Tech

Elon Musk Twitter deal underscores SEC’s bittersweet relationship with billionaire over the years

U.S. securities regulators have withdrawn their hits on dealing with Elon Musk largely because an April 2019 court hearing over a statement he made on Twitter about Tesla didn’t go their way, according to four sources with knowledge of the matter .

The Securities and Exchange Commission asked the court to contempt the billionaire, saying a tweet by the Tesla CEO — forecasting production at the automaker — violated a court agreement Musk signed last year to review some of his communications to let through a lawyer.

In attempting to contain his comments, the SEC entered relatively uncharted territory. SEC rules require public companies and their officers to disclose accurate information that may be important to investors through channels that investors know how to monitor. It is not usually specified how companies should do this.

But Judge Alison Nathan’s 2019 comments — who found the terms of Musk’s agreement with the SEC “soft” and urged them to come to a settlement — shook the confidence of officials overseeing the case that the courts would support them would if they tried to follow his activities on Twitter, the four sources said.

Interviews with people familiar with the situation — as well as a review of court documents, SEC and Tesla emails obtained by the media through a public filing request — indicated that after Nathan’s comments, SEC officials chose to Urging Musk to comply with the agreement instead of pursuing enforcement through the courts.

SEC spokesmen declined to comment on their enforcement deals with Musk. Speakers for Tesla and Twitter and a representative for Judge Nathan did not respond to requests for comment on this story.

Musk’s attorney, Alex Spiro, did not respond to requests for comment on the SEC’s deliberations, but court filings and Tesla emails show that he and other attorneys for the Tesla boss deny that Musk’s tweets violate the agreement.

After Musk’s use of social media was scrutinized following his bid to buy 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 were unfamiliar with the current mindset of the SEC, which has been under new leadership since US President Joe Biden took office in January 2021. Under new chairman, Gary Gensler, the agency has committed to cracking down on repeat misconduct and pushing for tougher penalties.

It recently launched further investigations into Musk. These include an investigation into two of his November tweets asking if he should sell shares in Tesla and court documents on Musk’s settlement with the SEC.

Nathan was promoted to the 2nd US Circuit Court of Appeals in New York in March. A newly appointed judge in the case, Lewis Liman, ruled in favor of the SEC last month.

“Material Information”

The SEC’s battle with Musk began on Aug. 7, 2018, when the CEO, whose company had urged investors to monitor his Twitter feed since 2013, sent Tesla shares skyrocketing by tweeting “funding secured.” to take the public company private. The SEC launched an investigation: It found that Musk had not even discussed key contract terms with a potential funding source at the time, later SEC court filings showed.

Musk says funding has been secured.

In September 2018, officials at the agency told Musk he had a choice: pursue charges over the tweet in court or have it face lighter penalties, one of the sources said. Tesla shares were around $300 (around Rs.23,200), compared to more than $630 today (around Rs.48,800) after a 5-for-1 stock split in 2020. Musk agreed to a settlement.

During the hearing on April 4, 2019, in comments to the SEC about the language of the settlement about which tweets should be reviewed, Nathan said, “This case is unusual.” Her investigation into the terms of the settlement was not previously reported in detail.

The settlement required Tesla to establish a process to monitor all of Musk’s communications about the company, including hiring or designating an “experienced securities attorney” to review social media posts. Musk also agreed that he would confirm in writing that he had complied and provide evidence; and to step down as Tesla chairman while remaining CEO. No end date has been set for the agreement.

The review process required Musk to obtain pre-approval for written communications — including tweets — that contained “or reasonably could contain” informational material to Tesla shareholders.

But deciding whether they contained essential information was left to Musk and Tesla.

Less than six months later, on February 19, 2019, Musk tweeted that Tesla would build “around 500,000” cars that year. Failure to verify this arguably violated the settlement, as production figures may be market-sensitive information, SEC officials said in court filings.

SEC officials asked Tesla if Musk submitted the tweet for review. He hadn’t, Tesla attorneys told the SEC. The SEC said in the court complaint that when it reviewed the February 2019 tweet, it found that Musk had not sought preapproval for Tesla-related tweets since the review system began. His attorney told the court, “Mr. Musk has tweeted about Tesla more than 80 times, and the SEC thought nothing of it. We assumed everyone was acting in good faith.”

Tesla attorneys said in a court filing that Musk didn’t seek pre-approval because he “didn’t tweet any material information about Tesla.”

“reasonability pants”

Musk’s breach was clear to SEC officials, four of the sources told Reuters.

In April 2019, they went to court in New York to argue that Musk should be held for contempt of court — a serious charge that could result in fines or jail time. The SEC wanted the court to require Musk to report to the agency monthly on his compliance and enforce escalating fines for violations, her attorney told the judge at the hearing.

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

Following a 1976 Supreme Court ruling, the SEC’s rules defined material information a public company must disclose as matters “a reasonable investor” would be likely to consider important. The regulator’s requirement in the Musk deal is broader, she told the court: “We would argue that this essentially means that something needs to be pre-approved unless something is obviously immaterial.”

Musk’s attorneys told the court the SEC’s interpretation of the settlement’s verification requirements was “wrong” and “overblown.”

Judge Nathan questioned what she called the “soft” standard of comparison for assessing when a tweet was material, the court transcript shows; She also agreed with Musk’s attorney that the SEC should have attempted to resolve the issue out of court, saying, “This calls out for it to be resolved.”

Nathan didn’t come to a conclusion on whether the tweets were substantive or ruled on the contempt motion, saying, “My call to action is everyone take a deep breath, put their appropriateness pants on, and sort this out.”

According to the four sources, SEC officials felt they had no choice but to reverse the settlement. The SEC, Tesla, and Musk agreed to be more specific about what comments require preapproval — including statements about Tesla’s financial condition, proposed or potential business, production numbers, and performance projections.

Nathan approved this revised Agreement on April 30, 2019.

The tweets continue

In the months that followed, SEC officials felt Musk had pushed the boundaries of the revised settlement but declined to return to court, fearing Nathan might dismiss her complaint and warn her that they would bring the matter back, three sources said .

On July 29, 2019, Musk tweeted that he hopes to be making “1,000 solar roofs” a week by the end of the year; 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 for information on whether they had been pre-approved, according to SEC correspondence provided to Tesla on the matter, which was prompted by inquiries for public records was obtained.

Musk had not requested pre-approval; Tesla’s attorneys argued in the emails to the SEC that it wasn’t necessary. The regulator disagreed. The SEC said in emails it was attempting to resolve the dispute “in the spirit of the court’s direction,” but attorneys for Tesla and Musk declined to provide the requested documents or to engage in “productive dialogue” with SEC officials to lead.

In June 2020, the SEC emailed Musk, telling him it was the “SEC’s position that you violated the Settlement.”

Instead of returning to court, however, the SEC said, “We urge you to comply.”

Some SEC officials felt the settlement limited Musk to some degree, which helped protect investors, the four sources said.

The SEC was also concerned about the risks of the most extreme move — canceling the deal and launching a lawsuit — given Musk’s resources, four of the sources said.

Additionally, Musk was and remains Tesla’s largest shareholder with around 16 percent of shares at the end of April, so it’s hard to argue that it was in shareholders’ best interests to bar him as a director or officer of a public company, or to loosen his grip on Tesla , said two of the sources.

In March, Musk asked the court to overturn his settlement with the SEC.

The new judge on the case, Liman, dismissed Musk’s appeal in April. He noted that the billionaire “lamented” the 2018 deal after believing Tesla was “invincible.” A court official said Liman would not comment.

© Thomson Reuters 2022


https://gadgets360.com/social-networking/features/elon-musk-twitter-deal-highlights-sec-bitter-sweet-relationship-billionaire-over-years-tesla-spacex-3006995 Elon Musk Twitter deal underscores SEC’s bittersweet relationship with billionaire over the years

Ryan Sederquist

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