The sad and tragic phenomenon of individuals goading police officers into shooting them is sufficiently common to have earned a nickname: “Suicide by cop.”
One wonders if something similar is driving Elon Musk’s deliberate taunting of the Securities and Exchange Commission, which has the authority to seek his removal from the management of Tesla.
In the latest development in this long-running saga, the SEC on Monday asked a federal judge in New York to declare Musk in contempt of court. The SEC hasn’t said what penalty it would like to see imposed on Musk, but its motion isn’t good news for Tesla, which as we write is off by about 1.5% in early Nasdaq trading, to about $294.
The company already has a lot on its plate, since it’s struggling with production of its mass-market Model 3 electric sedan, dealing with questions about demand for its vehicles and facing as much as $1.5 billion in debt coming due this year.
“Another boxing match with the SEC is the last thing investors wanted to see last night,” Wedbush Securities analyst Dan Ives, otherwise a Tesla bull, observed Tuesday morning. “While the jury is still out around the direction this SEC court action could have on Musk's activities going forward, it will be a near-term overhang on shares until investors can better gauge the impact.”
The SEC says Musk has manifestly violated an agreement reached in September, when he settled an SEC lawsuit by consenting to have his tweets preapproved by Tesla attorneys before sending them out on Twitter. The agreement covered tweets carrying potentially material information about his company.
That didn’t stop Musk from issuing an unapproved tweet at 7:15 p.m. EST on Feb. 19, stating in part that Tesla will make 500,000 cars in 2019. This information is as material as it comes, since the electric vehicle manufacturer’s production pace is among its most widely watched metrics.
The tweet also was “inaccurate and disseminated to 24 million people,” the SEC says, referring to Musk’s army of Twitter followers. Musk was forced to backtrack within hours, issuing a second tweet stating that he “meant to say” that Tesla would reach an “annualized production rate at end of 2019 probably around 500k, ie 10k cars/week.”
It’s not clear that that’s entirely accurate either, but at least it was issued with the approval of Tesla’s securities counsel, which is the process Musk had committed to following.
Most amazingly, Musk continued to poke at the SEC with further tweets Monday and Tuesday, starting within a couple of hours of the agency’s contempt motion. He claimed his Feb. 19 tweets merely reiterated earlier disclosures by the company — “SEC forgot to read Tesla earnings transcript, which clearly states 350k to 500k. How embarrassing…,” he tweeted Monday night. Then, on Tuesday at 4:25 a.m., he tweeted, “Something is broken with SEC oversight.”
It’s possible that the market is getting fed up with Musk and his shenanigans. “If anyone else antagonized the SEC twice they would call for his removal,” CNBC trading guru Jim Cramer tweeted Tuesday morning.
Here’s the back story: Musk agreed to have his tweets vetted in advance by two Tesla executives after the regulators sued him for a tweet in August declaring that he was intending to take the car company private for $420 per share, a substantial premium over its price at the time. The tweet said funding for the transaction was “secured.”
In fact, there was no funding, and Musk had taken no significant steps toward any such deal. His tweet set off a brief trading frenzy in Tesla stock and caught the SEC’s attention instantaneously.
The September settlement covered more than merely the requirement that Tesla establish a preapproval process for any Musk tweets that might carry material information about the company. Musk and Tesla each were fined $20 million. Musk was forced to relinquish his post as chairman, though he was allowed to remain as CEO. The company was required to add two new outside directors, part of a seemingly endless effort to dilute the influence of Musk sycophants on its board.
No indications have surfaced that Musk or the board has taken the SEC’s implicit warnings in this settlement to heart. Within weeks, he taunted the commission in a tweet as the “Shortseller Enrichment Commission,” a reference to his opinion that Tesla short sellers are trying to drive down the company’s stock.
In an interview in December with Lesley Stahl of the CBS program “60 Minutes,” Musk kept digging his own hole. He acknowledged that his tweets were still unsupervised and tried to rewrite the SEC agreement. The only tweets needing preapproval, he said, were those that “had a probability of causing a movement in the stock…. Otherwise, it’s ‘Hello, 1st Amendment.’ Like freedom of speech is fundamental.”
He told Stahl: “I want to be clear. I do not respect the SEC.” (To be fair, the interview aired on Dec. 9, and Tesla didn’t enact its “senior executives communications policy” codifying the review of Musk’s tweets until Dec. 11.)
None of that might have been actionable, if not for Musk’s Feb. 19 tweet. The SEC says the tweet plainly required preapproval under the company’s policy, and didn’t receive it. The next day, the agency queried the company. Tesla outside counsel Bradley J. Bondi defended the failure to preapprove the tweet by arguing that Musk was merely reiterating information contained in the company’s fourth-quarter earnings report and conference call Jan. 30, and therefore didn’t warrant special treatment.
The SEC isn’t buying that.
To begin with, it says, the first Feb. 19 tweet contained information that “was obviously different from information that had been preapproved in connection with the Jan. 30 communications.”
In the second place, even if it were the same information, that doesn’t matter according to the “clear and unambiguous” language of the settlement. Musk’s tweets had to be vetted if they contained anything material, period. In fact, if a tweet is delayed for as little as two days after receiving preapproval, the agreement requires that it be submitted again.
In any case, Tesla’s lawyer acknowledges between the lines that the company knew the Feb. 19 tweet was a time bomb. “Upon seeing the 7:15 EST tweet,” Bondi told the SEC, the securities counsel rushed to Tesla’s Fremont, Calif., plant to confront Musk. Together they “drafted a clarifying tweet.”
The most pressing question swirling around Musk’s behavior is: Why?
By failing to comply with the mandates of his legal settlement, he’s challenging the authority of the SEC and the federal judge who approved it. Does he expect them to take this sitting down? If they don’t, then the consequences for him and Tesla could be dire, including his removal from management.
Or does his determined antagonism of the SEC have another motivation? One wouldn’t want to link Musk’s behavior too closely to those poor souls who try to goad police officers into shooting them, since losing one’s job isn’t comparable to losing one’s life. But what rationale could there be for antagonizing an agency that has all the power in this relationship?
Musk has expressed frustration with the pressures of running Tesla and managing its production in the past. Is it possible that, consciously or subconsciously, he’s looking for an escape that he can blame on someone else?
Of more concern to Tesla investors: What if he knows something they don’t know about the company’s financial future — and is hoping to hang any failure on the nasty, overreaching regulators rather than his own dubious management skills?