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Elon Musk Faces Monday Deadline to Explain Why He Shouldn’t Be Held in Contempt

Elon Musk speaks during a press conference after the launch of SpaceX Crew Dragon Demo mission at the Kennedy Space Center in Florida on March 2, 2019. (Credit: JIM WATSON/AFP/Getty Images)

The clock is ticking down on Elon Musk’s deadline to explain why he shouldn’t be held in contempt of court.

The SEC requested Musk be found in contempt for a violating a settlement agreement. Monday is the deadline for Musk’s response.

The agency cites a recent tweet in which Musk said Tesla would build 500,000 cars this year. He quickly issued a second tweet clarifying his earlier claim: Tesla would build at an annual rate of 500,000 cars by the end of the year, but Tesla would only build 400,000 cars in 2019.

A mistake like that typically wouldn’t get the SEC too excited. But Musk has been battling with the agency since last fall. It sought to have him removed as CEO after he tweeted in August that he had “funding secured” to take the company private. It later turned out that he had talked to investors about backing such a bid but secured nothing.

Musk and Tesla reached a settlement with the SEC in which he got to stay as CEO but had to give up his chairmanship. The SEC fined Musk and Tesla $20 million each (Musk paid both). He also agreed to clear social media posts with someone at the company if those posts contained material information to investors.

The question for the court is whether or not Musk’s mistaken tweet about 500,000 cars violated his agreement.

Tesla’s lawyers, in a letter to the SEC filed with the court, admitted no one else at Tesla saw the tweet before he sent it at 7:15 pm ET on February 19. Other Tesla executives immediately talked to Musk about the tweet and he tweeted the clarification three hours later.

“There is no suggestion that Musk has sought or obtained pre-approval of any tweet prior to publishing it,” said the SEC in its court filings.

But the company’s attorney argued in a letter to the SEC that “Musk believed that the substance had already been appropriately vetted, pre-approved, and publicly disseminated” during the company’s earlier quarterly results.

“Moreover, the tweet was made outside of Nasdaq trading hours,” said the attorneys.

But SEC argues the pre-approval of that information, which Tesla released three weeks prior, lasted just two days under terms of the settlement. And it argues that the tweet was incorrect, so Musk couldn’t possibly have gained pre-approval.

“The SEC required this [pre-approval] provision as a term of its settlement with Musk in order to prevent Musk from recklessly disseminating false or inaccurate information about Tesla in the future,” said the agency’s filing.

The SEC has yet to say what penalty it wants to impose if Musk is found in contempt.

Brad Bennett, a securities lawyer who was formerly director of enforcement for the Financial Industry Regulatory Authority, thinks the court will probably put further restrictions on Musk’s public comments.

“It could tell him ‘No more tweeting,'” Bennett said.

Bennett believes there’s about an 80% chance of some kind of tighter restrictions, and only a 10% chance that Musk will not be found in contempt. But there is also a 10% chance the court could impose more severe penalties, up to and including stripping him of his CEO title.

“I don’t think that is likely,” Bennett said of that severe penalty. “They are loath to disrupt someone seen as an innovator. Those are the type of people who get the greatest benefit of the doubt.”

Musk doesn’t make his disdain for the Securities and Exchange Commission a secret, and he has continued to take shots at the SEC after his settlement. He called it the “Shortseller’s Enrichment Commission” in an October tweet. In an interview on 60 Minutes he said “I want to be clear. I do not respect the SEC. I do not respect them.”

His behavior since the settlement is probably the reason the agency moved against him, according to Bennett. “This guy couldn’t do more to piss off the SEC if he tried.”

The decision about whether Musk is in contempt will ride with the court. But Musk could lose there if Judge Alison Nathan feels he is mocking the earlier agreement with his actions and statements.

“No court likes having a thumb stuck in its eye when it’s exercising its power,” said Bennett.