In a confrontation with Elon Musk, the Securities and Exchange Commission shut down

In a confrontation with Elon Musk, the Securities and Exchange Commission shut down

Elon Musk, CEO of Tesla, stands at the Tesla Gigafactory construction site in Grünheide near Berlin, September 3, 2020.

Patrick Balloul | Image Alliance | Getty Images

US securities regulators pulled punches in their dealings with Elon Musk in large part because an April 2019 court hearing over a statement he made about Tesla on Twitter didn’t go their way, according to four sources familiar with the matter.

The US Securities and Exchange Commission (SEC) has asked a court to detain the billionaire, saying a tweet from the CEO of Tesla Inc. — which anticipated production at the automaker — violated a court agreement Musk had signed the previous year to acquire some of his work. Communications checked by a lawyer.

By trying to rein in his comments, the Securities and Exchange Commission was heading into relatively uncharted territory. Securities and Exchange Commission rules require public companies and their executives to disclose accurate information that may be material to investors through channels that investors are known to monitor. It does not usually specify how companies should do this.

But the 2019 statements by Judge Alison Nathan — who found the terms of the agreement between Musk and the SEC “soft” and urged them to come to an understanding — removed confidence among the officials overseeing the case that the courts would support them if they tried. To sue his Twitter activity, the four sources said.

Interviews with individuals familiar with the situation — in addition to reviewing court documents and SEC and Tesla emails obtained by the media by requesting public records — showed that in the wake of Nathan’s comments, SEC officials chose to urge Musk to comply with the agreement law, rather than Follow-up implementation through the courts.

Spokespeople for the Securities and Exchange Commission declined to comment on its executive dealings with Musk. Tesla spokespersons, Twitter and Judge Nathan’s representative did not respond to requests for comment for this story.

Alex Spiro, Musk’s attorney, did not respond to requests for comment on the Securities and Exchange Commission’s deliberations, but court records and Tesla emails show that he and other lawyers for the Tesla chief suspect that Musk’s tweets violated the agreement.

With Musk coming under scrutiny from social media use after trying to buy Twitter, interviews and documents shed light on the regulator’s view of his relationship with the billionaire, now the world’s richest man. He has 95 million followers on Twitter and called the SEC “bastards” in an interview in April.

Sources said they are not aware of the current thinking of the Securities and Exchange Commission, which has been under new leadership since President Joe Biden took office in January 2021. Under the new chairman, Gary Gensler, the agency has vowed to crack down on repeated misconduct and payment. to toughen penalties.

I recently opened more investigations into Musk. Among them, an investigation into two of his tweets in November asking whether he should sell shares in Tesla, court documents relating to Musk’s settlement with the SEC bid.

Nathan was promoted to the New York-based US Court of Appeals for the Second Circuit in March. The newly appointed judge in the case, Louis Lehman, ruled in favor of the Securities and Exchange Commission last month.

‘material information’

The SEC’s battle with Musk began on August 7, 2018, when the CEO, whose company has been telling investors to monitor his Twitter feed since 2013, sent Tesla shares soaring with a “secured funding” tweet to make the listed company private. The Securities and Exchange Commission opened an investigation: It found that Musk at the time did not even discuss the terms of the main deal with any potential funding source, SEC court filings later showed.

Musk says the funding has been secured Read more.

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

“This case is unusual,” Nathan said during the April 4, 2019 hearing, in comments to the Securities and Exchange Commission on settlement language about tweets that should be examined. Her exploration of the terms of the settlement had not previously been reported in detail.

The settlement required Tesla to create a process to oversee all of Musk’s communications about the company, including appointing or appointing an “experienced securities attorney” to vet social media posts. Musk also agreed that he would attest in writing to his compliance, and provide evidence; and step down as Tesla’s president while he remains CEO. No end date has been set for this arrangement.

The vetting process required that Musk seek pre-approval for written communications, including tweets, that “contain or could reasonably contain” informational material to Tesla shareholders.

But the decision on whether it contained material information was left to Musk and Tesla.

Less than six months later, on February 19, 2019, Musk tweeted that Tesla would build “about 500,000” cars that year. If this is not verified, SEC officials said in court filings, it could be a violation of the settlement because production numbers could be market-sensitive information.

SEC employees asked Tesla if Musk sent the tweet for scrutiny. Tesla’s lawyers told the Securities and Exchange Commission that he did not. The SEC said in the court complaint that when it looked at the February 2019 tweet, it found that Musk had not requested pre-approval for any Tesla-related tweets since the screening system began. Her attorney told the court, “Mr. Musk has tweeted more than 80 times about Tesla, and the SEC didn’t think so. We assumed everyone was coming forward in good faith.”

Tesla’s lawyers said in the lawsuit that Musk did not seek prior approval because he “did not tweet material information about Tesla.”

“reasonable pants”

Four sources told Reuters that Musk’s violation was clear to SEC officials.

In April 2019, they went to a New York court to demand that Musk should be tried for contempt of court – a serious charge that can result in fines or imprisonment. The SEC has asked the court to order Musk to file a monthly report to the agency on his compliance and to impose increased fines for violations, its attorney told the judge at the hearing.

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

After the 1976 Supreme Court ruling, SEC rules defined material information a public company must disclose as matters that a “reasonable investor” considers likely to be important. The court told the court that the regulator’s requirement in the deal with Musk was broader than that: “We will argue that it basically means that unless something is clearly not material, it needs prior approval.”

Musk’s lawyers told the court that the SEC’s interpretation of settlement examination requirements was “incorrect” and “loose”.

Judge Nathan challenged what she called the “soft” criterion of a settlement to assess whether a tweet was material, as the court text shows; She also agreed with Musk’s lawyer that the Securities and Exchange Commission should have tried to solve the problem out of court, saying, “These are cries of solving it.”

Nathan did not conclude whether the tweets were material or whether he judged the suggestion of contempt, saying, “My call to action is for everyone to take a deep breath, dress reasonably well, and work it out.”

The four sources said that SEC officials felt they had no choice but to review the settlement. The Securities and Exchange Commission, Tesla and Musk agreed to be more specific about which comments should be approved in advance — including statements about Tesla’s financial health, proposed or potential deals, production numbers and performance expectations.

Nathan agreed to the revised agreement on April 30, 2019.

Tweets continue

Three sources said that in the following months, SEC officials felt Musk pushed the amended settlement limits, but were reluctant to return to court, fearing that Nathan would dismiss their complaint and direct them to return the case.

On July 29, 2019, Musk tweeted that he hopes to manufacture “1,000 solar roofs” per week by the end of the year; On May 1, 2020, Tesla’s stock price was “too high”. Each tweet prompted the Securities and Exchange Commission to contact Tesla’s attorneys and Musk for information on whether it had been preapproved, according to SEC communications sent to Tesla on the matter obtained through public records requests.

Musk did not ask for prior approval; Tesla’s lawyers argued in emails sent to the SEC that it wasn’t necessary. The organizer disagreed. The Securities and Exchange Commission said in the emails that it was trying to resolve the dispute “in the spirit of court guidance” but that Tesla and Musk’s attorneys declined to provide the requested documents, or had a “productive dialogue” with SEC employees.

In June 2020, the Securities and Exchange Commission sent an email to Musk telling him that “the SEC’s position is that you violated” the settlement.

Rather than going back to court, the SEC said, “Going forward, we urge you to comply.”

The four sources said that some SEC officials felt the settlement restricted Musk somewhat, which helped protect investors.

Four of the sources said the Securities and Exchange Commission was not comfortable with the risks of a more extreme move – canceling the deal and starting litigation – given Musk’s resources.

Additionally, Musk was and still is Tesla’s largest shareholder, with roughly 16% of the stock as of late April, so it might be hard to argue that banning him as a publicly traded director or officer was in the best interests of shareholders or would loosen his grip. Two sources said on Tesla.

In March, Musk asked the court to invalidate his settlement with the Securities and Exchange Commission.

The new judge in the case, Lyman, dismissed Musk’s appeal in April. He found that the billionaire was “bemoaning” the 2018 deal now that he felt Tesla was “indomitable”. A court representative said Lehman would not comment.

2022-05-24 17:07:54

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