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Morningstar | SEC Seeking to Find Musk in Contempt of Settlement Suggests He Needs a Twitter Break

The SEC has asked a U.S. District Court judge to hold Tesla CEO Elon Musk in contempt of a settlement reached last year after civil fraud charges against Musk related to his tweets last August on taking Tesla private. Musk wrote three tweets on Feb. 19, 2019, regarding 2019 production that we think the SEC felt were misleading and material. The Wall Street Journal reported that Tesla counters the SEC by claiming that the content of these tweets, but not the tweets themselves, was vetted by lawyers in January. This situation is too uncertain to drive a change in our fair value at this time, but independent of this news, we are increasing our fair value estimate to $240 from $222 after rolling our model to incorporate results reported in the 10-K.

If Musk is found in contempt, the SEC could ban or suspend him from being CEO of a public company in a worst-case scenario, but we think it's too early to say that will happen. The settlement already forced him to step down as chairman for three years. If the SEC forced Musk to surrender the office of CEO of Tesla, we think he'd still remain with the company in some type of product development or design role, but his title would be uncertain and the SEC may not allow him to be an officer. We think a new CEO would also have a hard time trying to fill Musk's shoes, especially if Musk is still employed at Tesla. If the SEC removed Musk as CEO, we would likely raise our cost of equity to 13.5% from 11%, the highest possible in our methodology, and we'd also consider moving our fair value uncertainty to extreme, which would mean Tesla would have to trade about 75% below its fair value estimate to earn our 5-star rating. We could also take only one of the two above actions. If we raised our cost of equity per above, our $240 fair value estimate would decline to $180.

Musk's December 60 Minutes television interview troubled us because he went out of his way to say he did not respect the SEC, and we interpreted comments in that interview regarding supervision of his future tweets to mean that some mistakes in compliance with the settlement may be made. These comments concerned us because he is not giving the SEC a reason to give him the benefit of the doubt in any future compliance issues, such as the Feb. 19 production tweets, and we doubt the SEC is OK with Tesla correcting settlement compliance violations after the fact. We've long respected Musk for his candor but this candor in 2018 and 2019 keeps getting him into legal trouble,and we'd wish he'd stay off Twitter except for product news. In our view, Musk is critical to Tesla's future, to raise capital and to make great-looking vehicles such as the Model S and Model 3.