Securities Regulation Daily SEC charges Musk with Twitter falsehoods
Friday, September 28, 2018

SEC charges Musk with Twitter falsehoods

By Rodney F. Tonkovic, J.D.

The SEC has charged Elon Musk, the founder and CEO of Tesla, Inc., with fraud based on a series of tweets about potentially taking Tesla private. Musk had tweeted that he had secured funding to take the company private and only needed a shareholder vote. The Commission alleges that Musk had not discussed a deal with any potential financing partners and that he knew the transaction was uncertain and subject to numerous contingencies. Additionally, the subsequent spike in Tesla's stock price cause significant market disruption. Among other penalties, the Commission seeks to a bar Musk from serving as an officer or director of any public company (SEC v. Musk, September 27, 2018).

Tweet turmoil. On August 7, 2018, Musk told his 22 million Twitter followers that he had secured funding to take Tesla private at $420 per share. Immediately after this tweet was published, Tesla's trading volume and price spiked. Musk emphasized in subsequent tweets that current shareholders would be provided for and added that the transaction was contingent on a shareholder vote. Later in the day, Tesla published on its blog an email from Musk to its employees reiterating the news. Also, in response to questions from analysts, Tesla's head of Investor Relations said that there was a firm offer.

On August 13, 2018, a blog post on Tesla's public blog attributed to Musk walked back the earlier statements, indicating that he was still in discussions with investors and that no detailed proposal had been presented to Tesla's board. On Friday, August 24, 2018, a new blog post attributed to Musk stated that the process of attempting to take Tesla private had been abandoned. For the first time, Musk disclosed a number of obstacles to allowing current shareholders to remain invested if Tesla went private, correcting multiple earlier statements that any going-private transaction would not affect current shareholders. On the next trading day, Tesla's stock closed down over 15 percent from the August 7 price.

Tweets incomplete. According to the Commission, when taken together, Musk's August 7 statements gave the false impression that if Tesla were to be taken private, the only outstanding requirement would be a shareholder vote. The statements that funding was "secured" and investor support "confirmed" were false and misleading, however, because Musk had no commitment from any source to provide funding at any amount, let alone $420 per share. And, in addition to the disclosed need for a shareholder vote, there were numerous other reasons why a going-private transaction was not certain at the time, including the fact that Tesla's board would have to approve of any such transaction. Finally, while Musk assured current shareholders that they could maintain their stake, he had not determined or even explored whether this would be possible.

The Commission asserts that Musk's statements were premised on a series of baseless assumptions and were contrary to facts that he knew. Based on a July 2018 meeting with investors, Musk knew that no terms for a going-private transaction had been agreed upon. He also knew that a formal proposal had not been submitted to Tesla's board. None of Musk's August 7 tweets, however, disclosed that he knew these material facts or that there were many uncertainties that would have to be resolved before any going-private transaction would be possible.

Charges. The Commission charged Musk with knowingly making untrue statements in violation of the antifraud provisions of the Exchange Act. The complaint seeks a permanent injunction, disgorgement, civil penalties, and a bar prohibiting Musk from serving as an officer or director of a public company.

"Corporate officers hold positions of trust in our markets and have important responsibilities to shareholders," said Steven Peikin, Co-Director of the SEC’s Enforcement Division. "An officer’s celebrity status or reputation as a technological innovator does not give license to take those responsibilities lightly."

Co-Director Stephanie Avakian added: "Taking care to provide truthful and accurate information is among a CEO’s most critical obligations." She said that this standard "applies with equal force when the communications are made via social media or another non-traditional form."

The case is No. 1:18-cv-08865.

Companies: Tesla Inc.

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