14:56, April 04 115 0 theguardian.com

2019-04-04 14:56:04
Tesla CEO Elon Musk faces off against SEC in court

A federal judge in New York has heard oral arguments in a lawsuit brought by the US Securities and Exchange Commission (SEC) seeking to hold Tesla CEO Elon Musk in contempt for violating a settlement reached after he inaccurately claimed last year he had a buyer for the company.

The hearing Thursday in downtown Manhattan could be the first step in a far more draconian punishment, including his removal from Tesla management at a crucial moment for the electric carmaker’s expansion.

In court, lawyers for the unpredictable billionaire entrepreneur argued that Musk has not violated the terms of his settlement with the SEC reached last October in which he agreed to not to put out “material” information about the publicly listed Tesla without the pre-approval of a board established to oversee his social media posts.

The SEC ruling came after an extraordinary episode in August, when Musk inaccurately claimed he had an investor for the troubled company, sending the company’s share price soaring.

But in an apparent violation of the settlement Musk tweeted on 19 February that “Tesla made 0 cars in 2011, but will make around 500k in 2019”, meaning 500,000 vehicles.

Four hours later, Musk corrected himself, saying annualized production would probably be around 500,000 by the year’s end, with full-year deliveries totaling 400,000.

The SEC said the earlier tweet contrasted with Tesla’s 30 January forecast that it would deliver about 400,000 vehicles this year.

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Tesla, which built its reputation on luxury cars, has faced several production challenges with its Model 3 sedan, which it is counting on to reach the mass market, recently offering a version starting at $35,000.

Although Tesla conceded that Musk did not receive pre-approval for the posts and Musk corrected his mistake, regulators said he had “once again published inaccurate and material information about Tesla to his over 24 million Twitter followers”, according to court papers.

Since bringing the action, Musk has maintained he has diligently tried to follow the court settlement, and that the SEC’s request is a breach of his constitutional right to free speech.

The question beforeJudge Alison Nathan is whether Musk breached the settlement and, if he did, what penalties the regulator will now impose. If Nathan finds Musk in contempt of court she could impose another fine, extended limits on his social media use, or remove him from any executive or management role in the company.

“The issue isn’t that he corrected the tweet, it’s that he was supposed to get approval before he did it and he did not,” said Charles Elson, a professor of corporate governance at the University of Delaware. “He breached the settlement, so the SEC can do whatever they wish.”

Elson believes regulators are now obligated to take meaningful action or the settlement with Tesla or any future agreement the SEC reaches with any company in the future reaches will be rendered meaningless. But because Musk and his leadership of the company are so intertwined Musk has regulators “over a barrel”.

“He is saying if you don’t let me do what I wish I’ll blow myself up and take everyone with me. That’s the problem here, and the SEC has got to have the courage to say, Okay, go ahead.”

But others believe Nathan is not obligated to act severely, including the removal of Musk from Tesla’s board or as chief executive, in part because regulators would not want to be seen to be responsible for impacting the company’s future.

James Cox, a Duke University law professor, said Nathan was unlikely to impose a severe penalty such as giving up control over Tesla.

“We have to understand that Tesla is at a very important point in its history, and I don’t think any judge would want to be viewed in hindsight as the cause of the demise of Tesla,” he said.

“She could give him a good tongue-lashing, and tell him this is it, and next time she’s not going to be so nice,” Cox added.

Regulator’s battle with Musk dates back to 7 August 2018, when he tweeted that he had “funding secured” to take Tesla private at $420 a share – a false claim, as it turned out, that nonetheless sent Tesla’s stock up as much as 13.3%.

In September the regulator filed a lawsuit saying Musk had misled investors and fined both the company and Musk $20m and forced Musk to step down as Tesla’s chairman. he remains CEO.

The SEC accepted the company’s offer to adopt procedures to oversee all of Musk‘s communications, regardless of format, and pre-approve written communications that could be material to the company.

That has not stopped Musk’s war of words with the body. He has since labeled the SEC the “Shortseller Enrichment Commission”, recalling his attacks against hedge funds and other investors who sell Tesla stock short, hoping it will fall.

In a December interview with CBS’s 60 Minutes, Musk said he did not have respect for the SEC. He also said his tweets had not been reviewed in advance since the settlement.

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