SEC v. Musk: Endgame or the Latest Chapter?
Avengers: Endgame is the latest good guys vs. bad guys film drawn from the Marvel stable of stories and characters. The film is setting box office records with every seat taken at many theaters regardless of the show time. While the subtitle for the film is “Endgame,” many may question whether this is the end of for the good guy Avengers.
One might ask the same question of the latest iteration of SEC v. Elon Musk, the creator of Tesla Motors. This saga has at least some of the elements of Avengers: Endgame. There are supposed good guys – some might say almost good guys or perhaps good guys going a bit of the rails and looking more like a school yard bully rather than a prudent, thoughtful federal regulator. There are supposed bad guys – well really a person some might say is a genius entrepreneur who wants it all his way and is prone to the occasional petulant child tantrum. And, a battle – a contempt of court proceeding. But is this the Endgame?
Unlike Avengers: Endgame where there is an epic battle, SEC v. Musk has not yet resulted in an actual battle. To the contrary, the Court refused to rule, telling the parties to settle the dispute under threat of an order from the bench that neither side would like.
Settle they did. The SEC and Mr. Musk have filed a proposed modification of the consent decree previously entered by the Court. The initial order centered on a requirement that Tesla adopt disclosure controls. The key provision specified that Mr. Musk not tweet information about the company without pre-clearing it internally at the firm. The contempt proceeding was brought when Mr. Musk did not obtain pre-clearance based in part on a claim that there was no need because the information had largely been disclosed by the company.
The settlement filed by the parties proposes to modify the initial court ordered provisions by adding an open-ended litany of items Mr. Musk must pre-clear. Those begin with items such as “the Company’s financial condition,” continue with “production numbers or sales” and end with those which require the “filing of a Form 8-K” or which have been specified by the “Company or the majority of the independent” directors. Stated differently, the disclosure controls requirement by the federal securities laws and imposed on Tesla will under the proposed settlement become an open-ended check list.
Yet the federal securities laws are not designed to be a list where checking each box yields a passing grade. To the contrary, the federal securities laws were enacted to bring a new ethics to the market place. The statutes were designed to be interpreted flexibly and in view of their purpose to ensure full disclosure and fair dealing in the market place. Those who raise money from the public, for example, are required to act as stewards of those funds for the benefit of those who have entrusted their money to them. The SEC has repeatedly emphasized this point. Mr. Musk, who has through Tesla raised millions of dollars from the public surely know that while he can use the capital raised, it belongs to Tesla and ultimately to the investors who have entrusted their money to him.
A check list? Even if the check list was full and complete, resolving SEC vs. Musk with such an approach only serves to highlight the misguided nature of the proceedings and defense. Neither the SEC nor Mr. Musk need a checklist of the type included in the proposed settlement to determine if the items listed are market moving information which requires care when disclosed to ensure its accuracy. That would be true even if the check list were complete which it is not – it ignores the key issue of basing tweets on previously disclosed information, a critical defense for not pre-clearing the information. Ultimately, however, this is beside the point.
The situation here was not doomsday for the universe as in Avengers: Endgame. Before filing the contempt action, the SEC should have utilized its broad prosecutorial discretion in seeking a resolution of its concerns. In responding Mr. Musk should have avoided the “scorched earth” defense and sought a solution commiserate with role as the steward of other people’s money – he may be a visionary, but vision without capital to implement it goes nowhere.
The real winner if this settlement becomes a new court order – if anyone can be called a winner here — is the Court. It is the Judge who stepped-up and ended this matter. At the same time, whether this settlement is the endgame cannot be determined now. For the Avengers we all know it is not. The Avengers are, however, comic book characters fighting a comic book dispute. While the SEC and Mr. Musk are not comic book characters fighting a comic book dispute, we all hope that this round is in fact the Endgame.
Event: On June 3, 2019, the SEC Historical Society will host a gala celebration to commemorate the 85th Anniversary of the founding of the U.S. Securities and Exchange Commission and its 20th Anniversary. The event will be held at the Building Museum, Washington, D.C. Following a brief program featuring SEC Chairman Jay Clayton, there will be cocktails and dinner. For further information regarding tables, tickets and advertisements in the program please contact the Society here (full disclosure Mr. Gorman is the President of the Society).