SEC settlement of Elan Musk Approved by Judge
A settlement agreement has been reached regarding the SEC Investigation of Elon Musk and his infamous Tweet stating that he was taking Tesla private. The tweet created an array of problems for the company since its publication. Under the settlement agreement, both Tesla and Musk will each pay a $20 million dollar fine and Musk will resign as Tesla’s Chairman for three years in order to resolve other pending charges arising from this incident. (Munsif Vengattil, Business Insider). The $20 million dollar fine assessed to Tesla was not for fraud, however, but rather, for the company’s failure to have any procedures or disclosure controls over Musk’s communication practices, i.e. his Twitter account. (Kirsten Korosec, TechCrunch). As a result of Musk’s resignation, Tesla will have to appoint two new independent directors to its board. (SEC Press Release). Nevertheless, despite the settlement agreement and the backlash that ensued over his Tweet, Musk will remain as Tesla’s Chief Executive Officer and more importantly, he will not have to admit or deny the allegations of the lawsuit.
According to Business Insider, the SEC’s initial settlement agreement sought to prevent Musk from acting in an officer or director capacity for any public company, in addition to preventing him from serving as the Chairman of Tesla for two years. Under this agreement, Musk would not have had to admit guilt and Tesla would have been required to appoint two independent directors. (Robert Ferris, CNBC). Although the original agreement only imposed a nominal fine, Musk decided to back out at the last minute. (Id.) “Musk refused to sign the deal because he felt that by settling he would not be truthful to himself, and he wouldn't have been able to live with the idea that he agreed to accept a settlement and any blemish associated with that, the sources said.” (Id.) His refusal caused the SEC to continue with its initial lawsuit. (Id.)
From the opinion of four legal financial experts on securities law, the overall sentiment is that Musk “won” in the sense that he will remain as the company’s CEO. These experts also agreed that the settlement was reached in a surprisingly quick manner, and most importantly, that “[t]he settlement is a reminder that officers and directors at public companies must be careful when they make statements that can affect their company's stock price”. (Mark Matousek, Business Insider (quoting of Renato Mariotti — partner at Thompson Coburn)). They also agreed that the fine that was ordered was unusually large, although, probably beneficial for the SEC in the sense that it got a lot of attention and therefore put other corporations on notice of the SEC’s capabilities of fining for reckless conduct.
After the settlement was agreed upon, it was sent to the court for approval. Judge Nathan asked both the SEC and Musk to submit a joint letter explaining why the settlement was fair and reasonable. The letter was submitted on October 11th, and the Court approved the settlement a few days later.