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Tesla CEO Elon Musk Attends SEC Contempt-Of-Court Hearing

NEW YORK (CBS / AP) — The Securities and Exchange Commission wants to subject Tesla CEO Elon Musk to escalating fines to muzzle him from revealing important information about his company without the approval of lawyers, an SEC attorney told a judge Thursday.

The attorney, Cheryl Crumpton, spoke about appropriate punishment after urging U.S. District Judge Alison J. Nathan to find Musk in contempt for violating a deal with the SEC that requires him to clear any tweets that could disclose important company information with lawyers first.

At the end of the hearing, the judge ordered both sides to try to negotiate a resolution over the next two weeks as she expressed reluctance to rule unless she must.

Nathan said court-supervised agreements must be obeyed.

"I don't care if you are a small potato or a big fish," Nathan said.

elon musk AP photo
elon musk AP photo

Musk sat at a Manhattan courtroom table with his lawyers as Crumpton told the judge to take the chief executive's "wealth into account" as she imposed fines.

Crumpton said Musk had once claimed that a $20 million penalty he paid was worth it.

She said Nathan should impose fines "to make it not worth it."

After Crumpton argued, attorney John Hueston told the judge the SEC had failed to show Musk had violated the deal. He said his client was "somebody trying his best to comply."

"He actually does what he is told," Hueston said.

The issue over Musk's tweets stems from a settlement reached last year after Musk tweeted that he had secured the funding to take Tesla private at $420 a share — a substantial premium over the price at the time — when he did not. That tweet, last August, sent the company's stock on a wild ride. The SEC says it hurt investors who bought Tesla stock after the tweet but before they had accurate information.

Musk later backed off the idea of taking the company private, but regulators concluded he had not lined up the money to pull off the deal.

The SEC says Musk blatantly violated the settlement in February when he tweeted about Tesla's vehicle production without a lawyer's approval.

Musk's 13-word tweet on Feb. 19 said Tesla would produce around 500,000 vehicles this year. But the tweet wasn't approved by Tesla's "disclosure counsel," and the SEC's contempt-of-court motion filed that month said Musk had not sought a lawyer's approval for a single tweet.

Musk said his tweet about car production didn't need pre-approval because it wasn't new information that would be meaningful to investors. His attorneys said the SEC was violating his First Amendment rights to free speech.

Hueston said further restricting Musk's ability to communicate about his company and imposing fines would "freeze his ability" to operate as an effective entrepreneur.

To support his arguments, Hueston cited an earlier exchange between the judge and his adversary in which Nathan said she was "surprised" that the SEC left it up to Musk in so many instances whether to run by his lawyers what he intended to put out publicly.

"Does he need preapproval?" the judge asked Crumpton at one point.

"We're not saying 'yes' or 'no,'" she responded.

Although Hueston pounced on the exchange to his advantage, the judge responded by asking if the exact wording of the deal mattered if she concluded Musk had revealed material facts about his company with his tweet.

The judge questioned somewhat rhetorically whether there was anything Musk could be held in contempt for if Hueston was arguing that the SEC had imposed rules too hard to decipher.

As he arrived at the courthouse in Lower Manhattan, Musk said he has "great respect for the justice system."

The SEC says its deal doesn't restrict Musk's freedom of speech because as long as his statements are not false or misleading, they would be approved.

Meanwhile, Tesla's shares fell 8% Thursday after the company said it churned out 77,100 vehicles in the first quarter, well behind the pace it must sustain to fulfill Musk's pledge to manufacture 500,000 cars annually.

Tesla also said it only delivered 63,000 vehicles in the quarter, down 31% from 2018's fourth quarter.

The SEC sought to oust Musk from his role as chairman and CEO over his August tweet. Instead, Musk and Tesla agreed to pay $40 million and made other concessions to settle the case. Musk agreed to step down as chairman for three years and remain in his role as CEO. He also begrudgingly agreed to seek approval from a company lawyer before he tweets.

Musk's unpredictable behavior has led some to question whether he should remain CEO of Tesla, while others say he's the visionary behind the company and too valuable to lose. Last year, Musk berated stock market analysts for asking questions about Tesla's finances and prompted a defamation lawsuit when he called a diver who helped rescue 12 boys on a Thai soccer team from a flooded cave a pedophile.

As of Thursday's close, Tesla shares were down 19.5% so far this year.

© Copyright 2019 CBS Broadcasting Inc. All Rights Reserved. The Associated Press contributed to this report.

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