Is The SEC Ready To Concede Over Musk’s Tweets?

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Tesla CEO Elon Musk’s tweets have always been the object of scrutiny. They’ve been variously humorous, unsettling, visionary, juvenile, or spontaneous. With 62.5 million Twitter followers, Musk’s tweets also have the ability to move markets — to the point where it seems clear that the social media activity of influential individuals has a significant impact on investors’ decisions, pointing what’s been called a conflict among the ideals of freedom of speech, morals, and investor protection.

The biggest controversy within Musk’s substantial tweeting practices took place on Tuesday, August 7, 2018 at 12:48 pm, when Musk, using his mobile phone, published a tweet, “Am considering taking Tesla private at $420. Funding secured.” Immediately after this tweet, the trading volume and price of Tesla shares spiked. By approximately 2:08 pm, NASDAQ halted trading in TSLA shares. Then the US Securities and Exchange Commission stepped in, and Elon Musk and Tesla found themselves in court.

The US District Court, Southern District of New York subsequently entered a final judgment “permanently restraining and enjoining Defendant from, directly or indirectly, engaging in conduct in violation of Rule 13a-15.” That rule defines “disclosure controls and procedures” to mean controls and procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the Commission’s rules and forms.

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In other words, the SEC charged Elon Musk with securities fraud. The message was clear: Executives who communicate material information on social media need to have disclosure controls and procedures in place to review the information before and after publication.

As part of the settlement, Musk and Tesla each paid a separate $20 million penalty. The $40 million in penalties were to be distributed to harmed investors under a court-approved process. A related consent decree also required Musk to have Tesla lawyers vet his tweets and other public statements that could be material to Tesla.

The Language of Elon: Laments & Exclamations of Bullying

Fast forward to 2022. Musk’s legal team has accused the SEC of having “broken its promises” by dragging its feet on the payout, while trying to stifle their client’s speech and harass him with an “endless” investigation into his conduct. Musk believes the SEC has “weaponized” the decree as punishment for his criticism of the US government.

The top US securities regulator, in turn, has asked a judge for permission to distribute the $40 million to investors it obtained in the 2018 civil settlement. The SEC filed the proposed plan 10 hours after Musk asked to scrap the consent decree. US District Judge Alison Nathan in Manhattan enforces the decree and would need to approve the distribution plan, with payout distribution directed to investors who lost money in Tesla stock in the 1-1/2 days after Musk’s tweet.

Seeking a “fair and reasonable” means to distribute the payout, the SEC acknowledges that the settlement has grown to $41.2 million with interest that deserves “significant deference.”

“The SEC seems to be targeting Mr. Musk and Tesla for unrelenting investigation largely because Mr. Musk remains an outspoken critic of the government,” Alex Spiro, a lawyer for the South African billionaire and his company, wrote in a letter last month.

“I never lied to shareholders,” Musk said in a court filing. “I entered into the consent decree for the survival of Tesla, for the sake of its shareholders.”

The letter, filed to the US district judge who oversaw a previous settlement between Tesla and the SEC, said the agency’s “outsized efforts seem calculated to chill his exercise of First Amendment rights.”

His lawyers said the 2018 consent decree resolving SEC securities fraud charges should not allow “roving and unbounded investigations” into the Tesla CEO. “The SEC’s pursuit of Mr. Musk has crossed the line into harassment, which is quintessential bad faith,” Musk’s lawyers wrote to US District Judge Alison Nathan in Manhattan.

In March, 2021, an investor sued Musk and the company, accusing them of violating the SEC agreement regarding his tweets, and a second lawsuit was filed later in the year on behalf of a number of Tesla shareholders, who said Musk’s tweets had caused “billions of dollars in losses.” That suit also addresses Musk’s recent Twitter feud with Senator Elizabeth Warren, the Massachusetts Democrat, which allegedly drove down the stock price another 9.6% in December, as reported by The Guardian.

“Musk remains undeterred and continues to post on Twitter and social media on matters that are material to Tesla and its stockholders, and which ultimately have an impact on Tesla’s stock prices,” the suit says.

In early November, 2021, Musk posted on Twitter that he would offload 10% of his Tesla stake if users approved. A majority did, and the poll sent Tesla shares into a slump. Musk has since sold $16.4 billion stock.

The tweet renewed questions about whether Musk complied with his SEC agreement to obtain approval from a Tesla lawyer before issuing written communications about information material to his company or its shareholders.

Tesla said on Tuesday that Musk’s tweet on stock sales “is behavior the SEC should encourage: a CEO’s transparency with the public and shareholders about a proposed stock sale.”

Final Thoughts about Musk’s Tweets

Without a doubt, social media has had significant impacts on democratic discourse over the last decade; indeed, it is important tool for public figures to use in successfully conducting policy debates. Research indicates that firms with higher social media coverage reflect better predictability of their stock prices in comparison to firms with lower social media coverage. Moreover, there is a significant relationship between daily closing prices and the emotionality of tweets, suggesting strong potential for using Twitter as a tool to forecast stock returns.

Elon Musk has understood the power of social media for a long, long time — well before other CEOs who lead competing automakers. Musk had the capacity to use his tweets as transformative mechanisms for an equitable renewable energy future, to move beyond the privilege of announcements about his companies and their new events, beyond reactions to slights and pouts about indignities. He has the potential to reframe his social media messaging to spur solidarity and corporate social responsibility, to inspire those bogged down in the everyday doldrums to breathe in the inspired air of infinite, sustainable energy.

But will he do so? With little board oversight of his messaging and a continued adversarial relationship with US political parties on both sides of the aisle, that eventually seems remote.