SEC Held Off Elon Musk Enforcement ‘Due To Court Fears’

The discouraging outcome of a court hearing in 2019 may be behind the US finance regulator’s lack of tough action against Tesla chief executive Elon Musk over disclosure rules, according to sources cited by Reuters.

At the April 2019 hearing the Securities and Exchange Commission reportedly asked the court to hold Musk in contempt of a 2018 settlement after Musk tweeted about Tesla’s production plans for the year.

According to Reuters’ sources, the SEC believed Musk’s statement was an unambiguous violation of the settlement.

But judge Alison Nathan instead told the two sides to “put your reasonableness pants on, and work this out”.

‘Soft’ terms

The 2018 settlement required Musk to obtain approval from Tesla’s legal team for tweets containing information material to Tesla shareholders.

But Nathan reportedly found the terms were “soft” and that it was unclear which of Musk’s statements required vetting.

The SEC then reworked the agreement for greater clarity, but since then has opted to warn Musk rather than to return to court.

That’s because regulators lacked confidence the court would back them up, Reuters’ sources said.

Tweets in July 2019 and May 2020 notably pushed the boundaries of the settlement, but each time the SEC opted to urge Musk to comply rather than taking enforcement action, Reuters said.

Shareholder interests

The SEC was also reluctant to start legal action against Musk because of his financial resources, some of Reuters’ sources said.

Some also confirmed the speculations of industry watchers that the SEC was reluctant to try to bar him from being a Tesla director or officer – its most powerful option – because it might be difficult to argue that this was in shareholders’ best interests.

In announcing the 2018 settlement then-SEC chair Jay Clayton appeared to follow this logic, saying that the “interests of ordinary shareholders” were often “intertwined with the interests of offending officials and the company”.

In addition, Musk remains Tesla’s largest shareholders, with about 16 percent of its stock, so that such a move might not even reduce his grip on the company.

The SEC’s settlement followed a controversial Twitter statement by Musk that he had “funding secured” to take Tesla private, and was intended to restrain his future Twitter pronouncements, which routinely have a significant effect on financial markets.

Twitter stake

Reuters’ sources said the SEC’s thinking may have changed over the past year, since current Chair Gary Gensler took office in April 2021, after the election of US president Joe Biden.

Most recently, in March Musk broke disclosure rules by quietly building up a 9 percent stake in Twitter, going above a 5 percent threshold that triggers a disclosure requirement.

Musk later launched a $44 billion (£35bn) takeover bid for Twitter, which he says is currently on hold.

The SEC has said it is investigating the Twitter disclosure issue but has not yet filed an action in court.