Relevant Document:Reply
The Securities and Exchange Commission replied Monday, March 18, to Tesla CEO Elon Musk’s
argument for why the Southern District of New York should not
hold him in contempt for violating the court’s October 2018 final order and the terms of his settlement with the SEC. In asserting the gravity of Musk’s behavior, the regulatory government agency notes that it is “relatively rare” that it requests a party be held in contempt and requests that the court order all necessary and appropriate relief to enforce the terms of the settlement.
The SEC says that it does not believe an evidentiary hearing is necessary because there appear to be no disputed issues of material fact. Musk must indicate to the court whether he is seeking an evidentiary hearing by March 26.
According to the SEC, Musk has violated the “clear” language of the court’s final order, which requires Musk to comply with Tesla’s mandatory procedures requiring pre-approval before publishing tweets that “contain or reasonably could contain information material to Tesla and its shareholders.” The primary violation at the center of the SEC’s motion to hold Musk in contempt occurred on Feb. 19 at 7:15 p.m. ET through a
tweet stating the following: “Tesla made 0 cars in 2011, but will make around 500k in 2019.” The SEC also says that it has been “stunn[ed]” in learning from Musk’s response brief that, at the time the SEC filed its Feb. 25 motion for an order to show cause why the CEO should not be held in contempt,
Musk “had not sought pre-approval for a single one of the numerous tweets about Tesla he published in the months since the Court-ordered pre-approval policy went into effect” (emphasis added). While many of those tweets were written about topics “specifically identified” in Tesla policies as “potentially material to shareholders,” Musk has instead been unilaterally determining what is “material” based on his own belief and without pre-approval as required, says the SEC.
The reply notes that Musk’s explanation for not seeking pre-approval for the 7:15 p.m. tweet has changed, with the CEO initially saying in a
Feb. 22 letter to the SEC that, while his 7:15 p.m. tweet had not been “individually pre-approved,” he “believed that the substance had already been appropriately vetted, pre-approved, and publicly disseminated.” Musk provided a different explanation in his response to the court’s order to show cause, claiming in the
March 11 pleading that he did not seek pre-approval “because
he determined” before tweeting that the information could not reasonably have contained material information. According to the SEC, “
Musk’s contention that the potential size of a car company’s production for the year could not reasonably be material borders on the ridiculous” (emphasis added). The defendant’s “shifting justifications” suggest he never made “any good faith effort to comply with the Court’s order and the Tesla Policy,” instead “elect[ing] to ignore them.”
On Musk’s argument that information in the 7:15 p.m. tweet had already been approved, vetted and disseminated, the SEC asserts that, to the contrary, Tesla “had not publicly disclosed
any forecast of the total number of vehicles it expected to produce in 2019” before Musk’s tweet. In such “absence of an affirmative forecast on this important topic, Musk’s tweet contained new information that could reasonably have been material to Tesla and its shareholders” and that should “end the Court’s inquiry as to whether Musk’s failure to seek pre-approval constituted a violation of the Court’s order.” The SEC also notes that while deliveries and production can vary, in recent years, annual Tesla deliveries have closely tracked annual production, and points out that, “[e]vidently at a loss as to how to explain the material difference between the company’s recent and repeated deliveries guidance [of
between 360,000 to 400,000 for 2019] and his 7:15 tweet,” Musk’s reply brief omitted mentions of delivery guidance.
Musk also asserted that his tweet could not reasonably have been material because Tesla already disclosed it was “‘targeting’ an annualized production rate in excess of 500,000 Model 3 vehicles sometime between Q4 of 2019 and Q2 of 2020.” That disclosure, the SEC explains, was a “
qualified forecast (‘targeting’) of Tesla’s expected achievement of a
production run rate (not of aggregate production) for a particular vehicle line at some future point in time (somewhere between late 2019 and the middle of 2020).” The 7:15 p.m. tweet, on its face, “was materially different from Tesla’s production rate forecasts for Model 3,” the SEC says.
Musk stated in his brief that he relies on Tesla counsel’s review of his tweets “‘upon publication’ to ensure that he is compliant with the order and the Policy,” but it “strains credulity that Musk could believe in good faith that he is allowed to substitute post hoc review for the pre-approval requirement clearly set forth in the Court’s order” (emphasis added). Musk’s lack of articulation of “any particular methodology or process that he employs to determine that a tweet does not require pre-approval before publishing it,” continues the SEC, is “particularly troublesome given that it was Musk’s lack of judgment with respect to public statements about Tesla that led to entry of the Court’s order in the first place.”
Musk’s brief had referenced a lack of notable movements in Tesla’s stock price after the 7:15 p.m. tweet as evidence that it was not material to shareholders, but the SEC counters by arguing that the court is being asked to “re-write” the terms of its order and allow materiality of tweets to be determined based “on a hindsight analysis of whether they moved the market.” Such a standard, the SEC points out, is “plainly unworkable because Musk will never know if the market is going to move until it actually reacts to his statements.” In response to Musk’s argument that his tweet “was celebratory and forward-looking - a type of statement that courts have concluded is immaterial as a matter of law,” the SEC notes that there is “no carve-out from materiality for ‘celebratory’ statements that contain key numerical forecasts about a company’s business.” Regarding Musk’s assertion that the SEC is attempting to limit his First Amendment rights, the reply notes that Musk consented to the order in which he waived any First Amendment rights that may be implicated by the pre-approval provision. Musk has made no diligent or good faith effort to comply with the pre-approval provision, the agency asserts.
Subsequent to the SEC’s reply, Musk’s counsel filed a
letter Monday night asking the court to permit Musk to submit a sur-reply by March 22 “in order to respond to new factual assertions and legal arguments” raised in the SEC’s reply. According to the letter, among other things, Musk “would like to address the SEC’s unsupported assertions and submit documentation reflecting the negotiation history between the SEC and Mr. Musk and Tesla, which undermines the newly-presented interpretation the SEC sets forth in its Reply.”
Musk was previously represented in the
SEC lawsuit by Williams & Connolly, but a
substitution of counsel notice filed shortly after the SEC’s motion for an order to show cause indicates that the law firm has been replaced with Hueston Hennigan.