What To Watch As Musk’s Twitter Battle With SEC Plays Out
The U.S. Securities and Exchange Commission has an onerous problem with Tesla Inc. CEO Elon Musk.
How does the staff enforce securities laws, with mostly draconian remedies, against one of Musk’s tweets that asked a question of a polled Twitter audience? How does the staff decide if discussing a Twitter
question is considered insider trading? How does the staff incentivize compliance with the SEC’s settlement agreement with Musk with financial sanctions when he, as the majority shareholder and owner of Tesla, has between $200 billion and $300 billion in personal assets?
In early February, the SEC delivered yet another subpoena in its protracted war over Musk’s tweets. The most recent skirmish started in late 2021 when Musk triggered a stock sell-off by asking his Twitter followers whether he should sell 10% of his stake in Tesla. They voted yes.
This subpoena was followed up by, yes, another subpoena on Feb. 24 regarding whether Elon Musk informed his brother, Kimbal Musk, in advance about his tweet regarding whether he should sell 10% of his stake in Tesla.
All that is on the heels of the SEC filing a subpoena as part of an investigation into whether Musk complied with the SEC’s settlement with him. The latest flurry of battles with the SEC came to light in Tesla’s annual report filing.
I can sympathize with Musk, a little. I’m sure Musk must have wondered how asking a question — if he should sell 10% of his stake in Tesla — is misleading or making a statement in connection with the company’s stock when it was arguably neither. Perhaps Musk is now wondering if the government didn’t have better things to do — like look into Russian oligarchs using cryptocurrency to evade financial sanctions — then wonder if Musk spoke to his brother about asking a question in a tweet.
Social media may feel informal, but the stakes could not be higher for a man who taunts the SEC for the “lulz.” If Musk were to continue to breach his settlement with the SEC, the staff could potentially charge him with contempt of court; seek to reinstate the agency’s enforcement action against Musk and Tesla, or seek to remove Musk not only from the Tesla board but also prevent Musk from serving on the board of any publicly-traded company.
That might sting a little too much, even for Musk.
Musk Has a History of Taunting the SEC
The SEC may not look kindly to Musk’s long history of poking the bear or, whatever you would call demanding that a former SEC attorney be terminated from their new job. Musk did just that in 2021 after an attorney interviewed him in 2018 as part of an investigation concerning Musk’s tweet that he’d “secured funding” to take Tesla private at $420 per share, which suddenly sent the company’s stock price on a roller coaster ride.
In response to the tweet, the SEC sued and fined Musk and Tesla $20 million each. Musk stepped down as chairman of the board and agreed in a settlement to check with a lawyer before posting any statements that could affect the stock market — a Twitter sitter if you will.
In early 2019, Musk tweeted about Tesla’s Model 3 production numbers without the approval of the company’s legal department. The SEC responded again, asking the court to hold Musk in contempt for violating the settlement terms. Instead, the two sides went back to the negotiation table to clarify what specific types of tweet content had to be approved.
That wasn’t the end of it. In 2020, Musk sent Tesla’s stock plunging when he tweeted, “Tesla stock price is too high [in my opinion],” to his over 30 million followers at the time. It seems doubtful that Tesla’s legal department approved that one, or any of Musk’s other tweets insulting the SEC directly, for that matter. Instead, the company explained that Musk’s tweet didn’t fall “within the scope” of the settlement’s terms.
Does a question fall within the scope? We are going to find out.
How a Little Tweet Can Violate SEC Advertising Laws
When it comes to the stock market, the right information at the right time can be worth millions, or perhaps even billions, of dollars.
If you know a publicly-traded company is about to get bought by a much larger corporation, you know to invest your money into that company. Once news of the merger breaks, the stock price is sure to go up as others will see the potential for great growth. This is why insider trading is so strictly enforced — business insiders involved in closed-door decisions have an unfair advantage over the rest of the market. Without laws against insider trading, corporate insiders could bet on the market, and then manipulate market actions to cash in big — all at the expense of other market players and buyers, not to mention the economy as a whole.
Because information is currency, the SEC regulates what market and business insiders are allowed to share and act upon. The SEC keeps up with how communications evolve and is trying to update its marketing and advertising rules accordingly.
According to the SEC’s marketing rule, an advertisement covers any direct or indirect communication from a market adviser that offers investment advice or services to more than one person. The SEC has updated this definition to include any third-party social media comments endorsed or promoted by advisers.
Even if Musk’s tweets can’t be considered advertisements as defined under the rule, it’s clear that the SEC’s enforcement power extends over social media posts on sites like Twitter and Facebook.
In a 2013 press release, the SEC explicitly stated that “most social media are perfectly suitable methods for communicating with investors.” A publicly-traded company that communicates through social media must adhere to SEC standards. Any information it posts must be accurate and released to all investors at the same time. This ensures a fair and even playing field.
Misstatements and Material Omissions
In addition to the marketing rule, the SEC forbids company leaders and executives from making untrue or misleading statements in connection with their stocks. The SEC is responsible for regulating stock exchanges and protecting both investors and the entire securities exchange system. Publicly traded companies like Tesla must follow SEC rules and regulations or face legal fines, civil liability, or even criminal charges. The SEC can file lawsuits on behalf of investors and companies it believes have been harmed. Now, armed with this new information, let’s go back to the original incident in 2018. According to the SEC, when Musk tweeted that he had secured funding for a private Tesla buyout, this tweet caused harm to investors because the tweet directly affected Tesla stock. When stock prices fell because of Musk’s tweet, investors lost money. If investors bought or sold Tesla stock based on the tweet, they faced a much different reality than they expected because the buyout funding never materialized.
When Musk tweeted in 2019 that Tesla would produce 500,000 Model 3 cars that year, anyone who acted on that information was in for a rude awakening. Because hours later, Musk clarified the meaning of his tweet and backpedaled. Those production numbers were not accurate.
Misstatements and material omissions are serious matters. Investors must be able to rely on factual information when making investment decisions. Otherwise, why would anyone trust their money to an untrustworthy market? False information could lead to disastrous investments.
The Ultimate Problem: Stock Market Manipulation
When deciding whether to prosecute a case of misconduct, the SEC focuses its efforts on actions that move the stock market or unfairly tilt the playing field. After all, the agency is often understaffed and underfunded, so high-value cases must be prioritized.
Currently, Musk has over 70 million Twitter followers around the world. The effects of his tweets have shown them to be not only newsworthy but also destabilizing for the stock market, as well as the largely unregulated crypto markets. Even worse, his tweets could have led investors astray with false information.
Meanwhile, the SEC wants to keep misinformation and instability out of the market. None of Musk’s actions inspire confidence, especially if the SEC fails to enforce its own rules. Keeping all of that in mind, it’s no wonder the SEC is chirping so loudly on Musk’s tweets.
The recent SEC subpoena gives the agency the right to investigate Tesla’s records. The SEC argues that Tesla failed to oversee Musk’s tweets as required by the settlement in 2018. Did the company actually implement a Twitter sitter like it was supposed to?
The plot only thickens from here as the SEC investigates its claims. It will be interesting to watch what happens next. Depending on whether the SEC finds evidence for its claims, Tesla and Musk could face additional fines or sanctions, including his removal from participating as an officer in any publicly-traded company for his bad-boy behaviors. It’s certainly, something Musk should consider when threatening the SEC 280 characters at a time.
chris@warren.law
(212) 580-9600
