The S.E.C. and Elon Musk: Social Media Posts Cost $40 million?

October 2, 2018

Although social media has acted as a platform for world leaders and celebrities to make major controversial statements, it can also act as a platform for governmental regulation. Recently, the Securities and Exchange Commission has vehemently pursued litigation against the Chief Executive Officer of Tesla, Elon Musk. The S.E.C.’s action was entirely related to events surrounding Elon Musk’s comments made on Twitter. In August, he tweeted that he was “considering taking Tesla private at $420. Funding secured.” Less than two hours after that, he tweeted that “[s]hareholders could either to sell at 420 or hold shares & go private.” Shortly after that tweet, Tesla’s stock soared.
This weekend, after diligent efforts by the S.E.C. to hold Elon Musk accountable for alleged investment violations, Elon Musk agreed to step down as chairman of the company. The two parties settled the litigation, with Elon Musk having to pay a $20 million fine. The co-director of enforcement in the S.E.C. stated, “[t]his case demonstrates our commitment to holding individuals accountable for violations.” But, did Elon Musk’s tweets actually violate the S.E.C.’s marketing rules? Did Elon Musk settle simply because he feared the risk of losing his position as CEO of Tesla? In fact, Tesla’s directors issued a statement affirming that they are “fully confident in Elon, his integrity and his leadership of the company.” Even today Elon Musk believes his tweets did not violate the S.E.C.’s regulations, called the lawsuit “unjustified,” and agreed to settle “without admitting or denying the allegations of the complaint.”
The heart of the S.E.C.’s claim relies on the argument that Elon Musk engaged in fraudulent, deceptive, or manipulative actions in violation of Rule 10(b) of the Securities Exchange Act. In particular, the S.E.C. focused on the phrase “[f]unding secured” to argue that Elon Musk deceived and manipulated both current and potential investors because he did not actually acquire sufficient, and confirmed, funding to take Tesla private. The Exchange Act permits a corporation to disclose market-moving information on Twitter only if it has given investors notice that it may do so.
In its Complaint, the S.E.C. alleged that Elon Musk failed to provide Tesla’s Board of Directors with a specific, going-private proposal and that he failed to contact existing Tesla shareholders. The S.E.C. alleged that Elon Musk’s tweets were entirely based around a single meeting with representatives for potential funding, in which there was no discussion of the going-private transaction at a share price of $420. Ultimately, he did not determine what regulatory approvals would be required for such a transaction and whether certain investors could remain invested in Tesla as a private company.
Prior to the August 7th tweets, Tesla’s Chief Financial Officer described Elon Musk’s Twitter account as a “strong channel of marketing,” with Musk acting as a spokesman for the company. In addition, Tesla stated its intention to use Musk’s Twitter account as a means of announcing information of the company to the public. From these statements, the S.E.C. was able to quantify the loss to investors at an estimated $40 million. Although no court decision had to have been made on the matter, it appears a simple tweet typed on one’s cell phone can cost a business leader a fortune.