Analysts React To SEC Action Against Elon Musk

Tesla, Inc. TSLA stock traded lower Tuesday morning after the U.S. Securities and Exchange Commission filed a motion on Monday calling for a judge to hold Tesla CEO Elon Musk in contempt of court after Musk allegedly failed to adhere to the terms of a 2018 fraud settlement with the SEC.

SEC Complaint

On Thursday after the market close, the SEC filed an official complaint alleging that Musk’s recent tweets about Tesla car productions violated the terms of his fraud settlement because they were not approved by Tesla.

On Feb. 19, Musk tweeted Tesla would make “around 500K” cars in 2019. Tesla has previously said the company would make around 400,000 deliveries this year. Roughly four hours later, Musk made a second tweet clarifying that he “meant to say” Tesla would end 2019 at an annualized production rate of 500,000 vehicles per year.

The SEC filing claims Musk violated the terms of his settlement, which require him to get company approval before tweeting any information that could potentially move Tesla’s stock.

“Musk did not seek or receive pre-approval prior to publishing this tweet, which was inaccurate and disseminated to over 24 million people,” the SEC alleges in its complaint.

A federal judge ruled Tuesday Musk has until March 11 to explain why he should not be held in contempt.

Related Link: Tesla And Consumer Reports: A History

Musk Lashes Out

Musk has gotten in hot water before for tweeting out non-public and/or inaccurate information that subsequently moved Tesla’s share price. The 2018 fraud settlement came after Musk tweeted he had “funding secured” to take Tesla private at a price of $420 per share even though no such formal offer was ever made.

In his fraud settlement, Musk agreed to pay a $20 million fine, step down from his position at Tesla’s chairman for at least three years and get any public communications regarding Tesla, including Tweets, pre-approved by a company lawyer.

Following the settlement, Musk ripped the SEC in a December interview with “60 Minutes.”

“I want to be clear. I do not respect the SEC. I do not respect them,” Musk said.

Musk said he uses Twitter to express himself and only agreed to abide by the terms of the settlement because he respects the U.S. justice system.

“I am sort of impulsive, and I don’t want to try to adhere to some CEO template,” he said.

On Tuesday, Musk again lashed out at the SEC following its latest filing.

“Something is broken with SEC oversight,” Musk tweeted on Tuesday morning. “SEC forgot to read Tesla earnings transcript, which clearly states 350k to 500k. How embarrassing…” he said.

According to the complaint, the SEC takes issue with the fact that Musk appears to have not been getting his tweets pre-approved by Tesla.

“Since Tesla's Policy was implemented in December 2018, Musk's tweets have been reviewed after their publication, but there is no suggestion that Musk has sought or obtained pre-approval of any tweet prior to publishing it,” the SEC says in the complaint.

Analysts React

Several Wall Street analysts have spoken out in response to the latest SEC filing and what it means for investors.

Wedbush analyst Daniel Ives said uncertainty surrounding Musk and his legal troubles will continue to weigh on Tesla shares.

“With Tesla/Musk settling with the SEC in October this black cloud was in the rear view mirror for the company (and investors) and now this latest tweet (which most investors shrugged off at the time) represents a wild card that could potentially bring this tornado of uncertainty back into the Tesla story until resolved,” Ives wrote in a note.

Wedbush has an Outperform rating and $390 target for Tesla.

Canaccord Genuity analyst Jed Dorsheimer said the latest Musk tweets reopen Tesla’s 2018 Twitter wounds, and the near-term legal uncertainty create an overhang for the stock.

“Despite the self-inflicted challenges at TSLA, we remain bullish on the EV secular trend, as well as the operational headroom for TSLA to capture,” Dorsheimer wrote.

Canaccord has a Buy rating and $450 target for Tesla.

Loup Ventures' Gene Munster said Musk’s carelessness has once again come back to bite Tesla investors.

“While this tweet (after market hours) and the quick correction seem innocuous, the SEC isn’t likely to cut Musk any slack. When you make things personal, it’s not just personal for you,” Munster wrote.

CNBC's Jim Cramer took his criticism of Musk a step further and called for Musk to be removed as Tesla CEO.

"If this guy is going to attack the SEC, how about removing him? He attacked the SEC," Cramer said. "I love him. He's a genius, [but] he should be removed."

Tesla stock is down 17 percent overall in the past year. The stock traded around $301.67 per share at time of publication.