SEC Options To Rein In Elon Musk Include Leaning On Tesla And Directors

By: Francine McKenna

The Securities and Exchange Commission is between a rock and a hard place, experts say, in deciding what to do about what it told a judge on Tuesday is Elon Musk’s violation of the “clear and unambiguous” terms of a legal settlement the Tesla CEO made in October.

“You can’t stop Tweeting Elon from tweeting, but that might not be such a big problem if he exercised good judgement,” Matt Kelly, editor of the Radical Compliance newsletter and a long-time observer of corporate governance and compliance issues, told MarketWatch. “Instead, he repeatedly displays a deliberate, open and defiant attitude towards the role of the SEC in protecting investors from his recklessness.”

SEC Chairman Jay Clayton argued at the time of the original October settlement that taking Musk out of Tesla may also harm investors, since he is so important to the company. That would be anathema to the regulator’s mission to protect investors.

The October settlement with the SEC resolved a fraud charge resulting from tweets Musk made about a potential Tesla take-private transaction. The SEC said in its legal filing that the requirement was necessary to prevent Musk from “recklessly” sending out false or inaccurate information ever again. Musk and Tesla TSLA, -3.62%  had promised the SEC that the CEO would start getting pre-approval for any communications, including tweets, that might contain information material to Tesla or its shareholders.

But four months later, on Feb 19, Musk tweeted out a forecast of automobile production that was not consistent with what the company had reported in its recent earnings release and conference call.

The company’s attorney, Brad Bondi, confirmed to the SEC that Musk had not sought or received pre-approval for the inaccurate tweet that was sent out to his 24 million Twitter followers.

On Tuesday U.S. District Judge Alison Nathan ordered Musk to explain by March 11 why he should not be held in contempt for violating the settlement agreement.

“The SEC enforcement action was ultimately settled not just against Musk but also against Tesla,” Kevin LaCroix, an attorney and executive vice president at RT ProExec, an insurance intermediary focused exclusively on officer and director liability issues, told MarketWatch.

“I would think the SEC has the right to return to court to reopen the matter as to the company, too. The settlement with the company agreed to a number of measures regarding the company’s board (Musk to step down as chairman, independent directors to be appointed). The SEC could say that the company’s board’s is falling short on supervising Musk and that violate the purposes and intent of the agreement,” LaCroix told MarketWatch.

Tesla, the company, also agreed to adopt a “senior executives communication policy” that would spell out who would approve Musk’s communications and how that process would work. The policy, dated Dec 11, 2018, says that the board would appoint its general counsel and disclosure counsel, or in the case of unavailability, its CFO, to be the ones who could pre-approve Musk’s utterances.

Neither Tesla nor Bondi responded to whether the board appointed Jonathan Chang, the company’s new general counsel, and Zach Kirkhorn, the company’s new CFO to be Musk’s tweet-minders.

The SEC also required Tesla to add two new independent board members as part of the settlement. Oracle founder Larry Ellison and Kathleen Wilson-Thompson, who spent 17 years as an executive at the Kellogg Company, and currently serves as the executive vice president and global chief human resources officer of the Walgreens Boots Alliance, joined the Tesla board.

Ellison disclosed he owns 3 million shares in Tesla and has also admitted he and Musk are close friends.

The SEC has more power to force change than it lets on, Kelly told MarketWatch. “It wasn’t that long ago that the SEC forced Elizabeth Holmes to relinquish her control of Theranos, as settlement for fraud allegations. The board has the power to rein in Musk, even fire him. The SEC could use its enforcement leverage against Telsa’s independent directors to force more discipline.”

“The SEC can inform the board they want them to take a more active role in reigning in Musk’s tweets and other social media activity,” said Betsy Atkins, a leading public company director serving on the board of Wynn ResortsWYNN, -0.16%  , Schneider Electric SBGSY, +0.06%   and Volvo Cars.

“However, if I were the regulator, I would leverage Musk’s desire to stay on as CEO and a board member. I suspect he’d be very unhappy with a 5-year ban on serving on a public company board, including Tesla.”

That’s one of the SEC’s potential remedies, she said.

Atkins believes that market forces will cause the correction needed before any regulatory sanction, even a bigger fine for Musk, does. “If I were on that board, I would be very concerned and want the company to buy additional liability insurance for directors,” Atkins told MarketWatch. “Plaintiffs attorneys are already circling and at some point the current directors and officers insurance carrier may become fatigued and potentially unwilling to immunize the board from the public and private litigation.”


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