In SEC vs. Elon Musk, a question of when tweets matter

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  • Thursday, 18 Apr 2019

ELON Musk agreed with the government last year to have Tesla Inc. lawyers preapprove tweets that “reasonably could contain” material information about the electric car maker’s business. Those words are now at the center of court-ordered talks between the two parties over his 2018 civil-fraud settlement.

The outcome of the negotiations, which face a Thursday deadline, could alter the unique punishment Mr. Musk agreed to in the settlement with the Securities and Exchange Commission, which had alleged the Tesla chief executive misled investors with tweets saying he had funding in place to take the car maker private.

“They want the remedy to work in the future, that is why they might have to address that language,” said Andrew Vollmer, a law professor at the University of Virginia. “I hope both will be trying to find a standard of conduct that Musk feels he can meet and that the SEC deems to be sufficiently protective of the market.”

An SEC spokesman declined to comment on the negotiations. A Tesla spokesman declined to comment.

Under the settlement, Mr. Musk needed permission from company lawyers for tweets and other communications that could affect buying and selling of the auto maker’s stock. The SEC filed a contempt motion after Mr. Musk tweeted without permission in mid-February about expected vehicle deliveries. He hours later corrected the tweet with the help of a lawyer, prompting the SEC to initiate the contempt-of-court proceedings.

The SEC alleged he “blew past” the requirements in other instances. Mr. Musk has maintained his Feb. 16 tweet and others didn’t violate the terms of his settlement.

Rather than rule on the contempt request, Judge Alison Nathan at a hearing this month ordered the two sides to engage in a new round of talks. In particular, she said she found the preapproval language hard to pin down.

Legal experts say judges and other observers should be concerned with a bigger problem: a government-imposed standard so broad it could restrict free speech.

“The original settlement is a dangerous precedent—having the U.S. government order an individual to have prospective public statements reviewed in advance and be subject to disapproval,” said Mr. Vollmer, who was previously the SEC’s deputy general counsel.

Mr. Musk has at times sometimes provoked the regulator. He has accused the SEC of taking the side of short sellers. After the SEC accused him of violating his settlement, he suggested its oversight was “broken.” The tweet has since been deleted.

Others say the policy was narrow enough to address problems with Mr. Musk’s use of Twitter . “Those steps were crucial to the settlement—the idea we would have future oversight to prevent future problems from occurring,” said Robert Jackson, a Democratic SEC commissioner.

Information is material if it likely would affect an investment decision, and has been defined by U.S. Supreme Court case law. But the words “reasonably could contain” appears to be novel.

The SEC says the extra words make the standard broader than materiality, because the agency wanted Mr. Musk to be cautious about seeking preapproval. Cheryl Crumpton, the SEC lawyer arguing before Judge Nathan, said it was probably the first time the SEC had ever used the language in an enforcement order.

Ms. Crumpton said the only tweets exempt from the oversight policy would be statements that are “obviously immaterial,” such as interactions Mr. Musk has on Twitter with individual Tesla owners about their cars.

Mr. Musk’s lawyers say the wording is too vague to be the basis for any contempt finding, and make it hard for the Tesla CEO and his executive staff to interpret how to comply on a day-to-day basis.

For Mr. Musk, the court’s focus on the policy’s ambiguity is a win. As long as he and the SEC can resolve their latest dispute, Judge Nathan won’t need to rule on whether he should be held in contempt for violating the 2018 order.

Mr. Musk and Tesla have been feuding with the SEC since the auto executive tweeted in August that he might take the company private and had “funding secured” to do so. In September, Mr. Musk agreed to settle the SEC’s enforcement investigation over the tweet, agreed to pay a $20 million fine and relinquish his chairman title. He also agreed to the policy of having company officials oversee and preapprove certain tweets.

The SEC’s enforcement cases rarely involve forcing companies to undertake such particular corporate-governance steps. In another unusual example, the SEC last year obtained a settlement with Theranos Inc. founder Elizabeth Holmes that stripped her of voting control over the company.

The agency can seek to bar an executive from running a public company. But in Tesla’s case, that was thought to be bad medicine, because shareholders would suffer if the company collapsed without Mr. Musk’s vision and leadership steering it. - WSJ

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