2 years ago
The Securities and Exchange Commission is once again grappling with its least-favorite question: what to do about Elon Musk?
Tesla’s billionaire CEO was late in filing notice of his purchase of a sizable share of Twitter’s stock and initially submitted the wrong form, according to experts. Those potential securities law violations may seem technical, but they’ve set up yet another clash between the Wall Street regulator and the world's wealthiest man. They also raise questions about how the SEC might hold Musk accountable.
Among the options available to the SEC and its hard-charging new head, Gary Gensler: force Musk to forfeit gains he made between when he was supposed to inform the public of his moves and when he actually did. Still, the money in question — about $150 million — is chump change for a man worth $274 billion.
“I fully expect that the SEC is looking into this,” former SEC Chair Jay Clayton, who took on Musk during his 2017-2020 tenure, said in an interview.
An extensive investigation might rankle Musk, who has repeatedly and openly disdained the regulator, which in 2018 accused him of deceiving investors when he tweeted — inaccurately — that he had secured funding to take Tesla private. The resulting settlement forced the entrepreneur out as chair of the electric vehicle maker’s board but allowed him to stay on as chief executive. (“I want to be clear, I do not respect the SEC,” the Tesla CEO told CBS’ “60 Minutes” that year.)
Scott Galloway, a professor of marketing at the New York University Stern School of Business who himself considered investments in Twitter, said the SEC’s credibility could be at stake if it doesn’t find a way to bring Musk to heel.
“The SEC’s response to Elon’s ‘funding secured’ tweet was completely ineffective, and that along with everything it has done since has only emboldened Elon,” Galloway said. “And unfortunately, I think it’s emboldened a lot of wealthy people to believe that if you have enough money, the laws don’t apply to you.”
Musk's stake in Twitter, the social media platform he used to run afoul of SEC rules, could further complicate matters. The billionaire maintains an active presence on Twitter and has a record of sending out controversial tweets to his more than 81 million followers.
"Twitter is a war zone," he said on "60 Minutes."
Twitter had offered Musk a seat on its board following his purchase of the shares. Company CEO Parag Agrawal said Musk declined the position but Twitter would "remain open" to input from its now largest shareholder.
"The decisions we make and how execute is in our hands, no one else's. Let's tune out the noise, and stay focused on the work and what we're building," Agrawal wrote in a letter he posted on Twitter.
The latest alleged filing violations are themselves not necessarily the type of actions that usually result in highly aggressive action from the SEC.
Still, “there is a real problem with folks filing the wrong files, and if they let Musk get away with this, then others may claim that there’s something known as selective enforcement,” said Harvey Pitt, who headed the SEC under President George W. Bush.
The agency declined to comment. A lawyer for Musk did not respond to requests for comment.
By law, investors must notify the SEC within 10 days if they surpass a 5 percent stake in a company. According to his second filing — which changed his status from a “passive” to an “active” investor — Musk passed that threshold on March 14, meaning he should have disclosed it by March 24. But he didn’t disclose the large stake he was amassing until April 4 — a delay that allowed him to continue purchasing stock at a price of about $39 a share in the intervening 11 days. Once he did disclose his 9.2 percent stake, Twitter’s share price shot up to over $50 a share.
The delay brought Musk about $150 million at the expense of selling shareholders, according to Galloway.
“Sometimes securities law violations, or tax issues, or other things the wealthy do to entrench their wealth are in the gray areas, they are complicated. That makes it hard to prosecute them,” Galloway said. “Not this.”
In this case, the rule in question “is simple, every large public market investor knows it, and there’s no doubt Elon broke it — which is why it is such a gift for the SEC,” Galloway added. “The regulators need to make an example of someone.”
The SEC has already spent years waging battle against Musk. The 2018 settlement called for tighter oversight of his tweets, a section that eventually was amended — after the SEC alleged he violated it — to clarify that he needed to obtain the pre-approval “of an experienced securities lawyer” before publishing on Twitter about Tesla’s financial condition or business plans.
Musk is now in court trying to get rid of those restrictions. His lawyer in February accused the regulator of targeting Musk in an attempt to “chill his exercise of First Amendment rights” because he is an “outspoken critic of the government.”
The SEC was attempting to be innovative in dealing with Musk’s tweets, said Jill Fisch, a professor at the University of Pennsylvania Law School, and it might have to get creative in responding to him in the future.
“They were trying to get at the root of the problem and not just slap him with a fine that may not be meaningful,” she said. “The experience with how that’s worked hasn’t worked as well as they contemplated, but there’s room out there for more innovation.”
But it’s the particulars of any violation that should matter, not that it’s Elon Musk, said Jan Folena, a partner at Stradley Ronon, who previously served as supervisory chief litigation counsel at the SEC.
“Regardless of who it is, they have to look at the facts and circumstances,” she said.
Pitt, now CEO of the global consulting firm Kalorama Partners, said the SEC would likely be concerned about Musk’s actions because “by definition whatever he does becomes a big deal.” But he acknowledged that the tech entrepreneur’s wealth made the prospect of holding him accountable a little bit more complicated.
He noted, for example, that a typical fine for improper filing is about $100,000. “That’s tip money for Mr. Musk,” he said.
Another option would be to pursue a court order requiring him to properly disclose acquisitions, he noted. But he said the agency would be looking foremost at what the proper response is, not worrying about whether Musk is eroding their credibility.
“The SEC’s enforcement processes and people are very professional,” Pitt said. “They’re going to act on, do we have a case here? And it’s unmistakably clear they have a case.”
“They’ll come up with an approach that is professional and appropriate,” he said.
Or, as Galloway put it, “If you can put Martha Stewart in the big house, you can fine Elon $150 million.”
English (US)