Elon Musk, chief executive officer and co-founder of Tesla Motors Inc., listens during a meeting with U.S. President-elect Donald Trump and technology leaders at Trump Tower in New York, U.S. (Photographer: Albin Lohr-Jones/Pool via Bloomberg)

SEC Could Face Backlash if Elon Musk Is Exonerated

(Bloomberg) -- For months, the U.S. Securities and Exchange Commission had been quietly and methodically scrutinizing Tesla Inc.

Then Elon Musk tweeted, forcing the SEC to change its approach in an investigation that’s now putting intense pressure on the regulator.

SEC Could Face Backlash if Elon Musk Is Exonerated

Actions probed by the SEC aren’t typically so public and the agency prefers to keep it that way until it concludes whether laws were broken. The opposite has happened with Tesla, which has quickly become the highest-profile inquiry of SEC Chairman Jay Clayton’s tenure. One resulting sentiment within the SEC: The agency will take a beating from politicians and in the media if Musk avoids a sanction, a person familiar with the matter said.

“This is so visible that it’d be hard for the SEC not to do something,” said James Cox, a professor at Duke University School of Law. “There’s a lot of pressure on the SEC here.”

The SEC hasn’t confirmed it’s investigating Tesla, and agency spokeswoman Judith Burns declined to comment for this story. A Tesla spokesman didn’t respond to a request for comment.

Fast Subpoenas

The SEC hasn’t accused Musk of any wrongdoing and it can take years for the regulator to conclude that an executive has violated securities laws. But Tesla investors may not be so patient in light of the feverish attention on Musk for claiming that he was considering taking Tesla private and had lined up funding to do so.

There are already signs the SEC is moving fast.

After opening a new inquiry, lawyers in the agency’s enforcement division will often reach out to a company’s attorneys informally to discuss what kind of documents they want and who they might want to interview. In the Tesla probe, the SEC demanded information by issuing subpoenas within days of Musk’s Aug. 7 tweet, potentially shrinking its investigative timeline. And the New York Times reported Aug. 17 that agency officials were preparing to meet with Musk and Tesla directors as soon as this week.

The SEC almost always expects to face criticism from investors and lawmakers when it fails to bring cases over investigations that generate a heavy dose of headlines. Still, such concerns won’t prompt agency officials to sue executives if they don’t think the law merits an enforcement action.

Earlier Investigation

The SEC was already investigating Tesla before Musk sent his tweet on taking the company private, Bloomberg reported Aug. 9. The existing probe focused on whether Tesla had issued misleading pronouncements on manufacturing goals and sales targets, according to two people familiar with the matter.

Tesla and Musk’s disclosures have been closely scrutinized by investors amid the company’s yearlong struggle to ramp up production of the Model 3 sedan, the first vehicle it has attempted to mass produce.

The SEC investigation tied to Model 3 production is arguably more complicated than its review of whether Musk was trying to mislead investors by claiming he had secured funding for a Tesla buyout. If the SEC feels compelled to respond quickly to the chief executive officer’s tweet, one option would be breaking that issue out as a separate probe.

Restricting Access

Because the Tesla case is garnering so much attention, the SEC has severely restricted the number of officials with access to details on the investigation, said the person who asked not to be named because of the sensitive nature of the probe. One SEC official remarked that he couldn’t recall another matter generating as many calls from the media as the Tesla investigation.

Another reason why the SEC might be under fire is that the agency has drawn criticism from Democrat lawmakers for a drop in enforcement cases and fines under Clayton, who was appointed by President Donald Trump. While Clayton has strongly disputed that enforcement has been lax, the agency is aware that such a perception could gain traction if it doesn’t punish Musk, one of the people said.

©2018 Bloomberg L.P.