In a face-off with Elon Musk, the SEC blinked

The US Securities and Exchange Commission (SEC) has asked the court to hold the billionaire in contempt, saying a tweet from the CEO of Tesla Inc. that planned for the automaker’s production violated a court agreement Musk signed last year. previous request to have some of his communications examined by a lawyer.

In trying to rein in his comments, the SEC has ventured into relatively uncharted territory. SEC rules require public companies and their directors to disclose accurate information that may be material to investors through channels that investors know to monitor. They usually don’t specify how companies should go about it.

But remarks made in 2019 by Judge Alison Nathan – who found the terms of Musk’s deal with the SEC to be “soft” and urged them to work out a deal – shattered trust among officials overseeing the SEC. case that the courts would back them if they tried to prosecute his Twitter activity, 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 public records request – showed that following the comments of Nathan, SEC officials opted to urge Musk to comply with the agreement, rather than pursue enforcement through the courts.

SEC spokespersons declined to comment on the enforcement actions it took against Musk. Tesla and Twitter spokespersons and a representative for Judge Nathan did not respond to requests for comment for this story.

Musk’s lawyer, Alex Spiro, did not respond to requests for comment on the SEC deliberations, but court records and Tesla emails show that he and other lawyers for the Tesla boss dispute that the tweets of Musk violated the agreement.

With Musk’s use of social media coming under intense scrutiny after his bid to buy Twitter, the interviews and documents shed light on the regulator’s view of his relationship with the billionaire, now the man in power. richest in the world. He has 95 million Twitter followers and called the SEC “bastards” in an April interview.

The sources said they were unaware of the current thinking of the SEC, which has been under new management since Chairman Joe Biden took office in January 2021. Under its new chairman, Gary Gensler, the agency pledged to crack down on repeat misconduct and push for tougher penalties.

She recently opened new investigations into Musk. Among them is an investigation into two of his November tweets asking if he should sell Tesla stock, court documents show regarding Musk’s settlement with the SEC.

In March, Nathan was promoted to the 2nd Court of Appeals for the US Circuit, based in New York. A judge newly assigned to the case, Lewis Liman, ruled in favor of the SEC last month.


The SEC’s fight with Musk began on Aug. 7, 2018, when the CEO, whose company had been asking investors to watch his Twitter feed since 2013, sent Tesla shares skyrocketing by tweeting “secure funding” to make the company listed on the private stock exchange. The SEC opened an investigation: It found that Musk, at the time, had not even discussed the main terms of the agreement with a potential funding source, as SEC court documents later showed .

Musk says funding was secure.

In September 2018, agency officials told Musk he had a choice: Fight the harsh charges over the tweet in court or settle and face lesser penalties, one of the sources said. around $300, compared to over $650 today. Musk agreed to settle.

During the April 4, 2019 hearing, in comments to the SEC on rule language regarding which tweets should be reviewed, Nathan said, “This case is unusual.” His exploration of the terms of the settlement has not been reported in detail before.

The settlement requires Tesla to put in place a process to oversee all communications from Musk about the company, including hiring or designating an “experienced securities attorney” to monitor media messaging. social. Musk has also agreed to certify in writing that he has complied, and to provide proof thereof; and to leave the presidency of Tesla while remaining CEO. No end date has been set for this arrangement.

The vetting process required Musk to seek pre-approval for written communications – including tweets – that contained “or reasonably could contain” information material to Tesla shareholders.

But the decision of whether they contained important information was left to Musk and Tesla.

Less than six months later, on February 19, 2019, Musk tweeted that Tesla would make “about 500k” cars that year. If this has not been verified, it can be said to have been a violation of regulations, because production numbers can be market-sensitive information, SEC officials said in court documents.

SEC staff asked Tesla if Musk submitted the tweet for review. He hadn’t, Tesla attorneys told the SEC. The SEC said in its court complaint that when it reviewed the February 2019 tweet, it found that Musk had not sought pre-approval for Tesla-related tweets since the filtering system began. His attorney told the court, “Mr. Musk tweeted more than 80 times about Tesla, and the SEC thought none of it. We assumed everyone was doing this in good faith.”

Tesla lawyers said in a court filing that Musk did not seek pre-approval because he “did not tweet any material information regarding Tesla.”


For SEC officials, Musk’s breach was clear, four of the sources told Reuters.

In April 2019, they went to court in New York to argue that Musk should be held in contempt of court – a serious charge that can result in fines or jail time. The SEC wanted the court to order Musk to report monthly to the agency on his compliance and apply escalating fines for violations, his attorney told the judge at the hearing.

SEC officials thought they had the upper hand because they believed the breach was unambiguous, said the four sources, two of whom have direct knowledge of the matter.

Following a 1976 Supreme Court ruling, SEC rules defined material information that a public company must disclose as matters that “a reasonable investor” would likely consider material. The regulator’s requirement in the deal with Musk was broader than that, she told the court: “We would say it basically means that unless something is manifestly intangible, it must be approved in advance.”

Musk’s attorneys told the court that the SEC’s interpretation of the deal’s scrutiny requirements was “incorrect” and “overbroad”.

Judge Nathan challenged what she described as the agreement’s “soft” standard for determining whether a tweet was material, the court transcript shows; she also agreed with Musk’s lawyer that the SEC should have tried to resolve the issue out of court, saying, “It shows that it’s time to find a solution.”

Nathan did not conclude whether the tweets were material, nor rule on the contempt motion, saying, “My call to action is for everyone to take a deep breath, put on your reasonableness pants, and find a solution.”

SEC officials felt they had no choice but to revise the regulations, according to the four sources. The SEC, Tesla, and Musk have agreed to be more specific about comments that must be pre-cleared — including statements about Tesla’s financial condition, proposed or potential transactions, production numbers, and performance projections.

Nathan approved this revised agreement on April 30, 2019.


Over the next few months, SEC officials believed Musk had pushed the boundaries of the revised deal, but were reluctant to return to court, fearing Nathan would dismiss their lawsuit and reprimand them for bringing the issue back. , three sources said.

On July 29, 2019, Musk tweeted that he hoped to manufacture “1,000 solar roofs” per week by the end of the year; and on May 1, 2020 that Tesla’s stock price was “too high”. Each tweet prompted the SEC to contact Tesla and Musk’s attorneys to find out if they had been pre-approved, according to correspondence the SEC sent Tesla about, obtained through public records requests.

Musk had not sought prior approval; Tesla’s attorneys argued in emails to the SEC that this was unnecessary. The dispatcher disagreed. The SEC said in emails it was trying to resolve the dispute “in the spirit of the court’s direction,” but that Tesla and Musk’s attorneys refused to provide requested documents or have a “dialogue.” productive” with SEC staff.

In June 2020, the SEC emailed Musk advising him that the “SEC’s position is that you violated” the regulations.

However, instead of returning to court, the SEC said, “Going forward, we urge you to comply.”

Some SEC officials felt the settlement constrained Musk to some extent, which helped protect investors, the four sources said.

The SEC was also uncomfortable with the risks of the most extreme step – abandoning the deal and starting legal proceedings – given Musk’s resources, four of the sources said.

Additionally, Musk was and remains Tesla’s largest shareholder, with about 16% of the shares at the end of April. It might therefore be difficult to argue that banning him as a director or officer of a public company was in the interests of shareholders or would loosen his grip on Tesla, two of the sources said.

In March, Musk asked the court to void his deal with the SEC.

The new judge in the case, Liman, dismissed Musk’s appeal in April. He said the billionaire ‘lamented’ the 2018 deal now that he felt Tesla was ‘invincible’ [L2N2WP1WY]. A court official said Liman would not comment.

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