Elon Musk says the Securities and Exchange Commission is “virtually wrong at every level” for trying to hold him in contempt of court after he allegedly violated the settlement agreement the two sides reached last year. That claim was part of new arguments made Friday by Musk and his lawyers as part of a recent back-and-forth between the Tesla CEO and the federal agency.
The SEC asked a federal judge on February 25th to hold Musk in contempt because, the agency claimed, one of the Tesla CEO’s tweets on February 19th may have violated language in the settlement. In the tweet in question, Musk said Tesla would make “around 500k” cars in 2018, which the SEC believed flew in the face of the official guidance from the company offered on January 30th. Musk even published a correction hours after, which the SEC later determined happened because the Tesla lawyer in charge of monitoring Musk’s tweets felt it needed to be amended.
The settlement was reached in September last year after the SEC sued Musk for securities fraud over tweets he sent in August about taking Tesla private. Musk said at the time that he had “funding secured” to pull off the move, but the SEC’s own investigation turned up evidence that this was false. As a result, Musk was forced out as Tesla chairman and had to pay a $20 million fine.
That’s not all. Musk agreed to oversight around his public communications about Tesla — including his tweets. Specifically, Musk is supposed to submit to “pre-approval of any such written communications that contain, or reasonably could contain, information material to the Company or its shareholders,” according to the settlement. In other words, if Musk is about to tweet something that could affect Tesla’s stock price (and its shareholders), he’s supposed to run it by a designated in-house lawyer first.
This specific part of the settlement is what’s behind the current dispute. Musk argued again today that the language of the settlement allows him the freedom to determine whether his tweets about Tesla will be material or not. The way Musk’s team reads the terms of the settlement, there is an “obligation on the executive to make an initial, good-faith determination as to whether a particular tweet requires pre-approval.”
The SEC has a much more strict interpretation of the settlement, and believes Musk is taking too free an approach. After initially arguing that the February 19th tweet was a violation, the commission said this past Monday that “Musk’s unchecked and misleading tweets about Tesla are what precipitated the SEC’s charges, and the pre-approval requirement was designed to protect against reckless conduct by Musk going forward.”
But today’s filing reveals that the disagreement about what Musk could tweet apparently goes back to before the SEC charged Musk with securities fraud. Musk’s lawyers included emails and drafts of the original settlement in Friday’s filing that Musk had reportedly turned down. The documents show that the SEC originally wanted all of Musk’s public statements about Tesla — tweets included — to be approved before they were published, whether or not they were material to the company’s stock price and shareholders.
This became a “sticking point during the negotiations,” Musk’s lawyers said Friday. They write how they explained to the SEC at the time that “Musk’s ability to engage with customers about Tesla products is critical to Tesla’s success, and that Musk would not agree to broad pre-approval of Tesla-related statements.”
Musk ultimately rejected the initial settlement, which also asked for a two-year chairman ban and a $10 million fine. The SEC quickly filed suit against him in court, seeking a ban from all officer or director positions. Musk settled two days later on harsher terms, though with new language about the approval of his tweets.
Musk has also argued that the February 19th tweet was not material to Tesla’s stock price, for a few reasons. He said the 500,000-car production figure matched up with a claim he made on a call with investors on January 30th, which is true, though he has also since offered different estimates for 2019. Tesla has not responded to repeated requests as to which figure is correct. He’s also said the February 19th tweet was “aspirational and optimistic,” and that it caused no movement in the company’s stock price because it was published after trading was closed that day. The SEC has claimed this is a “post hoc” rationalization.
Last week, the judge in the case said both sides would have until March 26th to ask the court for a hearing on the contempt issue. The SEC declined this past Monday, believing that its case has been made. Musk’s lawyers have apparently not yet asked one way or another; we’ve asked them for clarification and will update this post if we hear back.