Elon Musk Runs Afoul of the SEC . . . Again
In August 2018, Tesla CEO Elon Musk oddly and fatefully tweeted that he had secured funding to take Tesla private. (Alexander Stein, Forbes). Shortly after, the Securities and Exchange Commission (the “SEC”) filed suit against Musk and Tesla, alleging that Musk made materially false and misleading statements in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b‑5. (SEC Complaint, Sept. 27, 2018). The SEC argued that Musk “knew or was reckless in not knowing that his statements were false and misleading” and that he omitted material facts in his statement. (Id.) According to the SEC, Musk’s statements “caused market chaos and harmed Tesla investors.” (Id.) In September 2018, the SEC and Musk reached a settlement on these charges which required Musk to step down as chairman of Tesla for three years, pay a $20 million fine, and consent to independent directors monitoring his communications to investors. (Matthew Goldstein, N.Y. Times).
In February 2019, Musk tweeted that “Tesla made 0 cars in 2011, but will make around 500k in 2019.” (Richard Gonzales, NPR). This statement was contrary to previous estimates from Tesla, which had projected delivery of around 400,000 cars in 2019. A few hours later, Musk corrected his statements on Twitter. (Id.) As a result, the SEC quickly filed a motion asking a federal judge to hold Musk in contempt for violating his 2018 settlement agreement. (Ahiza Garcia, CNN Business). In March 2019, the SEC confirmed with Tesla that Musk’s tweets were never reviewed or pre-approved by the company. (CNBC).
Musk has since argued that his tweets were immaterial and the SEC’s limitations infringed on his First Amendment rights. (Jonathan Stempel, Reuters; Lora Kolodny & Robert Ferris, CNBC). In a hearing on April 4, 2019, Judge Alison Nathan declined to address the merits of the arguments and gave the SEC and Musk two weeks to redefine and renegotiate the settlement agreement and to clarify how Musk’s communications were required to be monitored. (Jackie Wattles et al., CNN Business).
Twitter and other social media forums have rapidly changed the ways in which corporations and their executives communicate. While social media has allowed corporations to project their messages broadly and quickly, such a powerful medium requires careful handling. (SeeRobert Wynne, Forbes). Today, there is no shortage of news stories of popular icons or businesspeople who have caused themselves trouble by communicating inappropriately on social media. (See e.g., Quentin Fottrell, MarketWatch). Musk’s experience is evidence of just how closely the SEC monitors corporations and their executives on social media.
In Musk’s case, the SEC expressed concerns that his material omissions and materially false or misleading statements altered the market. When considering that the company’s share price rose over 10% following Musk’s tweet, these concerns were likely accurate. (James B. Stewart, N.Y. Times).
Social media creates a disclosure problem because these platforms are not venues for lengthy discussion or disclosures. Even though Twitter has increased its character limit, 280 characters is a significantly small communication when compared to the pages of disclosures that a 10-K or 10-Q contain. (Lisa Eadicicco, Time). Social media forums make it easy for a company to materially omit information or mislead investors because of a lack of information. These forums were not designed with SEC requirements in mind, and because of the ease with which a social media communication can be incomplete or misleading, reporting companies should think of the long-term consequences before participating. And as shown by Musk’s repeated and costly litigation issues, these consequences can have far-reaching impacts on the company.
The answer seems simple: think before you tweet. Whether Musk and other reporting companies will heed this advice is another matter. However, investors and reporting companies should expect the SEC to scrutinize and police companies for any incomplete or misleading social media posts that violate the federal securities laws.