The Securities and Exchange Commission just asked a judge to hold Tesla CEO Elon Musk in contempt for reckless tweeting and violating the settlement stemming from Musk’s “420-funding-secured” episode. (Contempt filing here.)
Musk settled with the SEC in September 2018 in response to a dubious $70 billion privatization claim. He had to step down as Tesla chairman for three years and pay a $20 million fine. Tesla also paid a $20 million fine, and adopted new governance rules, including the addition of a securities expert/Twitter censor to prevent less-than-accurate and potentially market-moving social media statements.
Yet Musk is still engaged in brinksmanship with the SEC.
Last week Musk tweeted, “Tesla made 0 cars in 2011, but will make around 500k in 2019.”
You’d have to call that 500,000 figure aspirational; that’s 10,000 vehicles a week, an unreachable rate at this moment. The SEC called it “inaccurate.”
Musk walked the claim back a few hours later, tweeting that Tesla’s annualized production rate at the end of 2019 would be about 500,000 cars, while the total number deliveries for 2019 was still forecast at roughly 400,000.
Musk went on to taunt the SEC once again, tweeting: "SEC forgot to read Tesla earnings transcript, which clearly states 350k to 500k. How embarrassing..."
The SEC claims that, contrary to the settlement, “Musk’s tweets have been reviewed after their publication," but "Musk did not seek or receive pre-approval prior to publishing this tweet, which was inaccurate and disseminated to over 24 million people," according to the SEC filing.
The SEC goes on to claim, "For all the reasons stated, the SEC respectfully requests that the Court enter an order to show cause why Defendant Elon Musk should not be held in contempt of the Court's October 16, 2018 Final Judgment."
A civil contempt violation can potentially result in a fine, imprisonment, or an officer and director bar. Tesla stock is down 3.6 percent in after-market trading.
Tesla is going to need capital to grow. SEC investigations inhibit its ability to raise capital in public markets.
[updated 10 a.m. PT Feb. 26] Reuters reports that Musk has until March 11 to explain why he should not be held in contempt. U.S. District Judge Alison Nathan in Manhattan issued her order one day after the SEC asked that Musk be held in contempt over tweets he made on Feb. 19 concerning Tesla’s 2019 production outlook.
This self-induced trouble comes at a treacherous time for Tesla. In order for Tesla to have a positive first quarter, a lot of pieces will have to fall into place. European and China deliveries need to ramp and make up for the de-emphasis on the U.S. market.
Meanwhile, as part of Tesla’s challenging quarter:
- Tesla has a convertible bond that will need to be settled with $920 million in cash at the end of this week.
- Consumer Reports dropped its recommendation on the Model 3 (and a number of other auto models), citing a lapse in reliability.
- Tesla’s general counsel resigned after only two months on the job.
- There are continued reports of customer service hell in the U.S., Germany and Austria.
- Enormous cash penalties could be imposed if employment targets aren't met at Tesla’s Buffalo factory.
- Tesla had layoffs affecting 7 percent of staff across the company in January.
Tesla will need some stellar sales performances in Europe and China this quarter to deliver on Musk’s promise of 50 percent growth in 2019 and quarterly profits.
Read a timeline of Tesla's privatization saga here.
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