Tesla CEO Elon Musk has until March 11 to explain to a federal judge in New York why he shouldn’t be held in contempt of court.
U.S. District Judge Alison Nathan issued an order Tuesday after federal securities regulators asked the court to hold Musk in contempt for violating the terms of a settlement agreement.
The Securities and Exchange Commission sought the order following a Feb. 19 tweet from Musk about auto production numbers that was not approved by a Tesla lawyer. Under a settlement from October related to a previous tweet, Musk’s tweets must be OK’d by the lawyer if there is potential for the message to influence the company’s stock price.
Legal experts say it’s unlikely Musk will face a severe penalty even if he is found to be in contempt, but he could be barred from serving as CEO or an officer at Tesla.
Erik Gordon, a University of Michigan law and business professor, doesn’t believe that that will happen, “because what Musk did was not gigantic and it was quickly corrected.”
But Gordon expects Musk will do it again, and that would trigger more significant action from the court.
“I think it’s only a matter of time before the nuclear option is invoked and upheld because Musk just will not constrain himself,” Gordon said.
The SEC sued Musk last September for using his Twitter account in August to announce he had secured financing for a potential buyout of Tesla — news that caused the company’s stock to swing wildly. He later backed off that buyout idea, but regulators concluded he had never lined up the money to pull off the deal that probably would have required at least $25 billion to complete.
Musk initially contended that he hadn’t done anything wrong, but reluctantly agreed to have future tweets that could affect Tesla’s stock pre-approved.
Now the SEC is alleging that Musk broke the terms of that agreement with a tweet that predicted Tesla would make about 500,000 cars this year. About 4 1/2 hours after that tweet, the statement was corrected, and Musk wrote that he meant Tesla had started to manufacture cars at a weekly rate that would translate into 500,000 cars during a yearlong period, but not necessarily for calendar 2019.
Musk acknowledged he didn’t get company approval for the initial tweet, according to the SEC, even though car manufacturing statistics can affect stock prices of automakers. In his defense, Musk said he didn’t think his tweet needed clearance because he was basing it on information that had been disclosed in late January. Both Feb. 19 tweets occurred while the U.S. stock market was closed. Tesla’s stock rose by just $1.10, or less than 1 percent, the next day.
But those factors evidently didn’t sway the SEC, which illustrated Musk’s allegedly contemptuous behavior with some of the comments he made during a television interview with “60 Minutes” that aired Dec. 9.
In that interview, Musk revealed that no one at Tesla was screening the tweets he posts to his account, which now has 25 million followers. When pressed how Tesla officials could know whether his tweets might be violating the SEC settlement if they weren’t readying them before they were posted, Musk replied: “Well, I guess we might make some mistakes. Who knows?”
The SEC also pointed out that during the same interview, Musk declared: “I want to be clear. I do not respect the SEC. I do not respect them.”
Tesla’s “disclosure counsel” realized Musk may have crossed a line with his Feb. 19 tweet about car manufacturing, according to the SEC. After that tweet posted, the lawyer “immediately arranged to meet with Musk and draft the corrective statement that Musk tweeted over four hours later.”
The SEC filed papers seeking a contempt finding late Monday, alleging that Musk violated a $40 million settlement he and Tesla reached with the U.S. stock market’s chief regulatory agency five months ago.
Letters to the SEC from the company’s attorneys included in Monday’s filing argued that Musk remains in compliance with the settlement.
Shares of Tesla rose just under 1 percent in midday trading Tuesday to $300.81.