise any meaningful control over the conduct of its CEO.”
The SEC is “evaluating” the company’s conduct, she said.
Musk, who was wearing a dark suit and tie, took notes and nodded along in agreement as his attorney argued that the disputed tweet did not violate the settlement agreement and that the SEC was offering shifting explanations of what would. The company’s stock price did not move after the initial tweet or the second clarification, Musk’s defense counsel John Hueston told the judge.
“The market gave its judgement that it was immaterial,” said Hueston. “Mr. Musk acted in good faith.”
“There is clearly not a clear enough standard … for contempt,” said Hueston. The pre-approval process is a “murky policy.”
Musk issued a brief statement following the hearing.
“I have great respect for Judge Nathan, and I’m pleased with her decision today," Musk said in a statement. "The tweet in question was true, immaterial to shareholders, and in no way a violation of my agreement with the SEC. We have always felt that we should be able to work through any disagreements directly with the SEC, rather than prematurely rushing to court. Today, that is exactly what Judge Nathan instructed.”
The order capped off a contentious week for Tesla, after the company told investors that deliveries fell sharply in the first quarter of the year, according to its announcement Wednesday evening, prompting the company’s stock to fall more than 8 percent on Thursday.
The company’s first-quarter delivery figure of 63,000 vehicles was 31 percent fewer than in the final three months of 2018.
Tesla cited a “massive increase in deliveries in Europe and China” and chalked the delivery troubles up to “many challenges encountered for the first time” in a statement detailing its first-quarter production and deliveries. The automaker declined, however, to specify the nature of the challenges or how it plans to catch up. It was the first quarter Tesla delivered its Model 3 to China and Europe, both of which are expected to be major markets for the sedan.
The vast majority of the cars Tesla built from January through March were Model 3 sedans, making up 62,950 of the 77,100 vehicles produced, Tesla said. The remaining 14,150 vehicles were the Model S sport sedan and the Model X SUV.
But the quarter’s 50,900 Model 3 deliveries fell far short of the 63,150 of the sedans customers received in the final three months of 2018, and in the third quarter, when the company delivered 56,065, according to Tesla’s figures. Analysts had predicted Tesla would come closer to replicating third-quarter results, but the quarterly delivery figure fell short of even their tempered expectations.
Tesla warned not to view vehicle deliveries as a reflection of its broader financial picture; its quarterly earnings remained unreported.
But the company warned its finances would take a hit amid the delivery challenges and price changes. Still, Tesla said, it had “sufficient cash on hand,” indicating it would not need to raise money.
While Tesla has plans to begin building vehicles in China for its burgeoning market there, the company says the fact it has only a single Bay Area factory has led to logistical challenges.