Among the terms that have been added to the lexicon of our post-truth world is “gaslighting,” defined as a form of psychological abuse designed to make someone doubt their own sanity.
The document, which is part of Musk’s ever-escalating battle with the SEC over his tweets about Tesla affairs, was signed by his lawyers but has his fingerprints all over it. And its goal seems to be to introduce the SEC staff to an alternative reality.
The reply brief effectively rewrites the company’s policy requiring that Musk’s tweets be preapproved by attorneys of his electric car company — a policy that was mandated by a legal settlement Musk accepted in September. It claims that his 1st Amendment rights are being infringed by the SEC, and that the agency must be aiming at “retaliation and censorship” of Musk because it has been “embarrassed” by his relentless taunting.
Let’s deconstruct what’s happening here. (Note for film buffs: Though the term “gaslighting” has a modern feel, it derives from the 1944 film “Gaslight,” in which Charles Boyer tries to drive his wife, played by Ingrid Bergman, off her rocker so he can steal her family jewels.)
The SEC sued Musk last year over a tweet in August declaring that he was intending to take Tesla private for $420 per share, a substantial premium over its price at the time. The tweet said funding for the transaction was “secured.”
In fact, there was no funding, and Musk had taken no significant steps toward any such deal. His tweet set off a brief trading frenzy in Tesla stock, which got the SEC’s attention.
In September, Musk and Tesla both agreed to pay $20 million to settle the SEC’s lawsuit over the tweet. Musk agreed to step down as Tesla chairman, though he remains as CEO. The company agreed to add two independent directors to its board as a means of reining Musk in. And Musk agreed to submit for preapproval all tweets that “contain, or reasonably could contain,” material information about the company.
Tesla didn’t actually formalize the preapproval policy until Dec. 11, or two days after Musk appeared on CBS’ “60 Minutes” boasting that he hadn’t submitted any tweets thus far for preapproval and portrayed the policy as an infringement of his free speech.
Fast forward to Feb. 19. That evening, Musk put out a tweet stating that Tesla would manufacture about 500,000 vehicles in 2019. A few hours later, after a Tesla lawyer in an apparent state of panic bearded Musk at Tesla’s Fremont, Calif., factory, he issued a second tweet stating that he meant to say that by the end of 2019, the company would be producing cars at an annualized rate of 500,000 a year, and that delivery of 400,000 cars was the official estimate for 2019.
The SEC then asked the New York federal judge overseeing its lawsuit to declare Musk in contempt of court for violating the settlement agreement. The agency hasn’t said what punishment it seeks to impose, but surely tightening the reins on Musk’s tweeting would be on the menu.
Now let’s examine Musk’s remarkable response.
Generally, he argues that he hasn’t violated the pre-examination policy even one little bit. The policy, he asserts, allows him to determine for himself whether a tweet contains, or reasonably could contain, material information. If Elon Musk decides that an Elon Musk tweet isn’t material, he hits the send button.
Yet the policy, as written, gives Musk no explicit authority to make that judgment about his tweets — though it doesn’t say who’s supposed to prejudge a tweet for preapproval. This vacuum is one that Musk has sailed through. If a tweet appears that looks material, he can just say, “It didn’t look material to me,” and therefore he can’t be said to have violated the deal. This might work in the case of a CEO genuinely determined to live up to the terms of a settlement, rather than looking for its loopholes, as Musk seems to be doing.
Musk and Tesla have acknowledged that not a single tweet has been submitted for preapproval since Dec. 11. The Feb. 19 tweet was the first one that tested the policy’s terms, and from the SEC’s standpoint, it failed the test.
Was the tweet, in fact, material — meaning, did it contain information that might have affected the average investor’s view of the company’s operations? Musk and Tesla say no.
Even though “projections, forecasts, or estimates regarding Tesla’s business” are specifically mentioned by the preapproval policy as items that might be material, Musk and Tesla say the tweet didn’t contain anything new. Tesla had released production forecasts as early as January, they say. Musk was simply repeating their essence. “The tweet simply was not ‘news,” the company brief says.
But that’s not quite true. The company’s official disclosures suggested that by the end of 2019 the company would be operating at rate that would produce perhaps 464,000 vehicles in 2019, not 500,000. In a Jan. 30 earnings conference call, Musk said Tesla might reach a weekly production rate of “10,000 vehicles … or close to it, by the end of the year.” Again — not 500,000 for 2019, but an annual rate of 500,000 by the end of 2019.
The company brief also asserts that no one should have taken Musk’s Feb. 19 projection as gospel. It was “aspirational and forward-looking on its face,” “non-specific,” and “a statement of pride and optimism, not of guidance.” Anyway, the brief implies, since Musk had tweeted that the figure was “about” 500,000, actual production of 460,000 or even 400,000 was still close enough to 500,000 to not really matter.
The fact remains that Tesla’s legal counsel thought the distinction was important enough that he or she sat down with Musk on Feb. 19 and wrote the second tweet to correct the first.
The brief argues that the first tweet must not have been material after all, since it didn’t move Tesla’s stock. This isn’t a great argument, since the tweet was issued after hours on a Tuesday and was “clarified” within four hours, long before the markets reopened for trading on Wednesday morning.
Finally, there’s Musk’s claim that the SEC is so annoyed with him that it wants to infringe his freedom of speech. The SEC’s interpretation of the settlement is “a de facto gag on a broad spectrum of statements implicating Tesla," the company asserts.
This is the most eye-catchingly ludicrous assertion in the brief. Musk and Tesla agreed to the preapproval policy. It doesn’t prevent them from issuing any statement they wish, but only requires Musk to place a tweet under the eyes of two company attorneys or executives before sending it out. If they approve, no problem. If they disapprove, then it has to be rewritten to conform with, you know, the truth.
And if the final version is still materially misleading, then the SEC has all sorts of weapons at its disposal to punish companies and executives who lie, whether via Twitter or otherwise. And those weapons have not been successfully challenged as unconstitutional.
It’s best to view the response brief in its entirety as yet another taunt by Musk to the SEC, which he has said he doesn’t respect. He’s saying, in effect, that the settlement he agreed to with the agency doesn’t amount to a hill of beans, because he’s the one who decides when it applies.
He’s saying that he can squeeze his production numbers numbers until they scream for mercy because his investors know he’s just being “aspirational,” not disclosing actually actionable facts. And he’s thumbing his nose not only at the SEC, but at federal Judge Alison J. Nathan of New York, who approved the September settlement and is still presiding over the case. (She gave the SEC until March 19 to file a response to Tesla.)
How long can Musk get away with treating the securities laws as a personal playpen? The signs are that investors are wearying of his act, especially as evidence emerges that Tesla sales and financial results may be disappointing.