Once again, Elon Musk is in trouble for tweets. The U.S. Securities and Exchange Commission (SEC) on Monday asked a federal court judge to hold the Tesla (NASDAQ:TSLA) CEO in contempt for violating an agreement that requires him to get advance approval for Tesla-related social media posts.
It might seem trivial -- who cares about a few tweets? -- but this could result in Musk's leaving Tesla, at least for a while. Legally speaking, Musk's Tesla-related tweets are considered investor communications, and it's not OK for a company to give forward-looking guidance that it knows it won't meet. Among the potential penalties: Musk could be barred from acting as CEO of Tesla (or any other public company) for a time.
Here's what we know.
Why the SEC wants a judge to hold Musk in contempt
Here's the background: Last year, the SEC sued Musk and Tesla over Musk's now-famous "funding secured" tweet, in which he (falsely) claimed that Tesla would soon go private at $420 per share. The case was quickly settled after Musk and Tesla agreed to pay fines and accept some limitations, including a provision that required Tesla to preapprove any company-related communications from Musk that might contain material information.
In a court filing on Monday, the SEC argued that Musk breached that agreement with a tweet on Feb. 19 that didn't follow the agreed-on preapproval process.
Tesla made 0 cars in 2011, but will make around 500k in 2019— Elon Musk (@elonmusk) February 20, 2019
A few hours later, after consulting with the lawyer assigned to monitor his tweets, Musk tweeted an amendment.
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.— Elon Musk (@elonmusk) February 20, 2019
Apparently, the amendment made the SEC suspicious. The commission contacted Musk and Tesla the next day, asking them to confirm whether Musk had complied with the preapproval procedures before posting that first tweet. After learning that he had not, the commission decided to ask the court to hold Musk in contempt.
What's the big deal? Won't this just blow over?
It's possible that Musk will receive the equivalent of a slap on the wrist -- a token fine or something. But there's one possible consequence that could be very significant for Tesla investors: Musk could be barred -- legally barred -- from being an officer or director of any public company for a period.
That would end his tenure as CEO of Tesla, at least for a while. And given that some huge percentage of Tesla's sky-high valuation is about its future potential as outlined by Musk, it seems likely that a penalty that bars Musk from serving as Tesla's CEO (or on the company's board) would clobber the stock price.
But how likely is it that the SEC would go that far? Wall Street analysts are skeptical. J.P. Morgan auto analyst Ryan Brinkman, who has an "underweight" rating on Tesla, acknowledged in a note on Tuesday morning that Musk could be removed in a "worst-case scenario."
But Brinkman feels that this latest kerfuffle is much less serious than the allegations following Musk's "funding secured" tweet last year -- and he thinks that Tesla's stock won't implode even if Musk is forced to step away from the company for a time. "If the SEC were to seek Mr. Musk's removal (perhaps subject to yet another settlement), we believe the shares may approach the mid-$200 levels," he wrote.
Still, it's possible that the SEC will try to make an example of Musk, who has not only flouted the rules, but has occasionally trash-talked the commission while doing so. And the reality is that if it comes to a battle between the Feds and Tesla, Tesla isn't going to win.
Check out the latest Tesla earnings call transcript.
The market doesn't think this is a big deal yet, but that could change
So far the broader market seems mostly unconcerned about these developments. Tesla's share price fell about 3% in early trading on Tuesday, but that's hardly a major move for what has always been a volatile stock.
But it's worth noting that Tesla's general counsel, Dane Butswinkas, who had been hired after helping to negotiate last year's settlement with the SEC, left the company on Feb. 20, the day after these tweets. Was his departure related to Musk's unwillingness to follow the rules?
We don't know yet, but we may find out -- especially if the SEC has decided to make an example of Musk.