In a high-profile enforcement action, the Securities and Exchange Commission sued and settled with Elon Musk, Chief Executive Officer and Chairman of technology company Tesla, Inc., on allegations he made fraudulent statements in several tweets regarding Tesla’s intention to go private. The SEC also brought charges against Tesla for failing to maintain required disclosure procedures and controls with respect to Musk’s tweets, which Tesla agreed to resolve.
The settlements, contingent upon court approval and on a neither admit nor deny basis (no admissions of liability), require Musk to step down as Chairman for at least three years and pay a $20 million civil penalty. Tesla also agreed to pay a $20 million civil penalty and must implement certain governance changes.
The SEC alleged that Musk issued a tweet on August 7, 2018 indicating that he could take Tesla private at $420 per share (a hefty premium to its then trading price), that funding for the go private transaction had been secured, and that the sole contingency was a shareholder vote. Musk, per the SEC, did not have specific deal term discussions, including a specific price, with any potential financing partners, and thus his tweet lacked a sufficient factual basis. Musk’s materially false tweets caused Tesla’s stock price to spike by over 6% on August 7th, and caused serious financial market disruption, the SEC claims.
For a further discussion of the SEC’s case against Elon Musk, check out the MarketWatch article in which I was quoted, which has been posted in the “In the News” section on my site.
As to Tesla, the SEC contends that notwithstanding that it advised the market that it intended to use Musk’s Twitter account to issue material information to the investing public, it had no disclosure controls to determine whether Musk’s tweets had to be disclosed in Tesla’s SEC filings or were accurate.
Tweets by a corporate chairman and CEO to shareholders and the investing public concerning material company events are governed by the anti-fraud provisions of the federal securities laws (just like formal corporate filings), and thus must be true, accurate and complete. While this statement seems obvious, the SEC in its enforcement case against Musk and Tesla evidently wanted to ensure it was crystal clear.
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