Tesla’s Elon Musk Accuses SEC of Harassment, Broken Promises, and Chilling Free Speech
Tesla’s founder and CEO Elon Musk is known for his controversial tweets, ranging from criticism to gender pronouns to predicting close to zero new coronavirus cases in the United States by April 2020. Most of his tweets do not generate repercussions beyond heated online debates—but there was one tweet in 2018 that cost him and his company $40 million, and still haunts him today.
In August 2018, Musk tweeted that he was considering taking Tesla private at $420 per share, which was a premium to the trading price at the time. The tweet added that Musk had already secured funding to do so. Tesla shares rose by over 6% following the tweet.
A month later, the Securities and Exchange Commission charged Musk with securities fraud, claiming that Musk had not discussed specific agreement terms with any financing partners and that he knew that the transaction was uncertain and subject to multiple contingencies. Two days later, the SEC reached a settlement with Tesla and Musk, in which:
- Musk stepped down as Tesla’s chairman, ineligible to run for re-election for three years;
- Tesla appointed two new independent directors to its board;
- Tesla established a committee of independent directors and put in place new controls and procedures to supervise Musk’s communications; and
- Tesla and Musk each paid a separate $20 million penalties to be distributed to harmed investors.
The settlement was approved by federal district Judge Allison Nathan of the Southern District of New York. But even three years after the settlement, the saga is far from over.
A Muzzled Musk
On Feb. 17, Musk and Tesla’s attorney wrote a letter to Judge Nathan, accusing the SEC of failing to live by its promise of distributing the $40 million penalty to Tesla shareholders and deciding instead to focus its energy and resources to muzzle and harass his clients.
The letter faulted the SEC for taking nearly 500 days from when Musk and Tesla deposited the $40 million to establish a Fair Fund, pursuant to Section 308(a) of the Sarbanes-Oxley Act, and to appoint a tax administrator. After that, it took the SEC nearly another 500 days to appoint a distribution agent.
The letter further alleges that, while the SEC dragged its feet to distribute the penalty funds, the Commission spared no time or effort to control Musk, launching investigations and issuing subpoenas not approved by the court in order to police his use of Twitter.
The SEC’s Reply
Steven Buchholz, the SEC’s Assistant Regional Director of Enforcement, replied with a letter of his own the next day.
In it, he claimed that the SEC was only made aware of Musk and Tesla’s concerns of the distribution of the penalties from their letter to the Judge, that the delay in developing a plan for allocating the funds was due to the complexity of the issue, and that the SEC expected to submit a distribution plan to the court by the end of March.
Regarding the controls of Musk’s communications, Buchholz denied the SEC issuing any subpoenas related to the settlement at issue. He added that the SEC not seeking court approval when communicating about Musk’s tweets was in line the court’s directive for the parties to make good-faith efforts to confer among themselves before raising issues with the court.
Will There Be An End to The Story?
The back-and-forth between Musk and the SEC has lasted over three years. The new letters to Judge Nathan seem to be just another battle rather than the end of the war. Musk’s animosity against the SEC is reflected in tweets suggesting that the acronym SEC stands for Securities and Elon’s Commission or Shortseller Enrichment Commission. His attorney’s letter goes as far as suggesting that the SEC is targeting Musk because he is an outspoken critic of the government.
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Camila Laval, J.D.