February 26, 2019

SEC Seeks Contempt Order for Tesla’s Musk Over New Tweet

Here we go again. Elon Musk can’t quit Twitter – which means the SEC can’t quit Elon. It was only last October that the Tesla CEO settled with the SEC on allegations of securities fraud, after a series of surprising “going private” tweets. Part of the settlement required Musk to get internal pre-approval of tweets that could contain material info about the company. But, as Broc and others predicted, it was a pretty tall order to think a mere mortal could stand between Elon and his social media.

Last week, Elon tweeted some production stats without getting that internal pre-approval. The SEC responded yesterday with this motion – asking the federal district court in Manhattan to hold Musk in contempt for violating the court-approved settlement. The motion is worth reading – it includes Tesla’s “Senior Executives Communications Policy” as well as a look into how the policy was being applied, and an excerpt from Musk’s December interview with “60 Minutes” Lesley Stahl in which Musk essentially thumbed his nose at the SEC.

If you don’t have time for that (or you don’t read Elon’s Twitter feed), this WaPo article also provides a good overview & analysis (also see this WSJ article and this NYT article). Here’s an excerpt:

It is not surprising that the SEC felt compelled to ask for Musk to be found in contempt, said Charles Elson of the University of Delaware. “They have to react. From an agency standpoint, if you show outright contempt towards the agency and they do nothing, how are they ever going to enforce the law?,” he said.

The SEC could ask the judge to increase the $20 million fine Musk has already paid or move to punish the company’s board if they don’t rein him in, said Adam Epstein, a corporate-governance advisor. But SEC is not likely to ask that Musk be removed from the company altogether, as it initially did last year, he said. “He has a pattern and practice of tweeting in an inflammatory fashion for years,” Epstein said. “He probably knows that the government is not going from Defcon 5 to Defcon 1 to remove him from the company, because that would be the worst possible outcome for investors. He’s clearly created more value than he’s hurt shareholders by his tweeting.”

Non-GAAP: Recognizing “Individually Tailored” Measures

As this ‘Journal of Accountancy’ article explains, Corp Fin clarified in 2016 that non-GAAP measures that substitute individually-tailored recognition & measurement methods for those of GAAP could violate Rule 100(b) of Regulation G (see CDI 100.04). Head scratching ensued – even at the Big 4 – because nobody knew the meaning of “individually tailored.” But the article reports that at the most recent AICPA conference, Patrick Gilmore (a Corp Fin Deputy Chief Accountant) provided these questions to guide the assessment:

– Does the adjustment shift GAAP from an accrual basis of accounting to a cash or modified basis of accounting? For example, Gilmore said using cash receipts or billings as a proxy for revenue for a subscription-based business that recognizes revenue over time would provide a profitability measure that would be determined on a mixed basis of accounting and would be an individually tailored accounting principle.

– Does the adjustment add in transactions that are also reportable in the company’s financial statements? As an example, Gilmore said adjusting from the guidance for determining whether a company is a principal or an agent could result in presenting transactions that don’t qualify as your own under GAAP and may be an individually tailored accounting principle.

– Does the adjustment reflect parts, but not all, of an accounting concept? For example, Gilmore said adjusting income tax effects for cash taxes but not for temporary or permanent differences may be an individually tailored accounting principle.

– Does the adjustment render the measure inconsistent with the economics of a transaction or an agreement? As an example, Gilmore cited some companies that earn revenue from operating leases, but also from sales-type leases or financing leases. “They will adjust revenue for the sales-type or financing leases as if they were operating leases, thus ignoring some of the economics of the lease agreements that they have,” he said.

Would Your Investors Support An Activist?

This recent “Trust Barometer” from the Edelman communications firm has lots of intel about what’s driving investment decisions – based on responses from 500 chief investment officers, PMs and buy-side analysts. This article recaps the declining level of trust in business and suggests that companies with higher trust levels, gained via accurate & transparent reporting, experience steadier (and better) share prices.

But what most caught my eye were the investors’ views on activism – especially since this WSJ article reports that there were a record number of activist campaigns last year, and Broc recently blogged that mutual funds are increasingly willing to employ activist tactics:

– 87% of investors are more open to taking an activists approach to investing

– 92% will support a “reputable” activist if they believe change is necessary at the company

– 87% think companies are unprepared for activist campaigns

Liz Dunshee