Elon Musk, Tesla’s CEO, is on the construction site of the Tesla Gigafactory in Grünheide, near Berlin, on September 3, 2020.
Patrick Pleul | photographic alliance | Getty Images
U.S. securities regulators have cut back on business with Elon Musk in large part because a court hearing in April 2019 about a statement he made about Tesla on Twitter did not go well, according to four sources familiar with the matter. subject.
The U.S. Securities and Exchange Commission (SEC) has asked the court to hold the billionaire in contempt, saying a tweet from the CEO of Tesla Inc., which predicted the carmaker’s production, violated a court order that Musk sign the previous year to have some of yours. communications reviewed by an attorney.
In an attempt to curb his comments, the SEC was diverted to relatively unknown territory. SEC rules require that public companies and their executives disclose accurate information that may be material to investors through channels that investors know they need to monitor. It is not usually specified how companies should do this.
But 2019 statements by Judge Alison Nathan, who found the terms of the Musk-SEC deal “soft” and urged them to reach an agreement, shattered confidence among officials overseeing the deal. case the courts would support them if they tried. to process their activity 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 request for public records, showed that following comments from Nathan, officials from the SEC chose to urge Musk to comply with the agreement, rather than seek enforcement through the courts.
SEC spokesmen declined to comment on his enforcement dealings with Musk. Tesla and Twitter spokesmen and a representative of Judge Nathan did not respond to requests for comment on the story.
Musk’s attorney, Alex Spiro, did not respond to requests for comment on the SEC’s deliberations, but court records and Tesla’s emails show that he and other Tesla boss dispute lawyers are arguing. that Musk’s tweets violated the agreement.
With Musk’s use of social media under scrutiny after making an offer to buy Twitter, interviews and documents clarify the regulator’s view on his relationship with the billionaire, now the richest man in the world. He has 95 million followers on Twitter and described the SEC as a “bastard” in an interview in April.
Sources said they are unfamiliar with current SEC thinking, which has been under new leadership since President Joe Biden took office in January 2021. Under new president Gary Gensler, the agency he has committed to repressing and pushing for repeated misconduct. for the harshest sanctions.
He recently opened more research on Musk. Among them, an investigation into two of his November tweets asking if he should sell Tesla shares show court documents on Musk’s deal with the SEC.
Nathan was promoted to the 2nd Circuit Court of Appeals of the United States based in New York in March. A newly assigned judge in the case, Lewis Liman, ruled in favor of the SEC last month.
“Material information”
The SEC’s fight with Musk began on August 7, 2018, when the CEO, whose company had asked investors to monitor his Twitter feed since 2013, sent Tesla shares to shoot while tweeting “secured financing” to take the company publicly private. The SEC opened an investigation: found that Musk had not even discussed the key terms of the deal at the time with any potential source of funding, SEC court documents later showed.
Musk says funding was guaranteed to read more.
In September 2018, agency officials told Musk that he had a choice: to fight the tough charges for tweeting in court or to resolve them and suffer minor penalties, one source said. Tesla shares were around $ 300 compared to the current $ 630 after a five-by-one share split in 2020. Musk agreed to a deal.
During the April 4, 2019 hearing, in comments to the SEC on the language of the agreement on which tweets should be reviewed, Nathan said, “This case is unusual.” Your exploration of the terms of the agreement has not been previously reported in detail.
The agreement required Tesla to establish a process to monitor all of Musk’s communications about the company, including hiring or appointing an “experienced securities lawyer” to verify posts on social media. Musk also agreed that he would certify in writing that he had complied and provide evidence; and resigning from the presidency of Tesla while remaining CEO. No end date has been set for the arrangement.
The verification process required Musk to seek prior approval for written communications, including tweets, that contained “or could reasonably contain” information material to Tesla shareholders.
But the decision on whether to contain material information was left to Musk and Tesla.
Less than six months later, on February 19, 2019, Musk tweeted that Tesla would make “about 500,000” cars that year. If left unchecked, it could be a violation of the agreement because production figures could be market-sensitive information, SEC officials said in court documents.
SEC staff asked Tesla if Musk had sent the tweet for verification. He hadn’t, Tesla’s lawyers told the SEC. The SEC said in the lawsuit that when it examined the February 2019 tweet, it found that Musk had not sought prior approval for any Tesla-related tweets since the verification system began. His lawyer told the court, “Mr. Musk has tweeted more than 80 times about Tesla, and the SEC didn’t think about it. We assumed everyone was acting in good faith.”
Tesla’s lawyers said in a lawsuit that Musk had not asked for prior approval because he “did not tweet material information about Tesla.”
“Reasonable pants”
For SEC officials, Musk’s rape was clear, four sources told Reuters.
In April 2019, they went to court in New York to argue that Musk should be considered for contempt of court, a serious charge that could lead to fines or jail time. The SEC wanted the court to order Musk to report monthly to the agency on his compliance and enforce increasing fines for rape, his lawyer told the trial judge.
SEC officials felt they had the advantage because they believed the violation was unequivocal, the four sources said, two of whom have direct knowledge of the matter.
Following a 1976 Supreme Court ruling, SEC rules have defined material information that a public company must disclose as matters that “a reasonable investor” would likely consider important. The regulator’s requirement in the agreement with Musk was broader than that, he told the court: “We will argue that it essentially means that unless something is obviously irrelevant, it has to get prior approval.”
Musk’s attorneys told the court that the SEC’s interpretation of the agreement’s verification requirements was “incorrect” and “excessive.”
Judge Nathan challenged what she described as the “soft” standard of the agreement for assessing when a tweet was material, according to the court transcript; he also agreed with Musk’s attorney that the SEC should have tried to resolve the issue out of court, saying, “This calls for it to be resolved.”
Nathan did not conclude whether the tweets were material or whether he spoke out on the contempt motion, saying, “My call to action is for everyone to take a deep breath, put on their reasoning pants and fix that.”
SEC officials said they had no choice but to review the deal, according to the four sources. The SEC, Tesla, and Musk agreed to be more specific about what comments should be approved in advance, including statements about Tesla’s financial position, proposed or potential bids, production numbers, and performance projections.
Nathan approved this revised agreement on April 30, 2019.
Tweets continue
In the months that followed, SEC officials heard that Musk was pushing the limits of the revised agreement, but were reluctant to return to court, fearing that Nathan might reject his complaint and reprimand them for returning it. problem, said three sources.
On July 29, 2019, Musk tweeted that he expects to make “1,000 solar roofs” a week by the end of the year; and on May 1, 2020 that Tesla’s share price was “too high”. Each tweet asked the SEC to contact Tesla and Musk’s attorneys to ask for information on whether they had been previously approved, according to SEC correspondence sent to Tesla on the matter obtained by requests for public records. .
Musk had not asked for prior approval; Tesla’s lawyers argued in emails to the SEC that it was not necessary. The regulator disagrees. The SEC said in an email that it was trying to resolve the dispute “in the spirit of the court’s ruling,” but that Tesla and Musk’s attorneys had refused to provide the requested documents or had a “productive dialogue” with the court. SEC staff.
In June 2020, the SEC sent an email to Musk informing him that it was “the position of the SEC that you violated” the agreement.
Instead of going back to court, however, the SEC said, “From now on, we urge you to comply.”
Some SEC officials felt the deal limited Musk to some extent, which helped protect investors, the four sources said.
The SEC was also concerned about the risks of the most extreme step: dismissing the deal and initiating litigation, given Musk’s appeals, four of the sources said.
In addition, Musk was and remains the largest shareholder in Tesla, with approximately 16% of the shares at the end of April, so it might be difficult to argue that excluding him as a director or official of a public company was in the interests of shareholders or would loosen its control. at Tesla, two of the sources said.
In March, Musk asked the court to rescind his agreement with the SEC.
The new judge in the case, Liman, dismissed Musk’s appeal in April. He found that the billionaire was “regretting” the 2018 deal now that he felt Tesla was “invincible.” A court representative said Liman would not comment.