What to expect after Elon Musk's day in court

Muzzle? Fine? Removal? What to do about Elon Musk?

The Tesla CEO had his day in court Thursdayfor a hearing in his ongoing battle with the Securities and Exchange Commission. This time, the financial regulators alleged Musk broke the terms of a prior settlement agreement by posting material company information on Twitter earlier this year. Musk claims he did nothing wrong.

Former SEC prosecutor Elliot Lutzker believes the agency will back down without removing Musk from the CEO position, but only after Musk pays a fine significantly larger than the $20 million he paid last year to settle his original dispute with the SEC, which stemmed from the CEO's infamous "funding secured" tweet where he suggested he was going to take Tesla private.

But Lutzker says he doesn't think Musk will be able to stay out of trouble "unless he gives up Twitter."

The latest round the legal battle started on Feb. 19, when Musk tweeted to his more than 24 million Twitter followers: "Tesla made 0 cars in 2011, but will make around 500k in 2019."

He later tweeted a clarification stating: "Meant to say annualized production rate at end of 2019 probably around 500k, ie 10k cars/week. Deliveries for year still estimated to be about 400k."

On Wednesday night, Tesla reaffirmed its full-year forecast of 360,000 to 400,000 vehicle deliveries in 2019 while at the same time reporting disappointing first-quarter deliveries — about 63,000 of its electric vehicles versus analysts' expectations of 76,000.

So, to hit the low end of its guidance, Tesla would need to deliver 297,000 additional vehicles to customers in 2019, or an average of 99,000 per quarter. That's more than Tesla has ever delivered in any quarter — its record is 90,700 during the last quarter of 2018.

Judge Alison Nathan heard oral arguments in Manhattan federal court on Wednesday but rather than rule immediately, she asked Tesla and the financial regulators to try to work out their differences within two weeks.

In response, Musk said in a statement, "I have great respect for Judge Nathan, and I'm pleased with her decision today. The tweet in question was true, immaterial to shareholders, and in no way a violation of my agreement with the SEC. We have always felt that we should be able to work through any disagreements directly with the SEC, rather than prematurely rushing to court. Today, that is exactly what Judge Nathan instructed."

CNBC asked former Lutzker, now a corporate and securities partner at Davidoff Hutcher & Citron, for his take on the case.

"When they entered into the settlement, the SEC thought they'd solve the problem. And Musk thought he didn't have to get preapproval of his tweets. He's wrong."

He suggests that the SEC will probably have to walk back the contempt matter.

"It is clear what both sides want right now," Lutzker said. "The SEC wants compliance with the settlement. Musk's attorneys want the SEC to drop the contempt proceedings, which they will need to do as he is not a recidivist securities law violator, just a recidivist tweeter."

But he also thinks Musk's attorneys went a bit far with their argument. "They keep saying the SEC is trying to violate his First Amendment rights. That's going too far. It's not a vendetta."

If an agreement happens: Lutzker expects a big fine to be part of any agreement.

"If contempt, and a move to suspend or bar Musk as an officer, are dropped, Musk will need to pay a hefty fine, substantially bigger than the $20 million already paid. They will work out a settlement again, which the court must approve. Whether Musk can follow it is doubtful — unless he gives up Twitter."

If no agreement is reached: If the SEC and Musk cannot reach an agreement, Lutzker predicts the court will try to thread the needle and punish Musk without hurting Tesla shareholders.

"The court is going to try to come down with some decision that won't be adverse to the shareholders of Tesla," he said.

"I don't think they'll remove him as CEO because he didn't do anything criminal. In all likelihood there will be a substantial fine. There could be a possible short-term suspension of Musk as CEO. They already removed him as chairman of the board and made the company replace him as chairman. The reason they won't remove him as CEO is that he is the company, for better or for worse."

Longer term, the SEC needs to revisit its policy allowing public company executives to use social media as means of communicating with shareholders, Lutzker added.

Whether it's Twitter, Facebook or another platform, he said, "I don't think they previously envisioned that social media would be a sole, or primary means, of communications with shareholders, especially by a CEO on the fly."

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