We are nearing the first real court drama moment in the Tesla (TSLA) saga. The reason for this is the order that Judge Nathan, U.S. District Judge, entered on March 12, 2019, in the case between The Securities and Exchange Commission (SEC) and Elon Musk: Dan Ravicher on Twitter.
Judge Nathan’s court order reads as follows:
“The Government’s motion for leave to file a reply memorandum is granted. The Government shall file its reply memorandum no later than March 19, 2019. No later than March 26, 2019, each party shall indicate in writing whether it is seeking an evidentiary hearing on this matter.”
In other words, the government (SEC) on March 12 asked to rebut Tesla’s argument in front of the court, as filed on March 11: PlainSite on Twitter. They now have a week to do so. But what's this thing about an evidentiary hearing, which the judge is asking each party to request?
For the government, such an evidentiary hearing is a golden opportunity to ask Musk all sorts of questions, knowing that he would be digging himself into unprecedented deep trouble if he did not tell the truth in response to the SEC’s questions. The evidentiary hearing therefore seems like an opportunity for which the SEC could not pass up - especially in the context of how Musk has taunted the SEC with statements such as “I do not respect the SEC. I do not respect them.”
Basically, if you’re the SEC: “Let’s ask Musk some questions on the stand, in front of the Judge, and see what we learn!”
With that in mind, I have put together a list of questions that the SEC surely would like to ask Musk at this March 26 evidentiary hearing:
Have you ever tweeted under a different account or user name than the one for which you are commonly associated, @elonmusk: Elon Musk (@elonmusk) | Twitter?
Have you ever dictated or collaborated with another account as to what would be tweeted, under their account name? This includes your mother’s account - Maye Musk (@mayemusk) | Twitter - and anyone you know who has or may reasonably believe have a position in Tesla stock?
Have you ever been given access to non-public information about a Twitter account holder from anyone at Twitter (TWTR), including its CEO Jack Dorsey or anyone acting on his behalf? If so, what kind of information about other Twitter users did you receive? In the March 13 Bloomberg article (here), your security team appears to have had access to private messages from at least one Tesla employee: “Gouthro, who wasn’t in the interrogation room, says at one point he saw a colleague reading the text messages and emails that Tripp was sending during breaks in the questioning. He says that somehow Tesla was able to access Tripp’s communications in real time.” Did you or anyone on your staff have access to private messages - whether on or off the Twitter platform?
Have you ever discussed the contents of a future Tweet, in the context of how it might influence the Tesla stock price, with anyone working on your staff, or anyone you may reasonably believe is a Tesla shareholder? If so, with whom, and regarding which tweet?
Have you ever tweeted about Tesla under the influence of any illicit drug? If so, which drug(s)?
Has anyone seen you tweet while you consumed any such drugs, or taking drugs in the minutes or hours leading up to such a tweet? If so, who is or are this person(s)?
Are you aware of any Tesla shareholder, or anyone acting on behalf of a Tesla shareholder, having placed more than two deposits within a year, on a Tesla Model 3?
Are you aware of any intent by any party, to place more than two deposits on a future Tesla Model Y? This includes knowledge of anyone acting on behalf of any other person or entity.
When you said on the August 2017 second-quarter earnings call - here - that “But what people should absolutely have zero concern about is that Tesla will achieve a 10,000 unit production week by the end of next year.” - had you ordered sufficient production equipment and supplier materials, components and modules to handle 10,000 complete cars produced per week?
It was reported on StreetInsider.com (behind paywall) that Wolfe Research and its analyst Rod Lache hosted two large group meetings for Tesla Investor Relations in New York City on March 11, 2019. In this writeup, the analyst hosting the Tesla Investor Relations meetings is quoted as saying "it was good to look management in the eye and hear that Tesla is selling every car they can produce.” The StreetInsider summary continues: “...they are incrementally convinced that the recent noise is '"just noise" after hosting Tesla IR Martin Viecha for two large group meetings in NYC.” Does this guidance conform to what Tesla has been telling other analysts and through publicly issued guidance about what investors can expect from the March 2019 quarter?
When you said on the August 2018 second quarter earnings call - here - that “And like the logic question is like do we have like a low balance in the bank? The answer is no, we've got – we're in no – we're not in any kind of cash shortage at all.” - Did you have any information that your average cash balance during the quarter was lower than your quarter-end cash balance as reported on your balance sheet? If so, by how much?
Going directly to your guidance for 2019, and Q1 and Q2 guidance specifically, on Jan. 30, 2019, you engaged in this exchange with Goldman Sachs analyst David Tamberrino: Tesla (NASDAQ:TSLA) Q4 2018 Earnings Conference Call Transcript - The Motley Fool
David Tamberrino - Goldman Sachs - Analyst
So like orders above, I think I've seen like 20,000 order levels for Europe and single-digit thousands for China. Is it better than that, Elon?
Musk -- Co-Founder and Chief Executive Officer
Was that answer truthful? Did Tesla in fact have over 20,000 Model 3 orders from Europe and single-digit thousands for China as of Jan. 30, 2019? The question was in the context of the Model 3 only, per the transcript: “How is that order profile shaping up relative to what you saw in the U.S. with the launch of the 3?” Also, “orders” are not “deposits.”
Conclusion: This hearing is a way for the SEC to get Musk to tell them more
I have no doubt that Musk would object to almost any line of questioning by the SEC in the March 26 evidentiary hearing. That is, however, what would make the whole matter interesting. He can only avoid having to answer these questions for so long. Not wanting to answer questions like these makes it look like he has something very sinister to hide - especially in front of the judge.
If the SEC doesn’t get answers to these questions at this March 26 evidentiary hearing, they will find another way to pursue them. For example, one line of inquiry has been confirmed in Tesla’s own 10-K filing in February: here.
“In particular, the SEC has issued subpoenas to Tesla in connection with (a) Mr. Musk’s prior statement that he was considering taking Tesla private and (b) certain projections that we made for Model 3 production rates during 2017 and other public statements relating to Model 3 production. The DOJ has also asked us to voluntarily provide it with information about each of these matters and is investigating. Aside from the settlement with the SEC relating to Mr. Musk’s statement that he was considering taking Tesla private, there have not been any developments in these matters that we deem to be material, and to our knowledge no government agency in any ongoing investigation has concluded that any wrongdoing occurred. As is our normal practice, we have been cooperating and will continue to cooperate with government authorities.”
-- Page 133 of Tesla’s February 2019 10-K filing
In other words, if the SEC doesn’t get answers to these questions at the March 26 evidentiary hearing, it can certainly pursue them in the context of the subpoenas that Tesla is talking about. After all, Tesla says that it's “cooperating” with these government authorities, so if the SEC asks, Tesla sounds like it will comply with responses.
By springing these questions in the March 26 evidentiary hearing, however, the SEC could go on the offense given that it would be made orally in front of Judge Nathan. It’s easier to be evasive in answering questions when it’s done in writing weeks apart, clothed in lawyerly briefs. However, when it’s done live and orally in front of the judge, any party who is evasive or outright refuses to answer, can be put in very unfavorable light in front of the judge.
Remember, last September it was the SEC’s “first ask” in its lawsuit against Musk that he be removed as CEO. It was only after a settlement negotiation thereafter that Musk was allowed to stay as CEO. If the SEC will now turn up the volume in front of the judge, Musk cannot afford to be evasive if he wants to maximize the probability of remaining as CEO.
That’s why it is so important that the SEC asks these questions from Musk at the March 26 evidentiary hearing in front of Judge Nathan.
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Disclosure: I am/we are short TSLA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: At the time of submitting this article for publication, the author was short TSLA. However, positions can change at any time. The author regularly attends press conferences, new vehicle launches and equivalent, hosted by most major automakers.