By Dave Michaels and Rebecca Elliott
WASHINGTON -- The Securities and Exchange Commission has tried
for several years to get Elon Musk to behave more like a typical
corporate leader. It hasn't worked.
The SEC sued Mr. Musk and Tesla Inc. in 2018 over tweets the
regulator deemed fraudulent, settling the case for a combined $40
million and changes to the company's corporate governance. As part
of the deal, it also fashioned a unique way to restrain Mr. Musk's
social-media habit: forcing the company to preapprove any statement
by its CEO that could move markets.
The Wall Street Journal reported Tuesday that SEC officials
wrote Tesla twice, in 2019 and 2020, arguing that some of Mr.
Musk's tweets should have undergone the required oversight. Tesla
disagreed, telling the SEC that his messages weren't within the
scope of the agreement.
There was no precedent for the communications-oversight policy
in financial enforcement, although regulators often prod companies
to improve compliance in the wake of scandals or missteps.
Restraining how a brash CEO communicates with the public and
investors has only led to more feuds with Mr. Musk and Tesla, who
seem to understand the leverage they have.
"Because Elon is so intertwined with this company, any serious
enforcement action against Musk has the potential to harm the
company and shareholders," said David Rosenfeld, a former SEC
official now teaching law at Northern Illinois University. "It
could end up being counterproductive. Musk has been poking the bear
because he knows he can get away with it."
Regulators say Tesla never followed through with oversight,
while Mr. Musk has continued to tweet in a way that the SEC saw as
violating the court-ordered policy, according to correspondence
obtained this week by the Journal under a Freedom of Information
Act request. Tesla didn't respond to a request for comment.
Many small shareholders revel in Mr. Musk's willingness to
stiff-arm regulators. Others are weary of the spectacle. Ross
Gerber, chief executive of Gerber Kawasaki Wealth and Investment
Management, a Tesla shareholder, said he would like to see the
company's board of directors step in to moderate Mr. Musk's
behavior on Twitter.
"I'm disappointed with the lack of oversight and I'm annoyed
that Elon seems to feel that he's exempt from any criticism for his
behavior," said Mr. Gerber, whose firm has about $1.85 billion in
assets under management.
To get the result it wants, the SEC could double down on the
policy by going back to federal court and asking a judge to hold
Mr. Musk in contempt for violating it. The regulator also could try
to unwind the whole deal and resume its fraud lawsuit against Mr.
Musk, with the potential to have him barred from public markets.
Neither option is appealing, according to securities lawyers and
The SEC's previous attempt in early 2019 to get U.S. District
Judge Alison Nathan to force Mr. Musk and Tesla to follow the
agreement didn't work out as planned. Judge Nathan told the two
sides to "put their reasonableness pants on" and settle the
In response, the SEC and Tesla agreed in April 2019 to narrow
the list of items required for preapproval. While the first deal
called for oversight of any written communication that could be
material to shareholders, the second version specified eight or
nine topics that Tesla's lawyers had to review before Mr. Musk
could tweet about them, including statements about production
numbers, projections, and finances.
The outcome was "not a clear win" for the SEC, said Urska
Velikonja, a law professor at Georgetown University who focuses her
research on securities enforcement. The agency's lawyers are likely
hesitant to return to the same judge and risk losing, Ms. Velikonja
The SEC has to be careful to not go too far and stifle an
executive from sharing useful information with markets, said Donald
Langevoort, who also teaches securities law at Georgetown. "I don't
think anyone -- the judge, the SEC, or Tesla's board -- relishes
the task of muzzling Elon Musk, and it seems that each of these
wants someone else to deal with it, " he said.
Given their hesitancy to litigate, regulators have few options
left. Senior SEC officials decided last year to stop writing to the
company, convinced it wasn't working and made the agency look
powerless, according to a person familiar with the matter.
One weapon available to the SEC, Ms. Velikonja said, is seeking
to have Mr. Musk barred from serving as an officer or director of a
public company. That punishment is a more common punishment in
SEC's enforcement cases, but it requires showing a person violated
antifraud laws and is unfit to serve in a leadership role.
SEC obtained bars in 32 cases during its 2019 fiscal year, Ms.
Velikonja said. Elizabeth Holmes, the founder of blood-testing
startup Theranos Inc., agreed in March 2018 to be suspended from
officer or director roles for a decade.
But Theranos was a private firm, while Tesla is an established
public company with a broad base of public shareholders. Barring
Mr. Musk from the company could hurt its future prospects and
market value, risking shareholder harm, lawyers said. Absent fresh
allegations of fraud by Mr. Musk, regulators probably wouldn't try
"There is no way the SEC wants to touch that with a 10-foot
pole," Ms. Velikonja said.
Write to Dave Michaels at email@example.com and Rebecca
Elliott at firstname.lastname@example.org
(END) Dow Jones Newswires
June 02, 2021 18:09 ET (22:09 GMT)
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