The latest legal action between U.S. securities regulators and Tesla Inc. Chief Executive Elon Musk highlights the challenge facing regulators and boards when it comes to reining in a wealthy chief executive whose identity is closely tied to the value of the company he or she leads.
The Securities and Exchange Commission on Monday asked a federal judge to hold Mr. Musk in contempt of court over social media messages he made last week about Tesla’s projected production volumes. The regulator said the tweets violated the terms of a fraud settlement he reached with the SEC in September because they weren’t preapproved by Tesla officials.
U.S. District Judge Alison Nathan on Tuesday ordered Mr. Musk to respond to the claims by March 11. Representatives from Tesla didn’t immediately return requests for comment.
The SEC last year sued Mr. Musk, alleging he tweeted misleading information about taking Tesla private. Mr. Musk’s settlement deal with the SEC in part required that Tesla officials preapprove statements from him that could affect the company’s stock price.
Steven Peikin, co-director of the SEC’s division of enforcement, said in October that the regulator deployed one of its most effective tools—a tailor-made directive—to prevent potential harm to investors caused by a lack of oversight of Mr. Musk’s communications. An SEC spokesman on Tuesday declined to comment beyond the court filing.
“The SEC has bent over backwards to allow Tesla to continue to get the benefits of Musk’s creative genius, but they have also attempted to put in place procedures and methodologies to prevent shareholders from being misled by his tweets,” said Harvey Pitt, former chairman of the SEC.
The regulator and Tesla’s board face the same conundrum if he is found in contempt: how to reprimand Mr. Musk without causing potential harm to investors.
Mr. Musk’s personal wealth, estimated in the billions, cushions the impact of any potential financial penalties, said Bonnie Hancock, executive director of the Enterprise Risk Management Initiative at the North Carolina State University Poole College of Management. Mr. Musk was fined $20 million as part of settlement with the SEC last year.
And any action that curtails his leadership responsibilities risks hurting the value of Tesla because Mr. Musk’s identity is closely intertwined with the company’s value. “It’s a situation where it’s hard to say what’s the right thing to do for the shareholders,” Ms. Hancock said. “It’s a horrible distraction that he’s created, but if they ultimately removed him as the CEO, that’s an even bigger distraction.”
Tesla shares fell 4% in aftermarket trading on Monday following the SEC court filing. On Tuesday, the company’s stock recouped most of those losses to close at $297.86 a share, down 0.3%.
Tesla’s board is likely discussing means to limit the damage, including stricter controls of Mr. Musk, said Byron Loflin, chief executive at the Center for Board Excellence, an organization that advises boards at large corporations. The board could also reprimand Mr. Musk publicly. “We need a signal that the board is addressing the issues,” Mr. Loflin said.
Mr. Musk must also defend himself in court. The judge can impose additional fines and additional measures for the company to review Mr. Musk’s tweets, including a monitor who reports to the court, rather than the company, lawyers said.
Stephen Crimmins, a partner at Murphy & McGonigle specializing in SEC enforcement defense cases, predicts that a judge could impose a steep monetary fine and tighten up the process for reviewing his tweets. The amount of any fine could be affected by the judge’s view on how serious Mr. Musk’s violation of his original settlement with the SEC was.
“It can be as much as the judge thinks is necessary,” Mr. Crimmins said.
Write to Tatyana Shumsky at tatyana.shumsky@wsj.com and Nina Trentmann at Nina.Trentmann@wsj.com
