Tesla Failed to Supervise Elon Musk’s Tweets, the Securities and Exchange Commission Argued in Letters.
Musk allegedly violated a court-ordered policy in 2019 and 2020, according to records.
According to records obtained by The Wall Street Journal, securities regulators informed Tesla Inc. TSLA -0.21 percent last year that Chief Executive Elon Musk’s use of Twitter twice violated a court-ordered policy requiring his tweets to be preapproved by company lawyers.
Tesla and the Securities and Exchange Commission settled an enforcement action brought by the Securities and Exchange Commission in 2018 alleging that Mr. Musk committed fraud by tweeting about a possible buyout of his company. Mr. Musk paid $20 million to settle the case—Tesla also paid $20 million—and agreed to have Tesla lawyers monitor his public statements on social media.
The SEC stated in correspondence sent to Tesla in 2019 and 2020 that tweets Mr. Musk made about Tesla’s solar roof production volume and stock price were not pre-approved by Tesla’s lawyers. The communications, which have not previously been reported, highlight the long-standing enmity between the nation’s top corporate regulator and Mr. Musk, who publicly mocked the SEC despite settling fraud claims with the agency.
Tesla was notified by the SEC in May 2020 that it had failed to “enforce these procedures and controls despite Mr. Musk’s repeated violations.” Tesla has abdicated the duties imposed by the court’s order, according to the letter signed by Steven Buchholz, a senior SEC official in the San Francisco office.
Tesla, Mr. Musk, and the Securities and Exchange Commission did not respond to requests for comment. The Journal obtained the records through a Freedom of Information Act request filed with the federal government.
Mr. Musk’s confrontation with the SEC is part of a pattern of him and Tesla skirting rules or evading enforcement efforts, the Journal reported in April. Tesla has also clashed with officials from the National Transportation Safety Board and the Nevada Department of Occupational Safety and Health. Mr. Musk’s other company, SpaceX, has also had a contentious relationship with the Federal Aviation Administration at times.
Preapproval was an unusual condition of the SEC enforcement action that regulators touted as a way to improve Tesla’s corporate governance following the 2018 investigation. Additionally, the agreement required Mr. Musk to relinquish his chairmanship and Tesla to appoint two independent directors. Mr. Musk and Tesla reached an agreement with the SEC without admitting or denying any wrongdoing.
The SEC’s social media policy has always been difficult to enforce. In February 2019, the SEC charged Mr. Musk with violating the rules and asked a Manhattan federal court to consider holding him in contempt. The judge indicated that she wished to resolve the dispute between the parties, and they agreed to amend the policy to clarify which topics required pre-approval. These included communications about production figures, new business lines, and the company’s financial health.
Within months, the SEC wrote Tesla again, this time in response to a tweet Mr. Musk sent on July 29, 2019, stating: “Spooling up production line rapidly.” By the end of this year, we hope to manufacture 1000 solar roofs per week.”
The SEC stated in an August 2019 letter to Tesla that any public message containing “production, sales, or delivery numbers” must be vetted. According to the SEC’s account of its correspondence with Tesla, Mr. Musk did not submit the tweet for review and a committee later determined that it did not require authorization because it was “wholly aspirational.”
Tesla’s shares fell less than a year later, on May 1, 2020, after Mr. Musk tweeted, “Tesla’s stock price is too high imo.” This resulted in another letter from Mr. Buchholz.
According to the SEC’s correspondence, Tesla informed the agency that its lawyers had not reviewed the tweet, which the company described as “personal opinion” that did not require authorization. When the SEC requested records relating to the tweet, Tesla stated that there were none, the agency stated in a letter to Tesla dated May 8, 2020. Mr. Musk’s tweet addressed the company’s financial condition, which is covered by the policy, according to the SEC.
“In light of Mr. Musk’s repeated refusals to submit his covered written communications on Twitter for pre-approval by Tesla, we are extremely concerned by Tesla’s repeated determinations that no policy violations occurred as a result of purported carve-outs,” the SEC wrote in that letter.
Later that month, Tesla’s outside counsel responded that tweeting about Tesla’s stock price was not covered by the agreement, according to a copy of a letter obtained separately by the Journal. According to the lawyers, regulators attempted to “harass Tesla and silence Mr. Musk” through investigations that “endlessly overlapped.”
“The serial nature of these investigations makes us fearful that the SEC is investigating Mr. Musk improperly,” attorney Alex Spiro wrote.
Mr. Musk, who has been critical of regulators in the past, immediately lashed out at the agency, tweeting in July, “SEC, three letter acronym, middle word is Elon’s.”
In a June 2020 letter to Tesla’s lawyers, the SEC stated that it hoped to resolve the disagreements amicably. Tesla and its lawyers, the regulator stated, “refused to engage in substantive dialogue regarding the May 1 tweet.”
According to the correspondence, the feud appears to have ended in a stalemate with no further consequences for Tesla or Mr. Musk. Tesla’s attorneys contested the SEC’s claims regarding the tweets, and the SEC never returned to court to seek a judge’s intervention.
The SEC concluded a June 2020 letter with the following request: “We urge the company to reconsider its positions in this matter by implementing and enforcing disclosure controls and procedures…to avoid further shareholder harm.”
The disagreements over Mr. Musk’s tweets do not mean the policy was misguided, according to Jill Fisch, a law professor at the University of Pennsylvania. Corporations and CEOs are still figuring out how to use social media effectively, she said, and regulatory oversight can help improve things. Leaders like Mr. Musk, who wields significant market influence, deserve special attention, she said.
“It’s difficult to craft a court order that permits some communication while also potentially restricting or monitoring it,” Ms. Fisch explained. “The first time you use it, it will be a flawed tool.”
