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Tesla's Elon Musk Arrives in Court to Square Off with SEC at Contempt Hearing

Tesla CEO Elon Musk arrives in a Tesla at Manhattan Federal Court, in New York, April 4, 2019.

Tesla Inc Chief Executive Elon Musk arrived in Manhattan federal court on Thursday for a hearing on whether he violated a fraud agreement and should be held in contempt, the latest twist in a high-profile battle between the billionaire and the government.

Musk's fight with the U.S. Securities and Exchange Commission has raised investor worries that it could lead to restrictions on his activities or even his removal from Tesla, while distracting him at a pivotal point in the electric car maker's expansion.

Tesla, which built its reputation on luxury cars, has faced several production challenges with its Model 3 sedan, which it is counting on to reach the mass market, recently offering a version starting at $35,000.

Wearing a dark suit and tie, Musk sat at the defense table with his lawyers in a packed courtroom, looking slightly nervous.

The SEC on Feb. 25 accused Musk of violating his October 2018 settlement by posting material information about Tesla on Twitter six days earlier, without first seeking approval from company lawyers.

Musk has countered that the information was not material, and did not need to be vetted.

Started with a tweet

The battle concerns a tweet that Musk sent to his more than 24 million Twitter followers: "Tesla made 0 cars in 2011, but will make around 500k in 2019," meaning 500,000 vehicles.

Four hours later, Musk corrected himself, saying annualized production would be "probably around" 500,000 by year end, with full-year deliveries totaling about 400,000.

The SEC called the earlier tweet "obviously different" from Tesla's Jan. 30 outlook, when it targeted annualized Model 3 production exceeding 500,000 as soon as the fourth quarter, and projected 360,000 to 400,000 vehicle deliveries this year.

Musk's lawyers countered that the earlier tweet merely restated a forecast he had given on Jan. 30, when he said Model 3 production could total 350,000 to 500,000 vehicles.

They have also said the SEC had conceded during settlement talks that Musk did not need pre-approval for all tweets about his Palo Alto, California-based company.

On Wednesday night, Tesla repeated its Jan. 30 vehicle delivery forecast, but said first-quarter deliveries had fallen 31 percent from the prior three months to about 63,000. Its share price was down more than 8 percent on Thursday afternoon, after earlier falling as much as 10.7 percent.

It is rare for the SEC to seek a contempt finding, though some legal experts said the regulator has a strong case over Musk's earlier tweet.

"It seems pretty clear that this particular tweet was not run through the scrubbing system that Tesla was supposed to have in place," said Stephen Diamond, who teaches securities law at Santa Clara University School of Law.

Musk says SEC ‘broken’

A contempt finding by U.S. District Judge Alison Nathan could subject Musk to new sanctions such as a higher fine or removal from Tesla's board or as chief executive, legal experts said.

James Cox, a Duke University law professor, said Nathan was unlikely to impose a severe penalty such as giving up control over Tesla.

"We have to understand that Tesla is at a very important point in its history, and I don't think any judge would want to be viewed in hindsight as the cause of the demise of Tesla," he said.

"She could give him a good tongue-lashing, and tell him this is it, and next time she's not going to be so nice," Cox added. The settlement resolved an SEC lawsuit that accused Musk of violating securities laws by tweeting last Aug. 7 that he had "funding secured" to take Tesla private at $420 per share.

That tweet sent Tesla's share price up as much as 13.3 percent. Musk's privatization plan was at best in an early stage, however, and financing was not in place.

In settling, Musk agreed to step down as Tesla's chairman, and the company said it would adopt procedures to oversee all of Musk's communications, regardless of format, and pre-approve written communications that could be material to the company.

Tesla and Musk also agreed to each pay $20 million civil fines.

Musk critical of SEC

The legal battle, which began in September, has not stopped Musk from being an outspoken critic of the SEC.

He has since labeled the SEC the "Shortseller Enrichment Commission," recalling his attacks against hedge funds and other investors who sell Tesla stock short, hoping it will fall.

In a December interview with CBS’s “60 Minutes,” Musk said he did not have respect for the SEC. He also said his tweets had not been reviewed in advance since the settlement.

And in the early morning of Feb. 26, after the SEC filed its contempt motion, Musk tweeted: “Something is broken with SEC oversight.”