In a faceoff with Elon Musk, the SEC blinked
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[May 24, 2022] By
Chris Prentice and Michelle Price
WASHINGTON (Reuters) - U.S. securities
regulators have pulled their punches in dealings with Elon Musk largely
because an April 2019 court hearing on a statement he made about Tesla
on Twitter didn't go their way, according to four sources with knowledge
of the matter.
The U.S. Securities and Exchange Commission (SEC) asked the court to
hold the billionaire in contempt, saying a tweet by the Tesla Inc. CEO -
which forecast production at the carmaker - violated a court agreement
Musk signed the previous year to have some of his communications vetted
by a lawyer.
By trying to rein in his comments, the SEC was veering into relatively
uncharted territory. SEC rules require that public companies and their
executives disclose accurate information that may be material to
investors via channels that investors know to monitor. It doesn't
usually specify how companies should do that.
But the 2019 remarks by judge Alison Nathan – who found the terms of the
agreement between Musk and the SEC to be "soft" and urged them to reach
an understanding – knocked confidence among officials overseeing the
case that the courts would support them if they attempted to prosecute
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 public records request – showed that in the wake of Nathan's
comments, SEC officials opted to urge Musk to comply with the agreement,
rather than pursuing enforcement through the courts.
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Spokespeople for the SEC declined to comment on its enforcement dealings
with Musk. Spokespeople for Tesla and Twitter 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 Tesla emails show he and
other lawyers for the Tesla boss dispute that Musk's tweets violated the
agreement.
With Musk's use of social media under scrutiny after he bid to purchase
Twitter, the interviews and documents shed light on the regulator's view
of its relationship with the billionaire, now the world's richest man.
He has 95 million Twitter followers and called the SEC "bastards" in an
interview in April.
The 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 new Chair, Gary Gensler, the agency has
pledged to crack down on repeated misconduct and push for tougher
penalties.
It recently opened more investigations into Musk. Among them, a probe
into two of his November tweets asking if he should sell shares in
Tesla, court documents regarding Musk's settlement with the SEC show.
Nathan was promoted to the New York-based 2nd U.S. Circuit Court of
Appeals in March. A newly assigned judge in the case, Lewis Liman, ruled
in the SEC's favor last month.
"MATERIAL INFORMATION"
The SEC's fight with Musk started on Aug. 7, 2018, when the CEO, whose
company had been telling investors to monitor his Twitter feed since
2013, sent Tesla shares soaring by tweeting "funding secured" to take
the publicly listed company private. The SEC opened an investigation: It
found Musk at the time had not even discussed key deal terms with any
potential funding source, SEC court filings later showed.
Musk says funding was secured.
![](http://archives.lincolndailynews.com/2015/May/02/images/ads/current/guzzardo_lda022609.png)
In September 2018, agency officials told Musk he had a choice: Fight
stiff charges over the tweet in court or settle and suffer lesser
penalties, one of the sources said.Tesla shares were around $300
compared with more than $650 today. Musk agreed to settle.
During the April 4, 2019 hearing, in comments to the SEC about the
settlement's language on what tweets should be vetted, Nathan said,
"This case is unusual." Her exploration of the terms of the settlement
has not previously been reported in detail.
The settlement required Tesla to establish a process for overseeing all
of Musk's communications about the company, including hiring or
designating an "experienced securities lawyer" to vet social media
posts. Musk also agreed that he would certify in writing that he had
complied, and provide proof; and to step down as Tesla chair while
remaining CEO. No end-date was set for the arrangement.
The vetting process required that Musk seek pre-approval for written
communications – including tweets – that contained "or reasonably could
contain" information material to Tesla shareholders.
But the decision on whether they contained material information was left
to Musk and Tesla.
Less than six months later, on Feb. 19, 2019, Musk tweeted that Tesla
would make "around 500k" cars that year. If unvetted, this was arguably
a violation of the settlement because production figures can be market
sensitive information, SEC officials said in court filings.
The SEC staff asked Tesla whether Musk had submitted the tweet for
vetting. He had not, Tesla attorneys told the SEC. The SEC said in the
court complaint that when it looked into the Feb. 2019 tweet, it found
Musk had not sought pre-approval for any Tesla-related tweets since the
vetting system started. Its attorney told the court, "Mr. Musk has
tweeted upward of 80 times about Tesla, and the SEC thought nothing of
it. We assumed that everyone was proceeding in good faith."
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![](../images/052422PIX/busine43.jpg)
Tesla CEO Elon Musk leaves Manhattan federal court after a hearing
on his fraud settlement with the Securities and Exchange Commission
(SEC) in New York City, U.S., April 4, 2019. REUTERS/Shannon
Stapleton
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Tesla attorneys said in a court filing Musk had not sought pre-approval
because he "has not tweeted material information regarding Tesla."
"REASONABLENESS PANTS"
For SEC officials, Musk's violation was clear, four of the sources told
Reuters.
In April 2019 they went to the New York court to argue that Musk should
be held in contempt of court – a serious charge that can result in fines
or jail. The SEC wanted the court to order Musk to report monthly to the
agency on his compliance and enforce escalating fines for violations,
its lawyer told the judge at the hearing.
SEC officials felt they had the upper hand because they believed the
violation was unambiguous, said the four sources, two of whom have
direct knowledge of the matter.
Following a 1976 Supreme Court ruling, the SEC's rules have defined
material information that a public company must disclose as matters "a
reasonable investor" would likely consider important. The regulator's
requirement in the deal with Musk was broader than that, it told the
court: "We would argue it essentially means unless something is
obviously immaterial, it needs to get pre-approval."
Musk's lawyers told the court the SEC's interpretation of the
settlement's vetting requirements was "incorrect" and "overbroad."
Judge Nathan challenged what she described as the settlement's "soft"
standard for assessing when a tweet was material, the court transcript
shows; she also agreed with Musk's lawyer that the SEC should have tried
to resolve the issue out of court, saying, "This screams of working it
out."
Nathan did not conclude whether the tweets were material, or rule on the
contempt motion, saying: "My call to action is for everybody to take a
deep breath, put your reasonableness pants on, and work this out."
![](http://archives.lincolndailynews.com/2022/May/24/images/ads/current/graue_21CAMARO_100421.png)
SEC officials felt they had no choice but to revise the settlement,
according to the four sources. The SEC, Tesla and Musk agreed to be more
specific about what comments must be pre-approved – including statements
about Tesla's financial condition, proposed or potential deals,
production numbers, and performance projections.
Nathan approved that revised agreement on April 30, 2019.
THE TWEETS GO ON
In the following months, SEC officials felt Musk pushed the boundaries
of the revised settlement but were reluctant to return to court, fearing
Nathan might reject their complaint and admonish them for bringing the
issue back, three sources said.
On July 29, 2019, Musk tweeted that he was hoping to manufacture "1,000
solar roofs" a week by year-end; 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 seeking information on whether they had been
pre-approved, according to SEC correspondence sent to Tesla on the
matter obtained by public records requests.
Musk had not sought pre-approval; Tesla's attorneys argued in the emails
to the SEC it wasn't necessary. The regulator disagreed. The SEC said in
emails it was trying to work out the dispute "in the spirit of the
Court's directive" but that Tesla and Musk's attorneys had declined to
provide requested documents, or have a "productive dialogue" with SEC
staff.
In June 2020, the SEC emailed Musk advising him it was the "SEC's
position that you violated" the settlement.
Instead of returning to court, however, the SEC said: "Going forward, we
urge you to comply."
Some SEC officials felt the settlement constrained Musk to some degree,
which helped protect investors, said the four sources.
The SEC also was uneasy about the risks of the most extreme step –
scrapping the deal and starting litigation – given Musk's resources,
four of the sources said.
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In addition, Musk was and remains Tesla's largest shareholder, with
roughly 16% of the stock as of late April, so it might be hard to argue
that barring him as a public company director or officer was in
shareholders' interests or would loosen his grip on Tesla, two of the
sources said.
In March, Musk asked the court to void his settlement with the SEC.
The new judge in the case, Liman, rejected Musk's appeal in April. He
found the billionaire was "bemoaning" the 2018 deal now that he felt
Tesla was "invincible" [L2N2WP1WY]. A representative for the court said
Liman would not comment.
(Additional reporting by Katanga Johnson in Washington, Hyunjoo Jin in
San Francisco, and Jonathan Stempel, Jody Godoy and Gui Qing Koh in New
York; Edited by Paritosh Bansal, Sara Ledwith and Daniel Flynn)
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