SEC faces unique challenge in face of Elon Musk’s goading

SEC faces unique challenge in face of Elon Musk’s goading

Pity the regulator who has to tame Elon Musk.

The Tesla chief executive officer was back in the legal firing line at the start of this week, after the US Securities and Exchange Commission asked a judge to find him in contempt of court. His offence: tweeting potentially important new information about the electric carmaker without first clearing it with in-house lawyers, something he has been required to do since settling a fraud charge from the SEC last October.

Never one to take things lying down, the headstrong Tesla boss was quickly back on Twitter to defend himself. It was the SEC that was really at fault, he said, by taking an enforcement action over an inconsequential matter that could end up hurting shareholders.

Mr Musk’s relentless goading — including, as the SEC itself pointed out, telling a TV interviewer that he did not respect the agency — has finally drawn a response.

“You don’t poke a bear. Nobody pokes a bear. You have to question his judgment,” said Charles Elson, a professor of corporate governance at the University of Delaware. The regulators “have to enforce this settlement, if they let this go then every CEO will be saying they’re special”, he added.

The latest tangle with Mr Musk, however, has left the SEC in an unenviable position. Not to take action would risk seeing its authority eroded. But a tough penalty against Mr Musk could hurt the very shareholders the agency is meant to protect: the ultimate sanction, blocking Mr Musk from being chief executive, could wipe nearly 20 per cent from the share price, according to analysts at JPMorgan.

That difficult balance seemed to be borne out by the SEC’s actions this week. The agency called for Judge Alison Nathan, who oversaw last year’s fraud settlement, to find Mr Musk in contempt of court — but stopped short of imposing sanctions.

“The SEC here is trying to avoid having to take extreme action, but [Mr Musk] keeps pushing them,” said Rebecca Roiphe, a professor at New York Law School. “It is hard to say how this is going to end.”

Because this is a civil contempt case rather than a criminal one, the judge will not be able to impose a jail sentence on Mr Musk should she find him guilty. Instead, lawyers believe she would be likely to slap him with a heavy fine and possible further restrictions on his social media use.

The agency’s careful approach might have been calculated to elicit contrition from the Tesla chief executive, said Doug Davison, a former SEC enforcement official. But if so, then Mr Musk showed no interest in obliging.

According to some, this has only served to underline how little power the regulators have to enforce their earlier agreement with him. The agency had already drawn criticism from corporate governance hardliners for not pushing Mr Musk out of the company over its fraud claim last year. The case arose from Mr Musk’s inaccurate claim last summer that he was close to a buyout of the company. By thumbing his nose at the SEC now, he is only adding to an impression that he feels impervious.

One former SEC official said: “The agency has actually revealed here how completely toothless it is.”

Adding to its difficulties is the challenge of regulating communication on Twitter, an informal and truncated medium where normal rules of discourse can break down. According to David Gourevitch, a securities lawyer, the SEC has a particular difficulty in enforcing its own rules about social media use, which say that a company can tweet material information about itself, but has to let investors know in advance.

“Tweets in particular are inherently inappropriate for securities law, because securities law requires caveats and disclosures for which tweets are too short,” he said.

Mr Musk’s scattershot approach to communications and instinctive flair for self-promotion seem tailor-made for this world, where it can be hard to pin him down to one version of events.

In last week’s questionable tweets, for instance, he first said Tesla might produce 500,000 cars this year, then followed that four hours later to say he had meant that its weekly production would reach an annualised rate of 500,000 by the end of the year. Either assertion would be material new information for shareholders, according to the SEC — putting Mr Musk under an obligation to consult his lawyers before tweeting, something he didn’t do.

But in Mr Musk’s world, other versions of reality could be equally valid. The Tesla chief executive himself pointed out on Twitter that he had also set a completely different target, putting Tesla’s sales of just one car — its Model 3 — at 350,000-500,000 this year, a figure that is impossible to square with the company’s other targets.

Perhaps not surprisingly, Wall Street has become inured to Mr Musk’s habit of throwing around such disparate goals without any apparent sense of contradiction — not least because of his frequent revisions of targets that have been missed.

“The Street did not view the tweet as a game changer and largely shrugged it off,” said Dan Ives, an analyst at Wedbush. The fact that Tesla’s shares did not move on Tuesday, despite the new legal jeopardy Mr Musk is now in, showed how the stock market sees this as “a side show”. He added: after sticking with Mr Musk through previous controversies like this, investors “have buckled their seat belts and are along for the ride”.

However, there is a different possibility. According to some lawyers, the SEC may simply be biding its time until it can get in front of Judge Nathan — and that the actions it then pushes for could bring a rude awakening for Mr Musk and his followers.

“Once the judge decides on civil contempt, she might be able to move to criminal contempt if the SEC decides it wants to push that,” said Carl Tobias, a law professor at the University of Richmond. “The SEC wants to protect its reputation. I think it is going to make an example out of him.”

There is much more at stake here for the SEC than a couple of wayward tweets, added Mr Elson. “If they don’t act, they lose their ability to regulate any other company,” he said.

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