SEC Told Tesla (TSLA) It Failed to Oversee Musk's Tweets: WSJ

The Securities and Exchange Commission (SEC) said Tesla’s (NASDAQ: TSLA) boss Elon Musk flouted its court orders in 2019 and 2020, according to the Wall Street Journal.

The regulator claims Musk had twice disobeyed court-ordered policy that required his tweets to be approved by the company lawyers before publishing, the WSJ reports.

The carmaker and the SEC already settled enforcement action in 2018 after Musk was accused of committing fraud by tweeting about a potential acquisition of Tesla. The settlement involved Musk paying $20 million and agreeing to have his public statements preapproved by the company’s lawyers.

However, Musk failed to comply with the court orders in 2019 and 2020. According to the SEC, Musk’s tweets about Tesla’s solar roof production volumes and stock price haven’t been previously approved by the automaker’s lawyers.

The regulator told Tesla in May last year that the carmaker hasn’t enforced “these procedures and controls despite repeated violations by Mr. Musk.”

“Tesla has abdicated the duties required of it by the court’s order,” said the letter signed by a senior SEC official Steven Buchholz.

While the move represents an unusual requirement from the SEC, the regulator saw the pre-approval condition as a way to improve Tesla’s corporate governance after the enforcement action in 2018. The SEC also asked Musk to abandon his chairman position and required Tesla to hire two independent directors.

On May 1, 2020, Musk published a tweet saying: “Tesla’s stock price is too high imo,” which resulted in Mr. Buchholz writing another letter to the carmaker.

The carmaker responded by saying its lawyers haven’t reviewed the tweet, arguing that “personal opinion” didn’t require approval, as per the regulator’s correspondence.

Musk even publicly mocked the SEC later in July, posting another tweet, “SEC, three letter acronym, middle word is Elon’s.”

According to Jill Fisch, a University of Pennsylvania law professor, Elon Musk deserves a special treatment given the impact he can produce on markets.

“It’s hard to draft a court order that allows for some communication but also potentially constrains or monitors it,” Ms. Fisch said. “The first time out, it’s going to be an imperfect tool.”

Analyst Gordon Johnson from GLJ Research reiterated a “Sell” rating on TSLA as he believes the chance is far higher the SEC may take “real action” here.

“We believe the details unveiled via the WSJ’s FOIA request have materially increased the possibility the SEC takes action directly against E. Musk,” the analyst commented.

“Our gut is the SEC is investigating more broadly and trying to build a “can’t lose” case – E. Musk has shown he will fight even when he is wrong, implying, in our view, the SEC is afraid to lose another (very) public battle, as they did they first time around.”

Johnson says that the SEC element adds more risk to the Tesla story, which could ultimately yield a bigger selloff.

“In a worst case scenario, should the SEC decide to enforce the original recommendation of banning E. Musk from being a public company CEO/officer, the consequences to TSLA’s stock price could be severe. Furthermore, given a number of Environmental, Social and Governance (“ESG”) investors are active owners of TSLA’s stock, and the “G” in “ESG”, as it relates to TSLA, appears to be severely lacking, should the investors in ESG funds begin to demand the stocks held in the portfolio match the mandate, there could be a more broad-based selloff of TSLA’s shares,” the analyst concluded.

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