Tesla tells federal Judge that SEC is harassing Elon Musk and the company

Tesla’s attorneys have told a federal judge that the regulator is conducting unfounded investigations into both the CEO and the company.

Elon Musk is allegedly being harassed by the SEC over a 2018 settlement that sought to restrict the CEO’s use of social media. Picture: Jim Watson / AFP

Tesla says regulators are harassing Chief Executive Elon Musk over his compliance with a 2018 regulatory settlement that sought to restrict his use of social media.

The Securities and Exchange Commission is conducting unfounded investigations of Mr Musk and Tesla, attorneys for the company say in a letter filed Thursday with a federal judge who oversaw the settlement. Tesla disclosed earlier this month that regulators sent a subpoena last year that sought information showing how the company and its CEO complied with the terms of the deal.

The SEC hasn’t distributed $US40m in fine money to shareholders allegedly hurt by Mr Musk’s 2018 tweets that he planned to take Tesla private, according to the letter. The SEC alleged that Mr. Musk’s statements weren’t truthful. The regulator’s 2018 lawsuit eventually led to an unusual agreement that Tesla lawyers would preclear certain of the CEO’s tweets and other public statements.

“The SEC seems to be targeting Mr. Musk and Tesla for unrelenting investigation largely because Mr. Musk remains an outspoken critic of the government,” attorney Alex Spiro wrote in the letter to U.S. District Judge Alison Nathan in Manhattan.

In December, Judge Nathan found that a company appointed to distribute money to shareholders hadn’t sent required status reports and quarterly accounting statements to the court about its efforts. The company, Rust Consulting, told the judge in January that it was still working with the SEC on the distribution plan.

The SEC typically distributes 80 per cent of the funds available in a case to shareholders within two years of the distribution plan being approved, according to the latest SEC annual report.

The SEC will have to respond to Tesla’s letter but “has every reason to keep pursuing him,” said Adam Pritchard, a law professor at the University of Michigan who specialises in securities regulation.

Regulators could ask Judge Nathan to find that Mr Musk violated the agreement and seek sanctions until he complies, Mr Pritchard said.

Judge Nathan previously declined to do that in 2019 when the SEC told her that Mr Musk should be held in contempt over tweets that violated the rules. The judge told the two sides to “put their reasonableness pants on” and find a way to settle the dispute.

“At some point the court may say, ‘this was a mistake. We should not have done this because the parties are unable to agree on whether the terms of the order are being satisfied,” Mr Pritchard said. “The court cannot be in the business of supervising this officer of a public company on a day-to-day basis.” An SEC spokesman declined to comment.

Mr Musk landed in trouble in 2018 over a tweet that said he had “funding secured” to take Tesla private at $US420 a share. The SEC alleged that Mr Musk had never discussed such a going-private deal and that his statement, which caused Tesla’s stock to skyrocket, constituted fraud.

Mr Musk and Tesla settled the SEC lawsuit by each agreeing to pay $US20m, and Mr Musk stepped down as chairman in addition to agreeing to the Twitter policy. But he continued to antagonise the SEC, tweeting in July 2020: “SEC, three letter acronym, middle word is Elon’s.” Mr Musk frequently ridicules government officials despite his need to work with regulators who play a role overseeing both Tesla and SpaceX, the rocket company he founded. He has taken aim at the SEC, highway safety regulators and the Federal Aviation Administration, whose space division he has called “fundamentally broken.” Mr Musk has also criticised public policies such as financial incentives to spur electric-vehicle adoption.

Mr Spiro’s letter suggests that Tesla and Mr Musk regret settling and agreeing to the social-media oversight policy, which Judge Nathan approved. The judge, not the SEC, should determine whether Mr Musk and Tesla violated the policy or other terms of the settlement, according to Mr Spiro.

The letter alleges there are serial investigations, including one instance of the SEC closing one probe only to open a new one at almost the same time.

The company decided to resolve the lawsuit because it believed that fine money would go to Tesla shareholders, it says.

“When Mr Musk and Tesla agreed to the consent decrees in 2018, Tesla was a less mature company,” Mr Spiro wrote. “Mr Musk and Tesla understood that settling with the SEC would at last end the SEC’s harassment and, importantly, make this court, and not the SEC alone, the monitor over any perceived compliance issues going forward.” The letter isn’t the first indication of friction over how Mr Musk and Tesla follow the social-media policy. SEC attorneys informed Tesla in 2020 that Mr Musk’s use of Twitter had twice violated the preapproval policy, The Wall Street Journal reported last year.

Of concern were tweets including a May 1, 2020, post in which Mr Musk said, “Tesla’s stock price is too high imo,” using an abbreviation for “in my opinion.” Tesla’s shares fell after that tweet.

The Wall Street Journal