In a faceoff with Elon Musk, the SEC flashed

  • The judge’s remarks in 2019 struck the SEC’s trust in supporting them
  • The core question – what is “material”[ads1]; information – was left to Musk and Tesla to decide
  • As some tweets were not investigated, the SEC chose to urge Musk to comply, instead of going to court.
  • The SEC was also concerned about the risk of starting lawsuits given Musk’s resources

WASHINGTON, May 24 (Reuters) – US securities regulators have pulled their strings in trading with Elon Musk mainly because a April 2019 court hearing on a statement he made about Tesla on Twitter did not go their way, according to four sources with knowledge of the case.

The US Securities and Exchange Commission (SEC) has asked the court to keep the billionaire in contempt, saying a tweet from Tesla Inc. (TSLA.O)’s CEO – who predicted the carmaker’s production – broke with a lawsuit Musk signed the year before. get some of his communications checked by a lawyer.

By trying to curb his comments, the SEC was heading into relatively unknown territory. SEC rules require public companies and their executives to disclose accurate information that may be relevant to investors through channels that investors know how to monitor. It usually does not specify how companies should do it.

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But the statements by Judge Alison Nathan from 2019 – who found the terms of the agreement between Musk and the SEC “soft” and urged them to come to an understanding – put confidence among officials who were monitoring the case that the courts would support them if they tried to prosecute his activity on Twitter (TWTR.N), 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 request for public records – showed that in the wake of Nathan’s comments, SEC officials chose to urge Musk to correct according to the law. agreement, instead of seeking enforcement through the courts.

SEC spokesmen declined to comment on their enforcement agreements with Musk. Spokesmen for Tesla and Twitter and a representative of Judge Nathan did not respond to requests for comment on this story.

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

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

Sources said they are not familiar with the current thinking of the SEC, which has been under new leadership since President Joe Biden took office in January 2021. Under the new chairman, Gary Gensler, the agency has promised to crack down on repeated abuse and pressure. for tougher punishments.

It recently opened several investigations into Musk. Among them, an investigation into two of his Twitter tweets where he asked if he would sell shares in Tesla, shows court documents regarding Musk’s settlement with the SEC.

Nathan was promoted to the New York-based 2nd US Circuit Court of Appeals in March. A recently appointed judge in the case, Lewis Liman, ruled in the SEC’s favor last month.


The SEC’s battle with Musk began on August 7, 2018, when the CEO, whose company had asked investors to monitor his Twitter feed since 2013, sent Tesla shares into the clouds by tweeting “financing secured” to take the listed company private. The SEC opened an investigation: It found that Musk at the time had not even discussed important contract terms with any potential source of funding, SEC legal documents later showed.

Musk says funding was secured read more.

In September 2018, the agency’s officials told Musk that he had a choice: Fight harsh accusations over the tweet in court or conciliation and get less punishment, said one of the sources. Tesla shares were around $ 300 compared to more than $ 630 today after a five-to-one share split in 2020. Musk agreed to make a settlement.

During the hearing on April 4, 2019, in comments to the SEC on the language of the settlement on which tweets should be investigated, Nathan said: “This case is unusual.” Her exploration of the terms of the settlement has not previously been reported in detail.

The settlement required Tesla to establish a process to oversee all Musk’s communications about the company, including hiring or appointing an “experienced securities attorney” to process social media posts. Musk also agreed that he would confirm in writing that he had followed, and present evidence; and to step down as Tesla leader while remaining CEO. No end date was set for the scheme.

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

But the decision on whether they contained essential information was left to Musk and Tesla.

Less than six months later, on February 19, 2019, Musk tweeted that Tesla would make “around 500,000” cars that year. If unchecked, this was undoubtedly a breach of the settlement because production figures could be market-sensitive information, SEC officials said in court documents.

The SEC staff asked Tesla if Musk had sent in the tweet for verification. He did not have that, Tesla lawyers told the SEC. The SEC said in the lawsuit that when it looked at the tweet from February 2019, it found that Musk had not applied for prior approval for any Tesla-related tweets since the control system started. Its lawyer told the court, “Mr. Musk has tweeted upwards of 80 times about Tesla, and the SEC thought nothing of it. We assumed everyone proceeded in good faith.”

Tesla lawyers said in a lawsuit that Musk had not applied for prior approval because he “has not tweeted significant information about 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 could result in fines or imprisonment. The SEC wanted the court to order Musk to report monthly to the agency on his compliance and enforce escalating fines for violations, the lawyer told the judge during the hearing.

SEC officials felt they had the upper hand because they thought the breach was unequivocal, the four sources said, two of whom have direct knowledge of the case.

Following a 1976 Supreme Court ruling, the SEC’s rules have defined essential information that a public company must disclose as matters “a reasonable investor” is likely to consider important. The regulator’s claim in the agreement with Musk was broader than that, it told the court: “We would argue that it essentially means that unless something is obviously insignificant, it must be approved in advance.”

Musk’s lawyers told the court that the SEC’s interpretation of the settlement’s assessment requirements was “incorrect” and “convincing”.

Judge Nathan challenged what she described as the settlement’s “soft” standard for assessing when a tweet was significant, 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, “This screams about resolving it.”

Nathan did not conclude whether the tweets were material, or took a stand on the contempt proposal, and said: “My call to action is that everyone should take a deep breath, put on their reasoning pants and find out.”

SEC officials felt they had no choice but to revise the settlement, according to the four sources. The SEC, Tesla and Musk agreed to be more specific about which comments need to be pre-approved – including statements about Tesla’s financial condition, proposed or potential agreements, production figures and performance forecasts.

Nathan approved the revised agreement on April 30, 2019.


In the ensuing months, SEC officials felt Musk was pushing the boundaries of the revised settlement, but were reluctant to go back to court, fearing Nathan could reject their complaint and exhort them to bring the case back, three sources said.

On July 29, 2019, Musk tweeted that he hoped to produce “1,000 sunroofs” a week by the end of the year; and 1 May 2020 that Tesla’s share price was «too high». Each tweet prompted the SEC to contact Tesla and Musk’s attorneys to seek information on whether they had been pre-approved, according to SEC correspondence sent to Tesla on the case obtained from requests from public records.

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

In June 2020, the SEC sent an email to Musk informing him that it was “the SEC’s position that you broke” the settlement.

However, instead of going back to court, the SEC said, “We encourage you to follow along.”

Some SEC officials felt that the settlement limited Musk to some degree, which helped protect investors, the four sources said.

The SEC was also concerned about the risk of the most extreme step – shelving the deal and starting lawsuits – given Musk’s resources, four sources said.

In addition, Musk was and will remain Tesla’s largest shareholder, with approximately 16% of the shares at the end of April, so it may be difficult to argue that banning him as public director or officer was in the interests of shareholders or would loosen his grip on Tesla. , said two of the sources.

In March, Musk asked the court to cancel his settlement with the SEC.

The new judge in the case, Liman, rejected Musk’s appeal in April. He found that the billionaire “regretted” the 2018 deal now that he felt that Tesla was “invincible” L2N2WP1WY. A representative of the court said that Liman will not comment.

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Additional reporting by Katanga Johnson in Washington, Hyunjoo Jin in San Francisco, and Jonathan Stempel, Jody Godoy, Gui Qing Koh and Herbert Lash in New York; Edited by Paritosh Bansal, Sara Ledwith and Daniel Flynn

Our standards: Thomson Reuters Trust Principles.

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