According to four knowledgeable sources, U.S. securities regulators have gotten their act together with Elon Musk largely because an April 2019 hearing on a statement he made about Tesla on Twitter was not to their liking.
The U.S. Securities and Exchange Commission (SEC) asked the court to scorn the billionaire, saying a tweet from Tesla’s CEO — predicting production at the automaker — violated a court agreement Musk signed last year to have some of his communications checked by a lawyer.
By trying to rein in his comments, the SEC was entering relatively uncharted territory. SEC rules require that public companies and their executives disclose accurate information that may be of interest to investors through channels that investors know they are watching. It usually doesn’t tell companies how to do that.
But the 2019 comments from Judge Alison Nathan — who found the terms of the agreement between Musk and the SEC “soft” and urged them to come to an agreement — shaken confidence among officials overseeing the case that the courts won’t grant them. would support if they tried to pursue his activity on Twitter, the four sources said.
Interviews with individuals familiar with the situation — as well as a review of court documents, SEC and Tesla emails obtained by the media through a request for public records — showed that in the wake of Nathan’s comments SEC- officials chose to urge Musk to comply with the agreement, rather than seek enforcement through the courts.
SEC spokesmen declined to comment on the enforcement activities with Musk. Tesla and Twitter spokesmen and a representative for 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 emails from Tesla show that he and other attorneys for the Tesla boss are contesting that Musk’s tweets violated the agreement. .
With Musk’s use of social media coming under scrutiny after he bid to buy Twitter, the interviews and documents shed light on the regulator’s views on his relationship with the billionaire, now the world’s richest man. He has 95 million Twitter followers and called the SEC “bastards” in an April interview.
The sources said they are not familiar with the current thinking of the SEC, which has been under new leadership since US President Joe Biden took office in January 2021. insist on harsher penalties.
It recently opened more investigations into Musk. Among them, an investigation into two of his November tweets asking if he should sell shares in Tesla, court documents related to Musk’s settlement with the SEC show.
Nathan was promoted to the New York-based 2nd US Circuit Court of Appeals in March. A newly appointed judge in the case, Lewis Liman, ruled in favor of the SEC last month.
“Material Information”
The SEC’s battle with Musk began on August 7, 2018, when the CEO, whose company had been telling investors since 2013 to keep an eye on his Twitter feed, skyrocketed Tesla stock by tweeting “funding secured” to delist the listed company. The SEC opened an investigation, finding that Musk hadn’t even discussed key deal terms with a potential funding source at the time, SEC filings later revealed.
Musk says funding has been secured.
In September 2018, agency officials told Musk he had a choice: fight hefty charges over the tweet in court or settle and receive fewer sentences, one of the sources said. Tesla shares were around $300 (about Rs. 23,200) compared to more than $630 today (about Rs. 48,800) after a five-for-one stock split in 2020. Musk agreed to settle.
During the April 4, 2019 hearing, Nathan said in comments to the SEC about the language of the settlement about which tweets should be vetted: “This case is unusual.” Her exploration of the terms of the settlement has not been previously reported in detail.
The settlement required Tesla to establish a process to oversee all of Musk’s communications about the company, including hiring or appointing an “experienced securities attorney” to monitor social media posts. Musk also agreed to certify in writing that he had complied, and provide evidence; and to step down as Tesla chairman while remaining CEO. No end date has been set for the scheme.
The vetting process required Musk to obtain prior approval for written communications — including tweets — that “or could reasonably contain” informational materials to Tesla shareholders.
But the decision whether they contain material information was left to Musk and Tesla.
Less than six months later, on February 19, 2019, Musk tweeted that Tesla would make “about 500,000” cars that year. If not vetted, it was arguably a breach of the settlement, as production figures could be market-sensitive information, SEC officials said in court filings.
SEC staff asked Tesla if Musk had submitted the tweet for vetting. He hadn’t, Tesla attorneys told the SEC. The SEC said in the court’s complaint that when it investigated the February 2019 tweet, it found that Musk had not sought pre-approval for Tesla-related tweets since the vetting system began. His attorney told the court, “Mr. Musk has tweeted about Tesla more than 80 times, and the SEC thought nothing of it. We assumed everyone was acting in good faith.”
Tesla attorneys said in a lawsuit that Musk had not requested pre-approval because he “did not tweet material information about Tesla”.
“reasonable pants”
To SEC officials, Musk’s violation was obvious, four of the sources told Reuters.
In April 2019, they went to court in New York to argue that Musk should be held for contempt of court — a serious charge that could lead to fines or jail time. The SEC wanted the court to order Musk to report monthly to the agency about his compliance and impose escalating fines for violations, his attorney told the judge during the hearing.
SEC officials felt they had the upper hand because they believed the violation was unequivocal, the four sources said, two of whom have direct knowledge of the matter.
Following a 1976 Supreme Court ruling, SEC rules defined material information that a publicly traded company must disclose as matters that “a reasonable investor” would likely consider important. The regulator’s demand in the deal with Musk was broader than that, it told the court: “We’d argue it essentially means that unless something is clearly intangible it needs to get pre-approval.”
Musk’s attorneys told the court that the SEC’s interpretation of the settlement’s vetting requirements was “incorrect” and “exaggerated.”
Judge Nathan challenged what she described as the settlement’s “soft” standard of assessing when a tweet was material, according to the court transcript; she also agreed with Musk’s attorney that the SEC should have tried to resolve the matter out of court, saying, “This begs to work it out.”
Nathan did not conclude whether the tweets were material, or did not judge the disdain move, saying, “My call to action is for everyone to take a deep breath, put on your reasoning pants and work this out.”
According to the four sources, SEC officials had no choice but to review the settlement. The SEC, Tesla and Musk agreed to be more specific about which comments require pre-approval — including statements about Tesla’s financial condition, proposed or potential deals, production figures and performance projections.
Nathan approved that revised agreement on April 30, 2019.
The tweets continue
In the months that followed, SEC officials felt Musk was pushing the boundaries of the revised settlement but were reluctant to return to court, fearing Nathan would dismiss their complaint and admonish them to bring the matter back, three said. sources.
On July 29, 2019, Musk tweeted that he hoped to produce “1,000 solar roofs” a week by the end of the year; and on May 1, 2020 that Tesla’s stock price was “too high.” Each tweet prompted the SEC to contact Tesla and Musk’s attorneys to request information about whether they were pre-approved, according to SEC correspondence sent to Tesla on the matter obtained through requests for public disclosure. registers.
Musk had not asked for pre-approval; Tesla’s attorneys claimed in the emails to the SEC that it was not necessary. The supervisor disagreed. The SEC said in emails that it tried to resolve the dispute “in the spirit of the Court’s directive” but that Tesla and Musk’s attorneys had refused to provide the requested documents or engage in “productive dialogue.” with SEC personnel.
In June 2020, the SEC sent Musk an email stating that it was the SEC’s position that you violated the settlement.
However, rather than return to court, the SEC said, “Going forward, we urge you to comply.”
Some SEC officials believed the settlement restricted Musk to some extent, which helped protect investors, the four sources said.
The SEC was also concerned about the risks of the most extreme move — scrapping the deal and filing a lawsuit — given Musk’s resources, four of the sources said.
Additionally, Musk was and remains Tesla’s largest shareholder, holding about 16 percent of the stock at the end of April, so it may be difficult to argue that it was in the best interests of shareholders to exclude him as director or officer of a publicly traded company. company or that it would loosen its grip. about Tesla, two of the sources said.
In March, Musk asked the court to annul his settlement with the SEC.
The new judge in the case, Liman, dismissed Musk’s appeal in April. He found that the billionaire was “complaining” about the 2018 deal now that he felt Tesla was “invincible.” A court representative said Liman would not comment.
© Thomson Reuters 2022
