Tesla Is the SEC's Problem - Barron's

Freshly appointed Securities and Exchange Commissioner Gary Gensler has a problem: Tesla CEO Elon Musk and his tweets.

The SEC reached an agreement with Tesla (ticker: TSLA) in September 2018 that was intended to establish more oversight over Chief Executive Elon Musk’s Twitter (TWTR) posts, some of which have moved the company’s stock. The agreement, which was reached after Musk tweeted about taking Tesla private with “funding secured,” has rarely been enforced, leaving Gensler with a decision about what to do next.

It wasn’t that the SEC didn’t try to hold Tesla accountable for Musk’s tweets. Over the span of more than a year, San Francisco Assistant Regional Director Steven Buchholz sent a series of letters to Tesla’s lawyers raising concerns about tweets Musk had sent since the agreement, according to documents obtained through a Freedom of Information Act request.

The SEC and Tesla didn’t respond to a request for comment.

The documents showed that Buchholz expressed concern over a number of tweets, and said that it was the SEC’s position that Tesla had failed to comply with a 2018 agreement, one that outlined a series of board-level procedures that were put in place to approve Musk’s tweets.

According to the correspondence, Tesla acknowledged that one of Musk’s tweets—a July 2019 tweet about solar roof capacity—was never cleared by the board mechanism. In the correspondence, Buchholz said Tesla’s lawyers argued that it wasn’t necessary.

It’s hard to make the case the July 29 tweet moved the stock. Shares declined 3.2% in the five days following the tweet, while the S&P 500 dropped 5.5% over the same span. The solar roof business is still relatively small for Tesla. In the second quarter of 2021, automotive sales were $10.2 billion, while energy generation and storage sales came in at $801 million.

Buchholz took issue with other Musk tweets that appeared to violate the agreement.

Musk tweeted Tesla would make 500,000 cars in 2019 as part of a statement celebrating what Tesla had accomplished as a start-up car company. He corrected that tweet the same day indicating the production rate at the end of 2019 would annualize to about 500,000 vehicles. Tesla delivered about 368,000 vehicles in 2019. The company delivered about 500,000 in 2020. The numbers in the tweet ended up approximating reality.

Tesla production has continued to expand and the company has delivered about 386,000 vehicles in the first half of 2021.

Tesla stock didn’t do all that much in response to that tweet either. Shares dropped about 3% in the five trading days after the tweet. The S&P 500 rose 0.7% over the same span. Tesla stock gained about 26% in 2019.

There have been tweets that moved Tesla stock. A 2020 tweet dealt directly with the stock price: Musk tweeted it was “too high imo.” IMO is short for in my opinion. The stock dropped 10% the day of the tweet, but recovered in five trading days. The tweet was sent when Tesla was trading at about $156 a share. It closed 2020 at $705.67, gaining 743% for the year.

Tesla lawyers called the tweet an amorphous personal opinion, according to one of the documents that was released to Barron’s via the FOIA. The SEC disagreed.

Now, Chairman Gensler, who has talked about the growing need for more regulation in the cryptocurrency market, has to decide what to do with the agreement. Musk’s Twitter account is unlike that of other public company CEOs. He has become a must-follow for Wall Street analysts and investors. He tweets about Tesla products, production, and technology. He tweets about upcoming events, including the company’s artificial intelligence event, which is scheduled for Aug. 19. Musk’s tweets have become an important source of information.

It was his frequent use of Twitter that landed him in trouble with the SEC in the first place and resulted in the 2018 settlement. The agreement included $40 million in fines—half by Musk and half by the company. Musk was also barred from the board chairman role for three years. According to a press release from the time, “Musk and Tesla have agreed to settle the charges against them without admitting or denying the SEC’s allegations.”

Musk’s Twitter account might grow in importance. He said on the company’s second-quarter call that he was unlikely to continue participating in quarterly earnings conference calls. The Street wasn’t all that surprised. Morgan Stanley analyst Adam Jonas, a Tesla bull, called that a good thing. Still, it’s hard to imagine Musk remaining silent.

That’s Gensler’s problem now.

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