The SEC and Elon Musk: Round Two
Elon Musk, founder of Tesla, and the Securities and Exchange Commission are again at loggerheads, back in court on a motion by the agency for an order to show cause why Mr. Musk should not be held in contempt of court. SEC v. Musk, Civil Action No. 1:18-cv-8865 (S.D.N.Y. Motion Filed Feb. 25, 2019). No response has been filed by Mr. Musk.
The SEC’s Motion presents the issue for decision as simple: Mr. Musk violated the agreed to court order entered to resolve the claims by the Commission that he made false statements about Tesla going private. Specifically, in August 2018 Mr. Musk published a series of brief statements on Twitter regarding the prospect of taking the company private. The SEC claimed the statements were false, focusing on the undefined phrase “funding assured.”
The Commission’s claims were resolved the next month in a settlement which imposed certain restrictions on material communications by Mr. Musk about Tesla. Those procedures require the “pre-approval of any such written communications that could contain, or could reasonably contain information material to the Company or its shareholders,” according to the Final Judgment entered by the Court.
On February 19, 2019 Mr. Musk tweeted “Tesla made 0 cars in 2011, but will make around 500k in 2019.” The statement was disseminated to Mr. Musk’s 24 million Twitter followers.
A few hours later Mr. Musk published a second tweet stating “Meant to say annualized production rate at end of 2019 probably around 500K, ie 10k cars/week. Deliveries for year still estimated to be around 400k.”
Letters from counsel for the company and Mr. Musk to the Commission staff in response to inquires about the communications, admit that the first tweet on February 19th was not pre-approved. Mr. Musk believed that the first tweet was simply a reiteration of publications made earlier by the firm. The second statement made on February 19th was pre-approved. Counsel assisted in preparing the clarification, citing facts from earlier Tesla public statements.
The Commission’s motion asserts four key points: 1) The Final Judgment is clear – it requires pre-approval; 2) Mr. Musk admits that he did not secure pre-approval for the first February 19th tweet; 3) this is not a technical violation – the point of the settlement was to prevent the dissemination of inaccurate information as was done here; and 4) Mr. Musk’s post settlement, pre-February 19th statements confirm that he has not diligently attempted to comply with the Final Judgment. Accordingly, the requested order should be entered.
The dispute in round one between the Commission and Mr. Musk hinged in large part on the meaning of the phrase “funding secured.” While volumes were written about the surrounding circumstances, those two words remained at the center of all the arguments.
Round two is similar but different. The dispute is similar since it keys to the words tweeted by Mr. Musk. It is different because the critical point is the text of the Final Judgment. The text of that court order requires pre-approval for the publication of any material information about the automaker by Mr. Musk. Since it is undisputed that there was no pre-approval and that the information was material and about Tesla the case is over – at least according to the SEC.
Perhaps. If the point of the Final Judgment was to ensure proper and accurate communications of information about Tesla as the SEC argues, then the ultimate resolution of this case may turn on whether the phrase “pre-approval” in the Final Judgment includes a reiteration of previously published information. Stated differently, if the publication of the information has been approved, must it be approved a second time?
It seems unlikely that the SEC and the Court intended to create and impose needless disclosure procedures requiring unnecessary duplication. Yet in this case the factual record presented by the SEC to the court specifically states that Mr. Musk reasonably believed he was reiterating information that previously had been published. Arguably the pre-publication review requirement of the Final Judgment has not been violated under such circumstances. Alternatively, any violation is substantially mitigated in view of these facts, counseling minimal, if any, sanction. This is particularly true in this case since the Commission has the burden of establishing a violation of the Final Judgement by clear and convincing evidence.
In the end, the real point of these proceedings is not so much the words or the court orders. It is about good corporate governance – reflected here in the disclosure policies incorporated in the Final Judgment – and a visionary company founder who does not fit into the typical public company senior executive mold. No doubt all companies – including Tesla – benefit from good corporate governance. No doubt companies such as Tesla greatly benefit from visionaries like Mr. Musk. Round two needs to resolve with an accommodation that draws the best from each side.