Elon Musk and the SEC

A few observations on the SEC investigation of Elon Musk and Tesla and resulting settlements.

1. Unsurprisingly, the SEC enforcement division has highlighted its settlements with Elon Musk and Tesla in discussing the enforcement actions it brought during the  fiscal year ended September 30, 2018.   Because of the high profile nature of the defendants and the favorable outcome to the SEC, these settlements will be touted over and over again by SEC senior staff in the weeks and months to come.
2. The staff’s investigation into the allegations surrounding Musk’s tweet was completed very quickly.  Musk tweeted about taking Tesla private on August 7, 2018, and the SEC filed a complaint against Musk on September 27, 2018.  That is fast work for the SEC.
3. The case wasn’t as straightforward and obvious as many have suggested.  The core of the case concerned a tweet by Musk on August 7, 2018, in which he wrote:  “Am considering taking Tesla private at $420.  Funding secured.”  The SEC claim is that that statement was false and/or misleading.  But, Musk claimed that he had in fact met with three representatives of a Saudi investment fund on July 31, 2018 to discuss taking Tesla private and during the meeting, one of the representatives of the fund (an individual empowered to make investment decisions for the fund) expressed interest in taking Tesla private.  Musk further claimed that at the end of the meeting, the representative asked Musk to tell the fund how he wanted to do a going-private transaction and represented that so long as the terms were “reasonable,” the fund would be fine with them.  If Musk’s version of events is accurate, the case would then have to turn on what “Funding secured”  meant in the context of the first sentence of the tweet (where he is considering taking the company private) and whether having a deep pocketed investor say that it would be fine with whatever terms Musk came up with is significantly different from secured funding.  The answer to that question is certainly not free from doubt.  Moreover, I am far from convinced that a jury would be willing to do in a company and its charismatic leader for the difference between what Musk said on his Twitter account and the actual facts.
4. In reading the SEC complaint it appears that the staff’s investigation into Musk’s behavior was relatively comprehensive but that there was also at least one significant hole in the SEC’s case.  The complaint fails to describe what the three fund witnesses recalled related to the July 29 meeting with Musk.  I think the reason for this omission is significant and can only mean that the SEC never spoke to the three witnesses.  This would have been a major litigation risk if the case had moved forward.
5. The Commission and its staff moved heaven and earth to get the settlements completed and filed in federal court court before September 30, which just happens to be the SEC’s fiscal year end.  The staff filed a complaint in federal court against Musk on Thursday September 27, after settlement talks with Musk apparently unraveled earlier that day (if you believe the press accounts).  The SEC staff then filed  settlement papers in court on Saturday, September 29, the last possible day to file the papers before the SEC’s fiscal year expired.  The September 29 court filing likely was preceded by intense back and forth negotiations between the SEC and counsel for Musk and Tesla and then drafting and redrafting the settlement papers.  The staff then needed to get the filings in order with appropriate review and approvals by the counsel and then all the papers filed in the New York courthouse.  Moreover, since the Commission typically meets to vote on Enforcement recommendations each Thursday, in this situation SEC enforcement staff either had obtained so-called “stand-by” authority to accept the settlements without further approval by the Commission or the Commission convened some sort of special meeting to approve the proposed settlements, either on Friday September 28 or Saturday September 29.  Obviously, the SEC badly wanted the settlements to be included its 2018 year statistics and didn’t follow traditional protocol to achieve that goal.  Kudos to the staff for working round the clock to make this happen (Commission awards to follow), even though there doesn’t really seem to be a very compelling reason to file the settlement papers on a Saturday, unless, of course, the SEC wanted to juice its enforcement statistics for 2018.
6. Although Musk settled to a securities fraud charge, Tesla was only required to settle to a much less serious charge involving internal controls, even though Tesla could certainly have been charged with fraud under well-established legal principles.  It is unclear why Tesla was given such a break — whether the settlement represents a significant shift in policy for corporate settlements by the SEC or was simply a settlement compromise in this particular instance.  Either way, the SEC should have been more forthcoming and transparent about its rationale for not charging the company with fraud and subjecting them to a fraud injunction.   Under this new policy or settlement position, when will the SEC charge a company with fraud when a senior officer of the company is charged with fraud?  Precedents matter.
7. The settlement requires Tesla to create a committee of independent directors to monitor potential conflicts of interest.  This requirement has nothing whatsoever to do with Musk’s tweets so was probably included as a way to resolve another part of the SEC investigation.   The SEC was probably willing to close that part of the investigation in exchange for Tesla including that provision as part of the settlement.
8. The Wall Street Journal recently reported that the Department of Justice is investigating whether Musk or Tesla misled investors about production of its Model 3 vehicle but that the SEC is not investigating such conduct.  I suspect that this article is inaccurate or incomplete in some way.  In most instances of potential financial fraud concerning public company financial statements, the SEC is generally involved.  DOJ typically does not have the expertise or resources to do such investigations and therefore is not inclined to do them without SEC involvement.