In a faceoff with Elon Musk, the SEC blinked

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  • US securities regulators have pulled their punches in dealings with Elon Musk since an April 2019 court hearing on a statement he made about Tesla on Twitter didn’t go his way.
  • The SEC asked the court to hold the billionaire in contempt, saying one of his tweets violated a court agreement signed last year by a lawyer to investigate some of his communications.
  • But a judge’s remarks in 2019 shattered trust among officials overseeing the case that courts would support him if they attempted to prosecute his activity on Twitter.
  • In the wake of those comments, SEC officials opted to urge Musk to comply with the agreement rather than pursue enforcement through the courts.

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US securities regulators have pulled their punches in dealings with Elon Musk, as an April 2019 court hearing on a statement made about Tesla on Twitter is on its way, according to four sources with knowledge of the matter. did not go.

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The US Securities and Exchange Commission (SEC) asked court to hold the billionaire in contempt, saying a tweet by the Tesla Inc CEO – which predates production on the carmaker – violates a court agreement called Musk signed last year. Communications vetted by a lawyer.

By trying to rein in its comments, the SEC was veering into relatively unknown territory. SEC regulations require that public companies and their executives disclose accurate information that may be material to investors through channels that investors know to monitor. It does not usually specify how companies should do this.

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But Judge Alison Nathan’s 2019 remarks — who found the terms of the agreement between Musk and the SEC “soft” and urged him to reach an understanding — knocked out confidence among officials overseeing the case that courts would support him if They attempt to prosecute his activity on Twitter, four sources said.

Interviews with individuals familiar with the situation — as well as a review of court documents, SEC and Tesla emails obtained by media via a public records request — showed that in the wake of Nathan’s comments, SEC officials urged Musk to comply. Selected option. Compromise rather than pursuing enforcement through the courts.

SEC spokespersons declined to comment on its enforcement deals with Musk. Representatives for Tesla and Twitter spokesman and Judge Nathan did not respond to requests for comment for this story.

Musk’s attorney, Alex Spiro, did not respond to requests for comment on the SEC’s deliberations, but court records and Tesla emails show that he and other attorneys for the Tesla boss dispute Musk’s tweets violated the agreement. Was.

Interviews and documents shed light on the regulator’s view of his relationship with the billionaire, now the world’s richest man, with investigations into Musk’s use of social media following his bid to buy Twitter. He has 95 million Twitter followers and called the SEC a “bastard” in an interview in April.

Sources said they are not familiar with the current thinking of the SEC, which has been under new leadership since President Joe Biden took office in January 2021. Under the new chairman of Gary Gensler, the agency has repeatedly promised to crack down on misconduct and pushback. for harsh punishment.

It recently opened up further investigation into Musk. Among them, an investigation into two of his November tweets asked whether he should sell shares in Tesla, court documents regarding Musk’s agreement with the SEC show.

Nathan was promoted to the Second US Circuit Court of Appeals in New York in March. A newly appointed judge in the case, Lewis Lyman, ruled in favor of the SEC last month.

‘Content Information’

The SEC’s battle with Musk began on August 7, 2018, when the CEO, whose company has been asking investors to monitor its Twitter feed since 2013, “secured funding” to take the publicly listed company private. The tweet sent Tesla shares soaring. The SEC opened an investigation: It found that Musk had not discussed the terms of the significant deal with any potential funding source at the time, an SEC court filing later showed.

Musk says funding was secure Read more.

In September 2018, agency officials told Musk he had a choice: to fight the tougher charges over the tweets in court or settle and suffer less penalties, one of the sources said. Tesla shares were up around $300 today compared to more than $630 after a five-for-one stock split in 2020. Musk agreed to the settlement.

During the hearing on April 4, 2019, in comments to the SEC regarding the language of the settlement as to which tweets should be investigated, Nathan said, “This case is unusual.” Her exploration of the terms of the settlement has not previously been explained in detail.

The settlement required Tesla to establish a process to oversee all of Musk’s communications about the company, including hiring or designating an “experienced securities attorney” to investigate social media posts. Musk also agreed that he will certify in writing that he has complied, and will provide evidence; And to step down from Tesla’s chair while he was CEO. No end date was set for the arrangement.

The vetting process requires that Musk obtain pre-approval for written communications—including tweets—which may “or reasonably” contain information material to Tesla shareholders.

But whether they contain physical information was left to Musk and Tesla to decide.
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Less than six months later, on February 19, 2019, Musk tweeted that Tesla would make “about 500k” cars that year. SEC officials said in court filings that if the investigation was not conducted, it was arguably a breach of agreement because production figures could be market-sensitive information.

SEC staff asked Tesla if Musk had submitted the tweet for investigation. He was not, Tesla’s lawyers told the SEC. The SEC said in the court complaint that when it looked into the February 2019 tweet, it found that Musk had not sought pre-approval for any Tesla-related tweets since the vetting system began. Its attorney told the court, “Mr. Musk has tweeted about Tesla upwards of 80 times, and the SEC thought nothing of it. We assumed everyone was proceeding in good faith.”

Tesla’s attorneys told a court that Musk did not seek pre-approval because he “has not tweeted material information about Tesla.”

‘Rationality Pants’

To SEC officials, Musk’s breach was obvious, four sources told Reuters.

In April 2019 they went to court in New York to argue that Musk should be held under contempt of court – a serious charge that could result in a fine or prison. The SEC wanted the court to order Musk to report monthly to the agency on his compliance and to enforce increased fines for violations, his attorney told the judge at the hearing.

SEC officials felt they had the upper hand because they believed the breach was obvious, said four sources, two of whom have direct knowledge of the matter.

Following a 1976 Supreme Court decision, SEC rules defined material information that a public company must disclose to “a reasonable investor” that may be material. The regulatory requirement in the deal with Musk was much broader than that, it told the court: “We would argue that it essentially means that unless something is clearly immaterial, it needs to get pre-approval.” “

Musk’s lawyers told the court that the SEC’s interpretation of the settlement’s review requirements was “wrong” and “overbroad.”

Judge Nathan challenged what he described as a “soft” standard of settlement for assessing the physicality of a tweet, the court’s transcript shows; She also agreed with Musk’s attorney that the SEC should have attempted to resolve the issue out of court, saying “it screams to make it work.”

Nathan did not conclude whether the tweets were physical, or rule out the contempt motion, saying: “My call to action is for everyone to take a deep breath, put on your rational pants, and this Work on.”

SEC officials felt they had no choice but to modify the agreement, according to four sources. The SEC, Tesla and Musk agreed to be more specific about which comments should be pre-approved — including statements about Tesla’s financial position, proposed or potential deals, production numbers and performance projections.

Nathan approved that revised agreement on April 30, 2019.

keep tweeting

Three sources said that in the months following, SEC officials realized that Musk had pushed the limits of the revised agreement, but was reluctant to return to court, fearing that Nathan might dismiss their complaint and ask him to The warning may be taken to bring back the issue, three sources said.

On July 29, 2019, Musk tweeted that he was looking forward to building “1,000 solar roofs” a week by the end of the year; And on May 1, 2020, Tesla’s share price was “very high”. According to SEC correspondence sent to Tesla on the matter obtained by public records requests, each tweet prompted the SEC to contact Tesla and Musk’s attorneys to see if they were pre-approved.

Musk did not ask for pre-approval; Tesla’s lawyers argued in an email to the SEC that this was not necessary. The regulator disagreed. The SEC said in the email that it was trying to resolve the dispute “in the spirit of the court’s direction,” but lawyers for Tesla and Musk declined to provide the requested documentation, or “productive dialogue” with SEC employees. did.

In June 2020, the SEC emailed Musk advising that it was “the position of the SEC that you compromised”.

However, instead of returning to court, the SEC said: “Going forward, we urge you to comply.”

Some SEC officials felt the settlement somewhat constrained Musk, which helped protect investors, four sources said.

The SEC was uneasy about the risks of even the most extreme step — scrapping the deal and starting litigation — given Musk’s resources, four sources said.

In addition, Musk was Tesla’s largest shareholder and held about 16% of the stock as of the end of April, so it can be hard to argue whether it was in the shareholders’ best interest to hold him as a director or officer of a public company. Will let loose on Tesla, two sources said.

In March, Musk asked the court to void his settlement with the SEC.

The case’s new judge, Liman, dismissed Musk’s appeal in April. They found the billionaire was “mourning” the 2018 deal now that he thought Tesla was “invincible.” A representative for the court said Liman would not comment.

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