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

The U.S. Securities and Exchange Commission (SEC) has asked the court to contempt the billionaire, says a tweet from the CEO of Tesla Inc. who planned the automaker’s production violated the court agreement Musk signed last year. his communications were reviewed by an attorney.

In an effort to suppress his comments, the SEC ventured into relatively unspecified 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 do it.

But what Judge Alison Nathan said in 2019 – who found the terms of Musk’s agreement with the SEC were “soft” and encouraged them to make a settlement – shattered trust with officials overseeing the SEC case. that the courts would support them if they tried to prosecute his Twitter activity, 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 by requesting public records – showed that following Nathan’s comments, SEC officials chose to urge Musk to comply with the agreement. , rather than pursue enforcement through the courts.

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

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

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

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 has vowed to step in over and over again. repeated misconduct and promote more severe punishment.

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

In March, Nathan was promoted to the 2nd Court of Appeals for the U.S. Circuit, based in New York. A newly appointed judge in 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 has been asking investors to watch his Twitter feed since 2013, sent Tesla shares rising by tweet “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 yet discussed the basic terms of the agreement with a potential source of funding, as SEC court documents showed.

Musk said the funding was safe.

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

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

The agreement requires Tesla to put in place a process to handle all communications from Musk about the company, including hiring or assigning an “experienced security attorney” to monitor media messaging. society. Musk also agreed to prove in writing that he complied, and to give proof thereof; and left Tesla’s presidency while remaining CEO. There is no set end date for this arrangement.

The review process requires Musk to seek prior approval for written communications – including tweets – that contain “or reasonably could contain” material information to Tesla shareholders.

But the decision on whether they contain valuable information is left to Musk and Tesla.

Less than six months later, on February 19, 2019, Musk tweeted that Tesla would make “about 500k” vehicles that year. If this is not proven, it could be said to be a violation of regulations, as production numbers could be market-sensitive information, SEC officials said in court documents.

SEC staff asked Tesla if Musk submitted the tweet for review. He’s gone, Tesla’s lawyers told the SEC. The SEC said in its complaint to the court that when it reviewed the tweet in February 2019, it found that Musk had not sought prior 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 didn’t think about it. We assume everyone is doing it in good faith.”

Tesla’s lawyers said in a court filing that Musk did not seek prior approval because he “did not tweet any material information about Tesla.”


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

In April 2019, they went to court in New York to argue that Musk should be defended in court – a serious case that could result in fines or imprisonment. The SEC wants the court to order Musk to report monthly to the agency about his compliance and apply rising fines for violations, his attorney told the judge at the hearing.

SEC officials thought they were in charge because they believed the violation was not vague, four sources said, two of whom had direct knowledge of the matter.

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

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

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

Nathan didn’t end whether the tweets were material, or the rule in defiance, saying, “My call to action is for everyone to take a deep breath, wear your fairness pants, and find a solution.”

SEC officials felt they had no choice but to change the regulations, according to four sources. The SEC, Tesla, and Musk have agreed to be more specific about comments that must be cleared in advance-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 felt Musk had pushed the boundaries of the revised agreement, but were reluctant to return to court, for fear that Nathan would dismiss their lawsuit and reprimand them for returning the issue. . , said three sources.

On July 29, 2019, Musk tweeted that he hopes to build “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 were pre-approved, according to the letter the SEC sent to Tesla, obtained through requests to public records.

Musk does not seek prior approval; Tesla’s lawyers argued in emails to the SEC that it was not necessary. The dispatcher did not agree. The SEC said in emails that it was trying to resolve the dispute “in the spirit of the court’s direction,” but Tesla and Musk’s attorneys refused to provide the requested documents or have “a dialogue.” productivity ”to SEC staff.

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

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

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

The SEC is also uncomfortable with the risks of the most drastic measure – abandoning the deal and starting legal proceedings – because of Musk’s resources, four of the sources said.

In addition, Musk was and remains Tesla’s largest shareholder, with approximately 16% of the shares at the end of April. It could be hard to argue that banning him as a director or officer of a public company is in the interest of shareholders or would loosen his grip on Tesla, two of the sources said.

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

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

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