There’s no shortage of distractions coming out of Tesla to take the focus away from a smoldering legal battle between the automaker and its favorite foe, the U.S. Securities and Exchange Commission.
The SEC, however, isn’t easily led astray by retail store turmoil and the promise of a crossover with no home. The regulator has stepped up its efforts to see Tesla CEO Elon Musk held in contempt of court for violating an earlier settlement agreement. At the root of the two contempt orders, the latest filed on Monday, is the source of all evil in today’s world: social media.
Just as a summertime tweet from Musk sparked a lawsuit that ultimately saw the Tesla co-founder dropped as company chairman and kept on a short Twitter leash, a February tweet stirred up the current controversy.
On February 19th, Musk tweeted that his company expected to “make around 500k” cars by the end of the year. He corrected himself a few hours later, tweeting, “Meant to say annualized production rate at end of 2019 probably around 500k, ie 10k cars/week. Deliveries for year still estimated to be about 400k.”
To use an overused term ripped from modern American headlines, the SEC pounced. In an earnings report issued not long before the tweet, Tesla claimed its forecast for the year was 400k vehicles. To the SEC’s eyes, this was misleading information, and a clear violation of the settlement agreement. It called on a federal judge to hold Musk in contempt of court.
Musk’s legal team argued the CEO did nothing wrong in the eyes of the law, claiming the tweet “was not material.” In the earlier settlement (which came after a fraud suit that Musk dared the SEC to file), Musk agreed to Court-ordered pre-approval of communications containing material that would be of importance to Tesla shareholders. That includes tweets. It was assumed that a third party would peruse all of Musk’s tweets before he fired them off into the internet ether.
Get real, Musk’s lawyers claimed.
“Since entry of the Order, Musk has dramatically reduced his volume of tweets generally and regarding Tesla in particular,” they wrote in a March 11th filing, adding, “the Order as the SEC interprets it would raise serious First Amendment issues and implicate other constitutional rights. The SEC seeks to rewrite the Order to eliminate Musk’s discretion, effectively requiring Musk to seek pre-approval of any tweet that relates to Tesla, regardless of its significance, prior dissemination, or nature.”
The SEC fired back on Monday. In a filing to the U.S. District Court for the Southern District of New York, the regulator claims Musk apparently had no intention of complying with the Court’s order, or the Feb. 19th tweet wouldn’t have happened.
“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,” the SEC wrote.
From that filing:
It is therefore stunning to learn that, at the time of filing of the instant motion, Musk had not sought pre-approval for a single one of the numerous tweets about Tesla he published in the months since the Court-ordered pre-approval policy went into effect. Many of these tweets were about the topics specifically identified by Tesla in its own policies as potentially material to shareholders. Musk reads this Court’s order as not requiring pre-approval unless Musk himself unilaterally decides his planned tweets are material. His interpretation is inconsistent with the plain terms of this Court’s order and renders its preapproval requirement meaningless.
In short, Musk’s team says the SEC is after an “unconstitutional power grab.” The SEC feels Musk’s defence “borders on the ridiculous.”
It’s not just the SEC that wants Musk to shut up. A group of institutional investors, already riled by Musk’s earlier tweets and seeking damages, filed suit in Delaware Chancery Court earlier this month in the hopes of barring Musk from unfettered access to the “tweet” button.
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