Tesla's Musk mocks SEC as judge demands they justify fraud settlement

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Tesla Inc CEO Elon Musk on Thursday mocked the US Securities and Exchange Commission, just hours after a federal judge ordered him and the regulator to justify their securities fraud settlement, which let Musk remain chief executive.

"Just want to [sic] that the Shortseller Enrichment Commission is doing incredible work," Musk, a frequent critic of investors betting against the electric car company, wrote on Twitter. "And the name change is so on point!"

The tweet came five days after Musk settled SEC charges that he misled investors in his August 7 tweets, including that there was "funding secured" to take his Palo Alto, California-based company private at 420 US dollars per share.

Musk agreed to pay a 20 million US dollars fine, and step aside as Tesla's chairman for three years, to avoid fraud charges that could have forced his exit from
Tesla.

Tesla and the SEC declined requests for comment.

Former SEC lawyers questioned the wisdom of Musk's latest tweet, but said it was unlikely to jeopardize the settlement, which prevents Musk from denying wrongdoing or suggesting that the regulator's allegations were untrue.

"I don't think the SEC would look at this as a denial of the alleged facts," said Peter Henning, a law professor at Wayne State University in Detroit. "But you don't take gratuitous shots at the SEC. There's no real upside."

Shares of Tesla closed down 12.97 US dollars, or 4.4 percent, at 281.83 US dollars, and fell another 2.1 percent to 276 US dollars following Musk's tweet after market hours.

The tweet came less than four hours after US District judge Alison Nathan in Manhattan ordered Musk and the SEC to explain by October 11 in a joint letter why their settlement was fair and reasonable and would not hurt the public interest.

Nathan said it was her regular practice to request such letters.

Reuters Photo

"She may want to know why Tesla is paying a fine because the CEO doesn't know when to shut up," said Adam Pritchard, a law professor at the University of Michigan and former SEC lawyer.

Deference to SEC

The settlement also required Tesla's board to implement procedures for reviewing Musk's communications with investors, which include tweets.

Thomas Gorman, a partner at Dorsey & Whitney in Washington, said Musk might argue that the latest tweet might be a mere "personal lament," and not a violation of the settlement.

For her part, Nathan may have limited room to intervene, after a federal appeals court curbed the ability of judges to reject SEC settlements.

One such judge was Jed Rakoff, a colleague of Nathan's who objected to the SEC policy of letting some corporate defendants settle without admitting or denying wrongdoing, as Musk did.

But in 2014, the 2nd US Circuit Court of Appeals overturned Rakoff's rejection of a 285 million US dollars SEC settlement with Citigroup Inc, saying he should have given "significant deference" to the regulator.

The 2nd Circuit has jurisdiction over Nathan's court, and lawyers said Musk's settlement would likely win approval, though orders such as Nathan's are not too common.

"In and of itself it's not an ominous sign," said Jordan Thomas, a partner at Labaton Sucharow and former SEC lawyer. "The vast majority of settlements like this are approved by courts."

Pritchard said before Musk's tweet that he saw no "serious chance" for a rejection of Musk's settlement, based on 2nd Circuit precedent. "This is just a hoop to be jumped through," he said.

Source(s): Reuters