Are we, who seek to know every twist and turn of Tesla's (TSLA) stock, not paying attention to the contempt of court fight between Elon Musk and the SEC? Are we not understanding of what could be the immense ramifications for Tesla shareholders of the riposte filed last night by the SEC in the federal court of Alison Nathan, Southern District of New York?
Right now, at this very moment, a serious jurist, Judge Nathan, is trying to decide exactly how it could be that there be not one, but two people in this country, who think they can post anything they want on Twitter, no matter what. The difference is that unlike Donald Trump, this one is before her court, and she can do something about it.
On the surface, there isn't much here. Musk is claiming that the SEC, with its contempt citation demanding adequate safeguards prohibiting him from discussing material aspects of Tesla's business on Twitter or elsewhere, is hampering his first amendment rights.
I don't know where Musk can get lawyers who write this stuff up with a straight face, because, when you go beneath the surface, they are abetting Musk in trashing the process, the process that not just the SEC, but also the Judiciary, live by.
First, this case has nothing whatsoever to do with the First Amendment. As part of the contempt agreement, Musk agreed to waive his First Amendment rights, putting the company in charge of policing him with a pre-approval process, a process we discovered was a total sham.
The SEC professed it was "stunning to learn" that Musk had not sought pre-approval for a single one of the numerous tweets he published in the months since the court-ordered pre-approval went into effect.
Second, even a cursory read-through of the SEC's brief shows that Musk tried to puff his stock by Tweeting on February 19, 2019 at 7:15 p.m. "Tesla made 0 cars in 2011 but will make around 500,000 cards in 2019."
That's why, the agency contends, after meeting with counsel, he came back on Twitter at 11:41 p.m. ET, that same night -- tweeting he "meant to say annualized production rate at end of 2019 around 500,000 cars, i.e. 10k cars /week, deliveries still estimated to be about 400,000."
The agency appends not one but two pieces of research, one from Wedbush from December 13 and one from Deutsche Bank from a year ago, explaining how run rates determine the valuation of the enterprise.
Now, again, I am astonished by the outrageousness of Musk's lawyers in arguing on behalf of the man that, even if there is no First Amendment right for Musk, he still has a right to determine what tweets are not material to the stock -- and if they are material and his counsel says they are material he can correct them as he did in the second Tweet on February 19 of this year.
That alleged process, the SEC argues shows a "brazen disregard of this court's order" and is "unacceptable and unworkable."
In other words, the SEC is saying "hey, we can't control this guy, but we don't have to anymore, it's your problem." Musk may think his beef is still with the SEC. He even told Leslie Stahl on 60 Minutes last December that he would respect the settlement because of the court. "I want to be clear I do not respect the SEC. I do not respect them," he told Stahl. She shot back: "But you're abiding by the settlement aren't you?" Musk replied: "Because I respect the Justice System."
And therein is why Musk is really in trouble. This contempt citation has nothing whatsoever to do with the SEC. It has everything to do with Judge Nathan, a distinguished Obama Judge, and I believe she isn't going to put up with this nonsense anymore. She, too, is a process persona, and this case is all about the process of the Judiciary -- and it cannot be attacked without pretty severe repercussions.
And here's where it gets difficult for Tesla shareholders. The whole contempt process is about having an orderly system of justice. The SEC is saying to the Judge Nathan that Musk represents a material threat to the settlement process that Nathan is overseeing.
How can he be stopped if a $20 million fine and the stripping of the chairmanship and a bevy of controls put on him meant nothing?
As I see it, Judge Nathan is boxed in. Her fine order and court ordered process to protect the public from his tweets to his 25 million followers meant absolutely nothing, as the process was never used and is a total sham. She can't fine him again. $20 million meant nothing to the man. She can't trust the attorneys involved in trying to rein him in; it was never invoked. She can't trust the board to do anything at all about him, or it would have removed him from the CEO job to spare the shareholders from his tweets.
So she can only trust herself to do something about it, because this one is now out of the SEC's hands.
As I see it, she has the following choices:
1. She can remove him from the CEO job so he no longer has the ability to even know what is material and can't speak for the company. That may be necessary, because it is obvious on the face of it that Musk can't control himself and doesn't even want to have a process that he agreed to.
2. She can make the violation criminal and actually sentence him to prison. That is a hard call, but one that would per se remove him from the right to be running a public company.
3. She can put a special master on the board to control him.
I can't see any other way out of this, because the attack on the court itself, and Nathan in particular, is so outrageous.
How any of this can be good news for stockholders is beyond me.
Remember, the SEC isn't even trying to say that Musk manipulated the stock. It isn't saying this is Musk versus the SEC. It's Musk versus a jurist, a real bad call for Musk himself.
Which brings me to the heart of the question. If you own stock, do you want Musk to be important to Tesla? Would you buy the stock without him running the place?
That's the real issue at stake in Judge Nathan v. Musk -- and this whole First Amendment dodge will be seen as both silly and repugnant to Nathan, as silly and as repugnant as the idea that this man and his toothless board and attorneys cares one whit about the process she ordered. I think it is fair to say that he's gone beyond the stage where he will just accept a Twitter block.
At this stage, a master would be a win for shareholders. Everything else a loss. This is the closest the company has come to losing Musk. The betting here after this assault on the Judiciary itself is that he's banned from anything more than operations, because he can't be counted on to be representative of the company itself, so he can't manipulate the stock even if he wanted to. He will be made into a pariah at his own company.
It's a shame. None of this matters. I think Nathan will find his Twitter addiction to be pathological -- and unless she wants to make a mockery of her own bench, he will soon be gone.
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