‘Make an example’: SEC weighs options in latest Elon Musk tussle

Among the options available to the SEC and its intractable new boss, Gary Gensler, is to force Musk to forfeit profits he made between when he was supposed to let the public know about his moves and when he actually did it. Still, the money in question — about $150 million — is pocket change for a man worth $274 billion.

“I fully expect the SEC to investigate this,” former SEC Chairman Jay Clayton, who took over at Musk during his 2017-20 tenure, said in an interview.

A full investigation could anger Musk, who has repeatedly and openly scorned the regulator, who accused him of deceiving investors in 2018 when he – inaccurately – tweeted that he had secured funding to take Tesla private. The resulting settlement ousted the entrepreneur as chief executive officer of the electric vehicle maker, but allowed him to remain as chief executive officer. (“I want to be clear that I don’t respect the SEC,” the Tesla CEO told CBS’s 60 Minutes that year.)

Scott Galloway, a professor of marketing at New York University’s Stern School of Business, who himself considered investing in Twitter, said the SEC’s credibility could be at stake if it doesn’t find a way to bring Musk under control.

“The SEC’s response to Elon’s ‘funding secured’ tweet was completely ineffective, and that, combined with everything it has done since, has only encouraged Elon,” Galloway said. “And unfortunately, I think it’s encouraged a lot of wealthy people to believe that if you have enough money, the laws don’t apply to you.”

Musk’s involvement with Twitter, the social media platform he used to break SEC rules, could complicate matters further. The billionaire maintains an active presence on Twitter and has a record of sending controversial tweets to his more than 81 million followers.

“Twitter is a war zone,” he said in 60 Minutes.

Twitter had offered Musk a seat on the board after buying the shares. The company’s CEO, Parag Agrawal, said Musk declined the position but Twitter will “remain open” to input from its now largest shareholder.

“The decisions we make and how we execute them are in our hands, in no one else’s. Let’s turn off the noise and focus on the work and what we’re building,” Agrawal wrote in a letter he posted on Twitter.

The recent alleged document filing violations are not themselves necessarily the sort of actions that typically result in extremely aggressive action by the SEC.

Still, “there’s a real problem with people filing the wrong filings, and if they let Musk get away with it, then others could claim that there is such a thing as selective enforcement,” said Harvey Pitt, who presided over the SEC under President George W . Bush.

The agency declined to comment. An attorney for Musk did not respond to requests for comment.

By law, investors must notify the SEC within 10 days if they own more than 5 percent of a company. According to his second filing — which changed his status from a “passive” to an “active” investor — Musk crossed that threshold on March 14, meaning he should have disclosed it by March 24. But he didn’t disclose his large stake accumulated until April 4 — a delay that allowed him to continue buying shares at about $39 a share for the intervening 11 days. After disclosing his 9.2 percent stake, Twitter’s share price shot up to over $50 a share.

The delay netted Musk about $150 million at the expense of selling shareholders, according to Galloway.

“Sometimes violating securities laws, tax issues or other things the rich do to protect their wealth are in the gray areas, they’re complicated. That makes it difficult to prosecute them,” Galloway said. “Not that.”

In this case, the rule in question is “simple, every major public market investor knows it, and there’s no doubt Elon broke it — which is why it’s such a gift from the SEC,” Galloway added. “Regulators need to make an example of someone.”

The SEC has been fighting Musk for years. The 2018 settlement called for stricter monitoring of his tweets, a section that was eventually changed – after the SEC claimed he had violated it – to clarify that he had to obtain pre-approval from “a senior securities attorney” before tweeting about Tesla’s published financial position or business plans.

Musk is now trying to get those restrictions lifted in court. His attorney in February accused regulators of targeting Musk to “prohibit his exercise of First Amendment rights” because he is an “outspoken critic of the government.”

The SEC is trying to innovate in how it handles Musk’s tweets, said Jill Fisch, a professor at the University of Pennsylvania Law School, and it may have to get creative to respond to him in the future.

“They tried to get to the root of the problem and not just hit him with a fine that might not make sense,” she said. “Experience with how this works hasn’t worked as well as they envisioned, but there is room for further innovation.”

But it’s the details of a breach that should count, not that it’s Elon Musk, said Jan Folena, a partner at Stradley Ronon who previously served as the SEC’s supervisor chief litigation counsel.

“Regardless of who it is, you have to look at the facts and circumstances,” she said.

Pitt, now CEO of global consulting firm Kalorama Partners, said the SEC is likely concerned about Musk’s actions because “by definition, anything he does becomes a big deal.” But he acknowledged that the tech entrepreneur’s wealth made the prospect of holding him accountable a little more complicated.

For example, he noted that a typical fine for improper filing is around $100,000. “That’s a tip for Mr. Musk,” he said.

Another option would be to pursue a court order requiring him to properly disclose acquisitions, he noted. But he said the agency would primarily look at what the right answer is and not worry about Musk eroding its credibility.

“The SEC’s enforcement procedures and staff are very professional,” Pitt said. “You will act, do we have a case here? And it is absolutely clear that they have a case.”

“You will find a professional and reasonable approach,” he said.

Or as Galloway put it, “If you can put Martha Stewart in the big house, you can fine Elon $150 million.”

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