Elon Musk is at it again.
The celebrity CEO of Tesla Inc. (TSLA, Financial)Â was the center of a "60 Minutes" episode, which aired Sunday, Dec. 9. In it, Musk attacked the Securities and Exchange Commission yet again, in apparent flagrant violation of the settlement reached as a result of the now-infamous “funding secured” tweet in which he claimed to be taking the company private.
Let’s take a look at Musk’s latest antics and what they could mean for Tesla.
The story so far
As we have discussed previously, the deal reached with the SEC was originally faced with greater than usual scrutiny by the presiding federal judge:
“On Oct. 4, less than a week after the settlement was reached, doubts sprang up about whether the deal would stick. The first jitters came in the morning, when the federal judge presiding over the settlement case ordered Tesla and the SEC to submit a joint document explaining why the terms were ‘fair and reasonable.’ While federal judges tend to rubberstamp such settlements, it is not unheard of for them to require justifications. But the uncertainty unnerved the market sufficiently to send shares down.”
At the time, Musk could not leave well enough alone, deciding to attack the SEC in a tweetstorm even as the federal court held the fate of his $40 million settlement in its hands. Rather than keep his head down, Musk chose to troll the agency, calling them the "Short Seller Enrichment Commission." Repeatedly, he doubled down on the comments, refusing to back off.
In light of that outlandish behavior, we opined that the SEC might well take a dim view of Musk’s antics, with his outright attacks potentially jeopardizing the deal before it was even finalized. Ultimately, however, the SEC filed its joint letter with Musk in support of the deal and the federal judge accepted it.
On the warpath yet again
According to the terms of his settlement with the SEC, Musk is required to do a few things:
- Have his future tweets deemed by a lawyer "not unacceptable" to the SEC.
- Appoint a new board chair and two independent directors.
- Not “take any action or make or permit to be made any public statement denying, directly or indirectly, any allegation in the complaint or creating the impression that the complaint is without factual basis.”
During his Sunday interview with Leslie Stahl for "60 Minutes," Musk managed to make a mockery of all three points:
- When asked whether his tweets were being monitored, Musk stated they were not, as his tweeting is protected by the First Amendment. When asked about specifically market-moving tweets, he was still unwilling to say they would be vetted.
- When asked if Robyn Denholm, the newly appointed chair, would be providing oversight, Musk declared he had chosen her personally and that, as the largest shareholder, he can effectively force whatever actions he deems necessary, irrespective of Denholm or any new board members.
- As for not calling into question the legitimacy of the settlement, Musk was succinct, stating, “I do not respect the SEC.”
Musk demolished all pretense that he respects the SEC or the settlement. And his statement that there could be “mistakes” with future market-moving tweets, he effectively claimed that the settlement had no effect whatsoever.
Unsurprisingly, the media was taken aback. Even Jim Cramer, who has long carried water for Musk, was shocked. On CNBC, he said he now believes Musk “thinks he’s above the law.” While the market seems to agree with Musk, for now at least, the SEC may beg to differ.
Verdict
In November, SEC Director Jay Clayton claimed ignorance of Musk’s outbursts against his agency, including the “Shortseller Enrichment Commission” jab, declaring the matter “settled.” Musk’s latest statements, broadcast to millions of viewers, will be much harder to ignore.
Musk has violated every facet of his settlement agreement, and did so on national television. The market is acting as if the SEC is completely toothless and likely to do nothing. While that may be Clayton’s natural response, it seems difficult to believe the agency will be permitted to allow this direct rejection of its authority to stand.
We view it as highly likely that the SEC will take fresh action against Tesla. When and if that occurs, expect a significant negative market reaction.
Disclosure: Short TSLA via long-dated put options.
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