Musk’s lawyers mount a spirited defense
It’s not my intention at all that this should become some sort of Tesla blog, but the news has come thick and fast in recent days. To me, the Tesla saga is one of the most fascinating stories in modern finance.
For those who are new to the story, the SEC (Securities and Exchange Commission) has moved for Tesla CEO Elon Musk to be held in contempt of the settlement he agreed with them and a New York court back in October 2018. This followed his infamous “funding secured” tweet, which resulted in $40 million of fines.
All of the related documents are available at this link (courtesy of Dana Hall at Bloomberg).
The Court-ordered judgement forming the settlement agreement ordered that Musk must (among other things):
“…comply with all mandatory procedures implemented by Tesla, Inc. (the “Company”) regarding… the pre-approval of any such written communications that contain, or reasonably could contain, information material to the Company or its shareholders.”
As for Tesla, it was required to “pre-approve any such written communications that contain, or reasonably could contain, information material to the Company or its shareholders. The definition of, and the process to determine, which of Elon Musk’s communications contain, or reasonably could contain, information material to the Company or its shareholders shall be set forth in the Company’s disclosure policies and procedures.”
Musk then made the following tweets in February:
The tweet stating that Tesla “will make around 500k [cars] in 2019” was not pre-approved by anyone at Tesla (except for Musk himself, obviously). The SEC contends that this tweet contains information that is material, or could be material, to the company’s shareholders, and therefore it should have been pre-approved.
Musk’s lawyers, on the other hand, contend that Musk has diligently complied with the settlement agreement. They say that Musk had already forecast that 500k cars could be produced in 2019, so the information in the tweet wasn’t new. They also point out that the tweet didn’t move the TSLA share price in after-hours trading, which proves that it wasn’t material.
It has been admitted that none of Musk’s tweets have been pre-approved, since the settlement agreement.
Tesla’s newly-hired general counsel, who would have been Musk’s “twitter sitter” for any messages which needed to be pre-approved, left the company in February. He lasted just two months, and left around the same time as the controversial tweet shown above.
The SEC has now effectively thrown up its hands in frustration and asked the New York district court of Judge Nathan to decide what must be done.
Yesterday, Musk’s lawyers filed their second reply to the SEC.
Their first claim is that the SEC’s reading of the settlement agreement is too broad, and provide evidence from the settlement negotiations to prove their point. Musk and Tesla explicitly refused to agree that all Tesla-related communications would need to be pre-approved, only those which are “material”. Since the 500k production figure, according to Musk’s lawyers, wasn’t material, Musk did not violate Tesla’s pre-approval policy.
They also highlight that Tesla, the company, has not accused Musk of violating its policy (although it’s hard to find any gap between Musk’s beliefs and Tesla’s beliefs, so what is this really worth?)
They also point to the clause added to the settlement agreement that certain categories of information may be material, “depending on its significance”.
I can’t claim to have any specific legal expertise, so do take what I say with a grain of salt.
Trying to be as objective as possible, I can see that the arguments from Musk’s perspective do have some merit. It can be argued that a 500k production number wasn’t “news”, since Musk had claimed (in a prior conference call) that such a number was possible. And they are right that not all Tesla-related tweets needed to be pre-approved.
However, I keep going back to the line from the settlement agreement stating that communications “which reasonably could contain” material information need pre-approval.
I think a car production forecast for the company could be material, so Musk should have sought pre-approval. Even if it turned out on review that the car production forecast wasn’t material, the settlement agreement was designed so that he would check with others first, before posting such things.
The whole point of the agreement was to prevent another “funding secured” fiasco. Since it is being interpreted by Tesla and Musk in such a way that pre-approval is not being sought for tweets containing things like car production forecasts, the very least that needs to happen is that this agreement needs to be thrown out. A new resolution for the problem is needed.
At the time of publication, the author has a short position in TSLA and a long position in TSLA puts.