SEC Cracks Down on CEO Elon Musk Again

Elon's tweets continue to be a risk factor for Tesla shareholders.

Daniel Sparks
Daniel Sparks
Feb 25, 2019 at 8:46PM

Tesla (NASDAQ:TSLA) shares took a hit in after-hours trading on Monday, falling 5% as of 6:38 p.m. EST. The stock's pullback was prompted by news that the U.S. Securities and Exchange Commission (SEC) has asked a judge to hold Tesla CEO Elon Musk in contempt for violating his settlement with the SEC last fall.

The news -- and the stock's subsequent pullback -- highlights the risk factor the outspoken CEO's frequent tweeting has morphed into over the last year.

A red Model 3 driving at sunset

Model 3. Image source: Tesla.

Musk's tweets are causing trouble again

Bloomberg explained the SEC's issue with Musk:

The SEC claimed on Monday that a Feb. 19 tweet by Musk violated the settlement when he wrote that "Tesla made 0 cars in 2011, but will make around 500k in 2019." The settlement with the agency required him to seek pre-approval from the company for social media posts and other written communication that would be material to the company or investors.

Tesla's actual guidance in its fourth-quarter shareholder letter was unclear about how many vehicles the company expected to produce in 2019. The company did say, however, that it expects to deliver between 360,000 and 400,000 vehicles during the year. 

Notably, the tweet was made after the trading day ended. In addition, Musk quickly corrected his forecast in a follow-up tweet later the same day, saying: "Meant to say annualized production rate at end of 2019 probably around 500k, ie 10k cars/week. Deliveries for year still estimated to be about 400k."

The SEC cites Musk's 24 million Twitter followers, which includes members of the press, as a reason the CEO's inaccurate tweets are such a big problem.

Check out the latest Tesla earnings call transcript.

An unfortunate liability

Whether Musk can avoid repercussions or not from this tweet, it's unfortunate that the CEO's tweeting has become a liability for shareholders. After working its way through an initial rough start for Model 3 production during 2017, the company benefited from a well-executed production ramp in 2018 -- particularly during the second half of the year. Even more, Tesla swung to profitability and posted meaningful profits and free cash flow in both its third and fourth quarter of 2018.

The CEO has already been stripped from his chairman role as part of his previous settlement with the SEC.

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Investors should look for Tesla to make a better effort to put policies and procedures in place to ensure Musk's social media usage is beneficial to shareholders instead of an unnecessary risk factor.