In a faceoff with Elon Musk, the SEC blinked

div classBodysc17zpet90 cdBBJodivpBy Chris Prentice and Michelle Pricep

pWASHINGTON Reuters – U.S. securities regulators have pulled their punches in dealings with Elon Musk largely because an April 2019 court hearing on a statement he made about Tesla on Twitter didnt go their way, according to four sources with knowledge of the matter.pdivdivdiv classBodysc17zpet90 cdBBJodiv

pThe U.S. Securities and Exchange Commission SEC asked the court to hold the billionaire in contempt, saying a tweet by the Tesla Inc. CEO – which forecast production at the carmaker – violated a court agreement Musk signed the previous year to have some of his communications vetted by a lawyer.p

pBy trying to rein in his comments, the SEC was veering into relatively uncharted territory. SEC rules require that public companies and their executives disclose accurate information that may be material to investors via channels that investors know to monitor. It doesnt usually specify how companies should do that.p

pBut the 2019 remarks by judge Alison Nathan – who found the terms of the agreement between Musk and the SEC to be “soft” and urged them to reach an understanding – knocked confidence among officials overseeing the case that the courts would support them if they attempted to prosecute his activity on Twitter, the four sources said.p

pInterviews with individuals familiar with the situation – as well as a review of court documents, SEC and Tesla emails obtained by the media through a public records request – showed that in the wake of Nathans comments, SEC officials opted to urge Musk to comply with the agreement, rather than pursuing enforcement through the courts.p

pSpokespeople for the SEC declined to comment on its enforcement dealings with Musk. Spokespeople for Tesla and Twitter and a representative for Judge Nathan did not respond to requests for comment for this story.p

pMusk‘s attorney, Alex Spiro, did not respond to requests for comment on the SEC’s deliberations, but court records and Tesla emails show he and other lawyers for the Tesla boss dispute that Musks tweets violated the agreement.p

pWith Musk‘s use of social media under scrutiny after he bid to purchase Twitter, the interviews and documents shed light on the regulator’s view of its relationship with the billionaire, now the worlds richest man. He has 95 million Twitter followers and called the SEC “bastards” in an interview in April. p

pThe sources said they are not familiar with the current thinking of the SEC, which has been under new leadership since President Joe Biden took office in January 2021. Under new Chair, Gary Gensler, the agency has pledged to crack down on repeated misconduct and push for tougher penalties.p

pIt recently opened more investigations into Musk. Among them, a probe into two of his November tweets asking if he should sell shares in Tesla, court documents regarding Musks settlement with the SEC show.p

pNathan was promoted to the New Yorkbased 2nd U.S. Circuit Court of Appeals in March. A newly assigned judge in the case, Lewis Liman, ruled in the SECs favor last month. p

p“MATERIAL INFORMATION”p

pThe SECs fight with Musk started on Aug. 7, 2018, when the CEO, whose company had been telling investors to monitor his Twitter feed since 2013, sent Tesla shares soaring by tweeting “funding secured” to take the publicly listed company private. The SEC opened an investigation: It found Musk at the time had not even discussed key deal terms with any potential funding source, SEC court filings later showed.p

pMusk says funding was secured.p

pIn September 2018, agency officials told Musk he had a choice: Fight stiff charges over the tweet in court or settle and suffer lesser penalties, one of the sources said.Tesla shares were around 300 compared with more than 650 today. Musk agreed to settle.p

pDuring the April 4, 2019 hearing, in comments to the SEC about the settlements language on what tweets should be vetted, Nathan said, “This case is unusual.” Her exploration of the terms of the settlement has not previously been reported in detail.p

pThe settlement required Tesla to establish a process for overseeing all of Musks communications about the company, including hiring or designating an “experienced securities lawyer” to vet social media posts. Musk also agreed that he would certify in writing that he had complied, and provide proof and to step down as Tesla chair while remaining CEO. No enddate was set for the arrangement.p

pThe vetting process required that Musk seek preapproval for written communications – including tweets – that contained “or reasonably could contain” information material to Tesla shareholders.p

pBut the decision on whether they contained material information was left to Musk and Tesla.p

pLess than six months later, on Feb. 19, 2019, Musk tweeted that Tesla would make “around 500k” cars that year. If unvetted, this was arguably a violation of the settlement because production figures can be market sensitive information, SEC officials said in court filings.p

pThe SEC staff asked Tesla whether Musk had submitted the tweet for vetting. He had not, Tesla attorneys told the SEC. The SEC said in the court complaint that when it looked into the Feb. 2019 tweet, it found Musk had not sought preapproval for any Teslarelated tweets since the vetting system started. Its attorney told the court, “Mr. Musk has tweeted upward of 80 times about Tesla, and the SEC thought nothing of it. We assumed that everyone was proceeding in good faith.” p

pTesla attorneys said in a court filing Musk had not sought preapproval because he “has not tweeted material information regarding Tesla.”p

p“REASONABLENESS PANTS”p

pFor SEC officials, Musks violation was clear, four of the sources told Reuters.p

pIn April 2019 they went to the New York court to argue that Musk should be held in contempt of court – a serious charge that can result in fines or jail. The SEC wanted the court to order Musk to report monthly to the agency on his compliance and enforce escalating fines for violations, its lawyer told the judge at the hearing.p

pSEC officials felt they had the upper hand because they believed the violation was unambiguous, said the four sources, two of whom have direct knowledge of the matter. p

pFollowing a 1976 Supreme Court ruling, the SEC‘s rules have defined material information that a public company must disclose as matters “a reasonable investor” would likely consider important. The regulator’s requirement in the deal with Musk was broader than that, it told the court: “We would argue it essentially means unless something is obviously immaterial, it needs to get preapproval.”p

pMusk‘s lawyers told the court the SEC’s interpretation of the settlements vetting requirements was “incorrect” and “overbroad.”p

pJudge Nathan challenged what she described as the settlement‘s “soft” standard for assessing when a tweet was material, the court transcript shows she also agreed with Musk’s lawyer that the SEC should have tried to resolve the issue out of court, saying, “This screams of working it out.”p

pNathan did not conclude whether the tweets were material, or rule on the contempt motion, saying: “My call to action is for everybody to take a deep breath, put your reasonableness pants on, and work this out.”p

pSEC officials felt they had no choice but to revise the settlement, according to the four sources. The SEC, Tesla and Musk agreed to be more specific about what comments must be preapproved – including statements about Teslas financial condition, proposed or potential deals, production numbers, and performance projections.p

pNathan approved that revised agreement on April 30, 2019.p

pTHE TWEETS GO ONp

pIn the following months, SEC officials felt Musk pushed the boundaries of the revised settlement but were reluctant to return to court, fearing Nathan might reject their complaint and admonish them for bringing the issue back, three sources said.p

pOn July 29, 2019, Musk tweeted that he was hoping to manufacture “1,000 solar roofs” a week by yearend and on May 1, 2020 that Tesla‘s stock price was “too high.” Each tweet prompted the SEC to contact Tesla and Musk’s attorneys seeking information on whether they had been preapproved, according to SEC correspondence sent to Tesla on the matter obtained by public records requests.p

pMusk had not sought preapproval Tesla‘s attorneys argued in the emails to the SEC it wasn’t necessary. The regulator disagreed. The SEC said in emails it was trying to work out the dispute “in the spirit of the Court‘s directive” but that Tesla and Musk’s attorneys had declined to provide requested documents, or have a “productive dialogue” with SEC staff.p

pIn June 2020, the SEC emailed Musk advising him it was the “SECs position that you violated” the settlement.p

pInstead of returning to court, however, the SEC said: “Going forward, we urge you to comply.”p

pSome SEC officials felt the settlement constrained Musk to some degree, which helped protect investors, said the four sources.p

pThe SEC also was uneasy about the risks of the most extreme step – scrapping the deal and starting litigation – given Musks resources, four of the sources said. p

pIn addition, Musk was and remains Tesla‘s largest shareholder, with roughly 16 of the stock as of late April, so it might be hard to argue that barring him as a public company director or officer was in shareholders’ interests or would loosen his grip on Tesla, two of the sources said.p

pIn March, Musk asked the court to void his settlement with the SEC.p

pThe new judge in the case, Liman, rejected Musks appeal in April. He found the billionaire was “bemoaning” the 2018 deal now that he felt Tesla was “invincible” [L2N2WP1WY]. A representative for the court said Liman would not comment.p

p

pp Additional reporting by Katanga Johnson in Washington, Hyunjoo Jin in San Francisco, and Jonathan Stempel, Jody Godoy and Gui Qing Koh in New York Edited by Paritosh Bansal, Sara Ledwith and Daniel Flynnp

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