The regulator asked a federal judge to find the billionaire entrepreneur in contempt of an October settlement reached after the agency sought his removal as CEO and chairman last year for a tweet about a funding deal that proved ephemeral. Under the terms of that agreement, Musk was supposed to have any possibly market-moving tweets vetted — a process he publicly dismissed.
The SEC said in a court filing late Monday that he “did not seek or receive pre-approval prior to publishing” a February 19, 2019 tweet to his nearly 25 million followers that Tesla would likely build about half a million cars this year. Four hours later, Musk amended his Twitter comment to note that the production pace would reach an annualized rate of 500,000 units by year-end. Tesla General Counsel Dane Butswinkas, the person who’d likely have to review Musk’s tweets, resigned the following day.
Elon Musk via Twitter
The SEC “respectfully moves this Court for an order to show cause why Defendant Elon Musk should not be held in contempt for violating the clear and unambiguous terms of the Court’s October 16, 2018 Final Judgment,” it said in the filing with the U.S. District Court in Manhattan.
Tesla shares fell 4% after hours.
While the company did not immediately respond to a request for comment on the development, Musk did – via Twitter late Monday, naturally, to defend his production comments, saying "SEC forgot to read Tesla earnings transcript, which clearly states 350k to 500k. How embarrassing."
Elon Musk via Twitter
During the January 30 results call Musk did indeed give the 500,000 unit figure, as the high end of the range for question about Model 3 sales in 2019, though his comment was less precise than his tweet.
During the conference call, Colin Rusch, an equity analyst with Oppenheimer, asked Musk to "talk a little bit about the geographic dispersion for the guidance for 2019, where you're expecting the Model 3s to sell through as well as the other models?"
"Well, I think we did, actually," Musk said. "Yes, it's clear in our letter."
Deepak Ahuja, Tesla's outgoing CFO, said, "We indicated in Q1, we will start delivering Model 3s in Europe and China. And we also shared a chart showing the potential market size for midsized premium sedans in North America, Europe and Asia, suggesting those markets could be even bigger. So I think that gives a good sense of where we'll be. And we'll launch the right-hand drive version at some point to go to the other markets."
Musk then added, "Yes. Maybe on the order of 350,000 to 500,000 Model 3s, something like that this year."
The company's fourth-quarter results letter also doesn't contain that precise reference. Instead, it says "barring unexpected challenges with Gigafactory Shanghai (under construction in China), we are targeting annualized Model 3 output in excess of 500,000 units sometime between Q4 of 2019 and Q2 of 2020."
That reference support his amended February 19 tweet, but not the first that said Tesla would "make around 500k in 2019."
'Funding Secured' Settlement
The SEC settlement arose from Musk’s August 2018 tweets about a plan to take Tesla private at $420 a share, claiming he had “funding secured” to do so. That tweet was issued as Tesla shares were actively trading, triggering a spike in the stock’s value and a temporary trading halt. The SEC determined the tweet was inaccurate and in September sought Musk’s removal as Tesla CEO and chairman, accusing him of fraud and share price manipulation.
Musk and Tesla agreed to a settlement that let him keep his CEO job, but he had to resign as chairman. He and the company also paid fines totaling $40 million, added two independent board members and agreed that Musk’s tweets about Tesla would be reviewed before he posted them.
Yet in an interview with CBS' 60 Minutes that aired in December 2018, Musk told interviewer Lesley Stahl that no one at Tesla was vetting his posts:
Stahl: “Have you had any of your tweets censored since the settlement?”
Stahl: “None? Does someone have to read them before they go out?”
Stahl: “So your tweets are not supervised?”
Musk: “The only tweets that would have to be say reviewed would be if a tweet had a probability of causing a movement in the stock.”
Stahl: “And that's it?”
Musk: “Yeah, I mean otherwise it's, 'Hello, First Amendment.' Like freedom of speech is fundamental.”
Stahl: “But how do they know if it's going to move the market if they're not reading all of them before you send them?”
Musk: “Well, I guess we might make some mistakes. Who knows?”
Stahl: “Are you serious?”
Musk: “Nobody's perfect.”
Stahl: “Look at you.”
Musk: “I want to be clear. I do not respect the SEC. I do not respect them.”
Stahl: “But you're abiding by the settlement, aren’t you?”
Musk: “Because I respect the justice system.”
That exchange was included in the SEC's court filing.
A day after Musk's production tweet, the SEC sent letters to lawyers representing Tesla asking if it had been reviewed in advance. Bradley J. Bondi, an attorney with New York-based firm Cahill Gordon & Reindel, responded in a letter to the agency that the specific tweet wasn’t pre-approved, but that Musk believed it was in line with approved information provided during Tesla’s January 30, 2019 earnings call.
“Mr. Musk’s 7:15 PM EST tweet — in which he stated that `Tesla made 0 cars in 2011, butwill make around 500k in 2019' — was intended to recapitulate the information set forth in these pre-approved statements, which had been published only 20 days prior,” Bondi said.
“Although the 7:15 PM EST tweet was not individually pre-approved, Mr. Musk believed that the substance had already been appropriately vetted, pre-approved, and publicly disseminated. Moreover, the tweet was made outside of NASDAQ trading hours.”