Tweets raise question of whether Musk can follow securities laws
First, it was a tweet proclaiming “funding secured” for taking Tesla private. That caused the Securities and Exchange Commission to sue Elon Musk, the company’s CEO, for misleading investors.
Then, having entered into a settlement with the SEC that has yet to receive court approval, Musk took to Twitter and appeared to call the agency the “Shortseller Enrichment Commission.” He also criticized BlackRock for lending shares to those betting against the company.
The settlement included a permanent injunction that raises the stakes for Musk if he violates the primary antifraud provisions of federal securities laws again. But his tweets raise a question: Will Musk be able to avoid violating securities laws in the future?
Musk’s criticism of the agency appears petulant and poorly timed, given his need to have the settlement approved, but it is not the type of statement that misleads shareholders. It does indicate that he may not be as contrite as other defendants who settle with the SEC, however, and could violate the injunction. That could have serious consequences by allowing the SEC to ask the federal court to impose additional penalties.
One basis for justifying a permanent injunction is whether the defendant is likely to violate securities laws in the future. The laws prohibit both false statements and those that are so sketchy that they could mislead investors — something the 280 characters allowed on Twitter might foster.
The SEC’s settlement with Tesla, which was sued separately from Musk, requires the company to “employ or designate an experienced securities lawyer whose qualifications are not unacceptable” to the SEC’s staff to review future communications through social media by its senior executives. That person must stay in place as long as Tesla remains a public company, with the SEC apparently hoping that the lawyer will be able to tone down Musk’s social media commentary. In addition, the company must create a committee of independent directors who will oversee the controls that Tesla has been told to put in place regarding public statements by its executives.
But can Tesla’s board of directors or corporate counsel control Musk? The SEC will certainly be watching and has the ability to punish him if he makes statements that are considered to be a potential violation.
If that happens, the SEC could pursue a civil contempt case and Musk’s tweets criticizing the agency could bolster it.
To prove a violation, the agency would have to show clear and convincing evidence that the order was valid and lawful, clear and unambiguous, and that the violator had the ability to comply with the order. That is a higher standard than the one usually applied in civil cases because a contempt finding can have serious consequences.
A federal judge who finds civil contempt can order that the defendant be incarcerated until they comply with an order, but that is unlikely to happen if the matter concerns only misleading statements. The more likely remedy would be a corrective statement along with an additional monetary penalty for a violation. Given Musk’s wealth, the likelihood is that any fine would make little difference to him.
If a violation is significant, a court may require the defendant to stand trial for criminal contempt. Under the federal statute governing contempt, a judge can find a defendant guilty if the person willfully engaged in “disobedience or resistance to its lawful writ, process, order, rule, decree or command.”