Part of the settlement stipulated that Tesla is supposed to pre-approve all of his communications with shareholders that include “material” information about the company.
On February 20, Musk tweeted that Tesla would produce 500,000 cars this year. He quickly clarified that he “meant to say” Tesla would produce 500,000 cars and deliver 400,000. The first tweet was not vetted by Tesla, while the second was, the firm said in a letter to the SEC.
Following the tweet, the SEC asked a judge to hold Musk in contempt of the federal court that approved that settlement. Musk has until March 11 to explain why he should not be held in contempt, according to Reuters.
Peter Haveles, a lawyer and partner at Pepper Hamilton in New York, said a fine and a strong reprimand is the likeliest outcome if Musk is found to be in contempt of court.
“Tellingly, the SEC’s motion paper did not describe what sanction it was seeking from the judge, so they’re leaving some flexibility here,” he added.
Elliot Lutzker, a former SEC enforcement officer, told Business Insider that there’s a possibility the agency could push for Musk to be suspended as CEO if it emerged that the billionaire consistently failed to get his Twitter messages pre-approved.
“They already stripped him of being a chairman, they could bar him from being an officer of a public company,” said Lutzker, who now works for law firm Davidoff Hutcher & Citron.
He agreed with Haveles that a fine is the more likely outcome, as booting Musk from the top position could adversely affect Tesla’s shareholders. “It’s a tough situation because Musk is Tesla and they need him,” he said.
When asked how likely it is that the SEC would pursue criminal proceedings, SEC compliance consultant Robert Quinn said it is rare in a civil case such as Musk’s, but if other tweets are deemed to be in violation of the settlement, things could get a lot more serious.
“The SEC takes market manipulation very seriously,” said Quinn, a consultant at Robert Quinn Financial Regulatory Experts in London. He added that the agency “has a long track record of making examples of people.”
Musk might not have the strongest defense
Musk and Tesla have argued that the tweet is not in violation of the settlement because in Tesla’s Q4 earnings call on January 30, the CEO forecast that Tesla would make between 350,000 and 500,000 Model 3 vehicles in 2019.
The SEC rejected this in its filing, saying it was “not credible.” Quinn, Haveles, and Lutzker agreed that it’s not the strongest line of defense.
“The purpose of the order is to put in some supervision and pre-clearance… So whether or not for the moment his statements were accurate or not, he consciously did not follow the rules,” Haveles said.
Read more:“How embarrassing”: Elon Musk fired back at the SEC in latest fight over Tesla production numbers
Lutzker also said that the “substance” of the tweet was not the issue.
“The telltale sign is that his attorney who represented him… resigned almost simultaneously or contemporaneously with this latest violation of the SEC injunction,” Lutzker said. Tesla’s general counsel Dane Butswinkas resigned on February 20, the same day Musk tweeted about production figures.
Haveles and Quinn agreed that the information in his tweet was potent enough to move the market. Haveles said Musk was lucky the pronouncement was made outside of trading hours.
“He tweets whenever he gets the urge, so I think it was fortuitous but not deliberate on his part that he did it in the middle of the night,” said Haveles.
He added that the tweet’s timing does mitigate against the potential harm it could have caused, “but it doesn’t change the fact that he did engage in misconduct.”
What happens next
Haveles said there will be a procedural hearing, which will involve lawyers from Tesla and the SEC arguing it out in front of Judge Alison Nathan, who approved the original settlement. But if Judge Nathan deems it necessary, she could demand an evidentiary hearing, forcing Musk to testify in person.
Haveles, who has been in the courtroom with Nathan multiple times, said she is not to be messed with. “She is known for being fair-minded, but she is also tough and if she thinks you are playing games with her or misleading her, she will be very sharp in pointing that out to you,” he said.
Musk has a history of mocking the SEC, at one point dubbing the agency the “Shortseller Enrichment Commission.” He doubled down on this on Tuesday, tweeting that “something is broken with SEC oversight.” Musk did, however, say he has that he has “great respect for judges.”
Get the latest Tesla stock pricehere.