Is Elon Musk too big to regulate?

When Elon Musk announced he was putting his $44bn acquisition of Twitter “temporarily on hold” on Friday, it sent a familiar spasm through the stock market.

Once again, the Tesla chief executive had used a brief tweet to deliver market-moving news. And once again, his offhand way of dealing with Wall Street provoked questions about how fully he was complying with securities regulations.

Musk’s notorious 2018 tweet declaring he was considering taking Tesla private, “funding secured”, brought a lawsuit from the Securities and Exchange Commission and led to a settlement in which the Tesla boss paid a fine and stood down as Tesla chair for three years.

Since then, though, the regulators have held back, despite Musk’s frequent provocations and instances where he has tested the limits of the settlement. “They have trod carefully, and he has taken advantage of that,” said David Rosenfeld, an associate professor at Northern Illinois University.

Yet Musk’s recent actions may finally have left him open to more severe punishment — at least, if the regulators choose to pursue it. According to John Coffee, a law professor at Columbia University, he might already have laid himself open to the SEC’s “nuclear option”: suspending or disqualifying him completely from being an official or a director of a public company.

If Musk is in legal jeopardy, it is unlikely to come directly from the tweet that hit Twitter’s shares on Friday, according to legal experts. The tweet, in which Musk questioned whether there were more fake accounts on Twitter than the company has reported, wiped $7bn from Twitter’s share price in pre-market trading. A second tweet two hours later saying he was still committed to the acquisition erased half the loss.

The posts were widely viewed on Wall Street as a sign that Musk was softening up Twitter in preparation for trying to negotiate a lower price, leaving the social media company’s shares at a 25 per cent discount to the price he has agreed to pay.

Legal experts argue it would be almost impossible for the SEC to build a share price manipulation case linked to the tweet, in the absence of a false statement by Musk or clear evidence he was deliberately seeking to push the stock price down.

Manipulation charges are notoriously hard to prove, since they turn on being able to show intent. “The SEC and private litigants generally have not had great success with manipulation claims,” said James Cox, professor of corporate and securities law at Duke University. “In this case it may be difficult to prove a false statement because Musk has repeatedly said he’s concerned about the number of bots [on Twitter].”

But as Musk continues to flout convention and skirt the edges of securities laws, the SEC has other tools at its disposal that could give it a clearer opening, according to securities lawyers.

One is the 2018 settlement, which requires Musk to have any potentially market-moving statements vetted in advance by a Tesla lawyer. He only needs legal clearance for things that affect Tesla’s share price.

However, Friday’s tweets about Twitter could be caught by the settlement, said Henry Hu, a former SEC official and now law professor at the University of Texas. They could have eased concerns among Tesla shareholders that Musk would be distracted by owning Twitter, or that financing the deal might weigh on Tesla’s stock price, although it is unclear if Musk cleared the tweet with a lawyer, he added.

A second regulatory threat stems from Musk’s disclosures about his investment in Twitter. He secretly built up a 9 per cent stake, going above the 5 per cent threshold that triggers a disclosure requirement on March 14. Yet the stake was not publicly reported until April 4, exceeding the 10-day grace period allowed under federal law.

Musk’s initial disclosure also described his investment as passive — though a day later a second filing amended this to say he had agreed to take a seat on Twitter’s board, and within 10 days he had reversed course on the board seat and made an offer to buy the company.

Some legal experts remain surprised the agency — which is reportedly investigating the matter — has yet to charge Musk over the late disclosure. The SEC has not responded to requests for comment on the existence of the probe.

“I am completely amazed that the SEC hasn’t trodden in already in the federal court to file an action” over his late disclosure, said Cox.

But a former senior SEC official said the regulator may be delaying acting while it looks beyond just the issue of timing to see if there is any evidence of potential misstatements in Musk’s disclosures. Any evidence showing his intentions towards Twitter changed earlier than his filings suggested could open him to action.

Yet it is questionable how aggressively the SEC would pursue a case, even if it believed there was one to answer. After Musk’s “funding secured” tweet, the agency initially sought to bar him from ever serving as a public company’s officer or director, but later agreed to the lighter settlement.

The former SEC official said the agency ultimately may not have barred Musk, who had become “so integral and critical to Tesla”, to avoid hitting the company’s shareholders. Unlike corporate leaders like Apple’s Steve Jobs, Microsoft’s Bill Gates or Google’s Eric Schmidt, Musk’s potential successor remains unclear, he added.

Jay Clayton, then SEC chair, appeared to confirm that when he announced the settlement. “It often is the case that the interests of ordinary shareholders — who had no involvement in the misconduct — are intertwined with the interests of offending officials and the company,” adding that “the skills and support of certain individuals may be important to the future success of a company”.

Fear of hurting Tesla’s shareholders has continued to blunt the agency’s actions, according to some. “I suspect that’s continued to plague the SEC in some way, [in] that they have real issues with [Musk’s] conduct but they feel a bit handcuffed as to what they could or should do,” said the agency’s former senior official.

“Has he become so important to such an important company that the SEC is afraid to do something?” the ex-official asked. “It’s a fair question”.

Yet holding back from taking action, if it believes Musk has a case to answer, would hit at a central tenet of US securities regulation, according to Hu: that full disclosure is essential to a properly functioning market. “Broadly speaking, the SEC’s central reason for being is at stake,” he said.

Source: Financial Times