Elon Musk Loves Poking the Bear. Will the SEC Claw Him?

(Bloomberg Businessweek) -- It’s not enough that the U.S. Securities and Exchange Commission’s attempt to hold Elon Musk accountable for fraud the agency alleged he committed three years ago did little to change how he runs Tesla Inc. The company’s chief executive officer just can’t resist rubbing it in the regulator’s face.

Exhibit 69 (or was it 420?): On Nov. 30, Tesla put a new product called Cyberwhistle on its website just in time for stocking-stuffer shoppers. The $50 stainless-steel instrument, shaped like the pickup Musk showed in 2019 (and has yet to produce), sold out almost immediately after the CEO tweeted a link to his more than 60 million followers. “Blow the whistle on Tesla!” he wrote.

Close watchers of Musk’s feed immediately predicted that a real Tesla whistleblower would emerge in a matter of days, and they were right. Reuters reported a week later that the SEC was investigating concerns a former engineer raised in 2019 about solar panel defects and fire risks—and whether Tesla had disclosed them properly to its shareholders and customers. The ex-employee sued the company in November 2020, claiming wrongful termination.

It strains credulity that the two events could be explained away as coincidence, especially since this isn’t the first time Musk has promoted a satirical product by tweeting taunts at the SEC. In July 2020, after Tesla had surpassed Exxon Mobil Corp. and Toyota Motor Corp. in market value and posted vehicle-delivery figures that sent the stock soaring further, the CEO declared the company would “make fabulous short shorts in radiant red satin with gold trim,” needling the short sellers who had been betting against the company.

“Will send some to the Shortseller Enrichment Commission to comfort them through these difficult times,” Musk wrote. He then tweeted a profane play on the agency’s initials—“SEC, three letter acronym, middle word is Elon’s”—that made a fund manager who regularly engages with him anxious. “Dangerous,” the Tesla shareholder tweeted, to which Musk replied: “But sooo satisfying.”

It’s difficult to tell how big a deal the SEC’s investigation into Tesla’s solar safety risks will ultimately be. What may be a more serious concern is Musk’s penchant for poking the bear in Washington that’s tried before to bring him down.

The SEC charged Musk with securities fraud in September 2018 after he claimed to have the “funding secured” to take Tesla private at $420 a share. According to the agency, Musk picked the price in part because of the number’s significance in marijuana culture and thought his then-girlfriend would find it funny.

The regulator wasn’t laughing. It briefly sought to ban Musk from serving as a director or officer of a public company before the two sides reached a settlement. Tesla and Musk each paid $20 million penalties, he gave up the chairman role for at least three years, and the company agreed to put in place controls to oversee the CEO’s tweeting. This would include having a securities lawyer on staff pre-approve any of Musk’s missives containing information material to shareholders.

A few days after the settlement, Musk sardonically dubbed the SEC the “Shortseller Enrichment Commission.” He told CBS’s 60 Minutes in December 2018 that nobody was reading his tweets before they went out and that he didn’t respect the agency.

Two months later, after Musk posted that Tesla would make about 500,000 cars in 2019—then clarified within hours that he meant this would be its annualized rate of production by the end of that year—the SEC pounced. It sought to have him held in contempt for violating the settlement, but this fell on unsympathetic ears. U.S. District Judge Alison Nathan told the agency and Musk in April 2019 to “take a deep breath, put your reasonableness pants on and work this out.”

They settled the dispute weeks later, agreeing to amend their earlier deal by specifying topics that the CEO can’t tweet about without getting advance approval. This was to the chagrin of SEC Commissioner Robert Jackson, who said at the time that Musk had gotten off easy.

Tesla shares have since soared, but the company isn’t out of the woods with regard to the SEC. Two years ago this month, on the same day it closed an investigation into Model 3 production projections, the agency sent a subpoena seeking information about “certain financial data and contracts including Tesla’s regular financing arrangements.” The company hasn’t elaborated on the matter since it disclosed receiving the summons early last year, but it keeps mentioning the issue in quarterly filings.

One area of Tesla’s business that could be ripe for the SEC to probe are the features it has branded Autopilot and Full Self-Driving, or FSD. Days before he agreed to the revised settlement with the agency over his tweeting, Musk predicted during an “Autonomy Day” event that by the middle of 2020, Tesla would have more than 1 million robotaxis on the road that would so reliably drive themselves, no one inside would need to pay attention.

Within weeks, Tesla raised $2.35 billion through expanded debt and stock offerings. But instead of getting its automated-driving technology to the point where passengers could tune out, the company says to this day that the features are still intended to be used only by drivers who keep their hands on the wheel and remain prepared to take over at any time. In March of this year, Musk said Tesla had revoked a beta version of FSD from drivers who didn’t pay enough attention to the road.

Musk’s hopeful hyping of Tesla’s future may have spawned copycat behavior that the SEC is cracking down on. Electric-truck maker Nikola Corp. is closing in on a settlement of the agency’s investigation of claims its founder deceived investors about its business prospects. If Nikola was wrong to promote a video showing an inoperable semi rolling down a hill to give the incorrect impression it could drive under its own power, why can’t the SEC take issue with Tesla’s 2016 Autopilot demo that claimed in its opening frame that the person in the driver’s seat was there only for legal reasons and that the Model S was driving itself?

The New York Times reported last week that Tesla had charted out ahead of time the route that the car took, using three-dimensional mapping that wasn’t then available to consumers. At one point during filming, the Model S hit a roadside barrier on company property, the Times said, citing three people who worked on the video. Footage of this incident was left on the cutting-room floor.

The level of scrutiny to which the SEC has subjected up-and-coming EV companies should give Musk pause. The agency hasn’t stopped at Nikola; it’s been investigating the likes of Lucid Group Inc., Lordstown Motors Corp. and Canoo Inc., as well. Musk would be wise to recognize that if he continues to let his Twitter fingers get the best of him, the regulator could end up having the last laugh.
 
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