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How Securities Lawyers View Elon Musk's Latest SEC Clash

Elon Musk. Photo: Steve Jurvetson via Wikimedia Commons

In the latest episode of Elon Musk's battle with the U.S. Securities and Exchange Commission, the Tesla chief executive officer's lawyers said the agency has no basis for contempt sanctions against him.

The SEC called for Musk to be held in contempt of court last month for tweeting inaccurate Tesla production estimates without seeking pre-approval from the Palo Alto, California-based company's general counsel, an alleged violation of his settlement with the agency. Musk settled with the SEC in September over tweets incorrectly claiming he'd secured funding to take Tesla private at $420 a share.

Musk's defense counsel John Hueston of Hueston Hennigan said in a filing Monday that the CEO has attempted to comply with the SEC agreement and that his tweets contained publicly available information and didn't heavily impact stock prices. Hueston further claimed "the Order as the SEC interprets it would raise serious First Amendment issues and implicate other constitutional rights," as Musk has openly criticized the agency. Neither Tesla nor Hueston immediately responded to request for comment.

"Because he agreed to the terms of the deal with the SEC, Musk’s argument that now seeking contempt against him for allegedly violating the agreement may set a dangerous precedent chilling future criticism of the SEC is weak, in my opinion, and is a red herring," said Michael Piazza, a securities partner at McDermott Will & Emery, in an email to Corporate Counsel. "There are other prominent individuals that have done battle with and criticized the Commission ... and I doubt a contempt order against Musk will chill others from voicing their opinions of the SEC."

Drinker Biddle & Reath securities partner Marc Leaf said Musk does not have a legitimate free speech argument because "it's not his speech that is the issue, it's his conduct as an officer of a public company."

Leaf added SEC's latest action highlights the importance of closely adhering to any orders issued by the agency to avoid new investigations or allegations of contempt including, in this case, only disseminating verified, approved information.

Musk's most recent controversial tweet, which stated Tesla would produce 500,000 cars in 2019, was not only unapproved by his general counsel—it was incorrect. Shortly after tweeting the 500,000 production prediction, Musk clarified Tesla would make around 400,000 cars this year.

Tesla's then-GC Dane Butswinkas left the company the next day. He's since been replaced by longtime Tesla in-house counsel Jonathan Chang.

"The SEC has been very clear over the years that if you want to use social media to communicate with investors you can do so, but you then have to be prepared to monitor what you say and make sure that it's accurate," Leaf told Corporate Counsel. "And Musk didn't meet that very low bar."

For Thomas Gorman, a partner at Dorsey & Whitney and author of the blog SEC Actions, Hueston's response added to an increasingly complicated fight over the consent decree's specifics. He said the SEC's decree intended to ensure Tesla-related information in Musk's tweets were vetted and not "the kind of off-the-cuff statements" Musk made about taking the company private.

"Here there is no dispute that: a) the information Mr. Musk published was recycled from an earlier Tesla release; and b) that Mr. Musk did not have the information vetted again," Gorman said in an email. "Under these circumstances the purpose of the consent decree has been more than fulfilled. Both sides should, accordingly, drop this unfortunate dispute and focus on properly serving the company and shareholders in the future."

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