Earlier this month, we reported that $40 million in penalties seemed ready for distribution to Tesla investors as a result of an US Securities and Exchange Commission (SEC) settlement. On Friday, a US federal judge authorized release of the Tesla funds, which resulted from 2018 civil settlements with Tesla, Inc. and its Chief Executive Officer Elon Musk.
US District Judge Alison Nathan in Manhattan approved the shareholder payment plan. Musk’s attorneys had argued that the SEC had neglected its court-ordered duty to transfer the Tesla funds to investors by waiting nearly 3-1/2 years.
[Full disclosure: I own some Tesla stock. Nothing in this article is investment advice of any kind.]
A confluence of events spurred the original SEC penalty.
In 2018, the SEC decided against Musk, saying he defrauded investors by tweeting that he had “funding secured” to take Tesla private. Musk stepped down as Tesla’s chairman as part of the resolution. The trigger was contained within the suggestion that he could take Tesla private at $420 per share. The SEC said Musk hadn’t discussed deal terms or price with any potential financing partners, and his tweets caused Tesla’s stock price to jump by over 6%, leading to significant market disruption.
Additionally, in November 2021, Musk polled his Twitter audience about whether or not he should sell 10% of his Tesla stock (TSLA). The SEC is investigating whether Tesla CEO Elon Musk and his brother Kimbal Musk broke insider trading rules, as one day earlier, Kimbal sold shares worth $108 million.
Some saw the survey as a crowdsourcing invitation, but others decried it as a manipulation of stock valuation. Quickly afterward, the stock value plunged about $60 million. The survey coincided with Musk’s need to pay extensive tax bills on stock options he held. Analysts have estimated his tax obligation at $10 billion to $15 billion.
At the time, Musk owned about 17% of the 1 billion outstanding Tesla shares, according to CBS News. Since then, Musk has sold more than 15 million Tesla shares worth about $16.4 billion.
Questions arose as to whether the CEO had violated his original settlement with the SEC, which determined that Tesla failed to provide disclosure controls and procedures relating to Musk’s tweets.
How Did the SEC Invest the Tesla Funds It Held?
The SEC explained that the payouts would go to investors who lost money in Tesla stock in the 1½ days after Musk’s tweet.
On August 7, 2018, Musk uttered the infamous “funding secured” tweet. Tesla stock closing value was listed at $75.91, having had a volume of 154,379,000.
By August 9, 2018, the closing value was $70.49, with 85,919,000 shared traded that day. The stock tumbled about 16% over the period, with the lowest point of the period occurring a month later at $52.65 — or a 30% loss.
The available Tesla funds since the SEC fines have grown to about $41.2 million, including interest.
COVID-19 hit the US. In response, the Federal Reserve dropped the federal funds rate to between 0–0.25%. This caused other short-term and long-term rates to drop.
On August 11, 2020, Tesla announced that its Board of Directors has approved and declared a 5-for-1 split of Tesla’s common stock in the form of a stock dividend to make stock ownership more accessible to employees and investors. Each stockholder of record on August 21, 2020 received a dividend of 4 additional shares of common stock for each then-held share, with the stock split-adjusted basis on August 31, 2020.
On Friday, March 25, 2022, Tesla stock was valued at close at $1,010.64. Let’s have some fun. If the SEC had been permitted to hold the Tesla funds in Tesla stock (not allowed by federal rules and regulations), the financial gain would’ve have been very different. You do the math. Would Tesla shareholders have been better off having their investment — even at a loss post-“funding secured” tweet — stay with Tesla?
The Legal Proceedings Continue
Musk hasn’t given up his efforts to throw out his 2018 legal agreement with the SEC. Citing freedom of speech protections, he claims that the SEC requirement for a Tesla attorney to pre-approve any of his tweets that could be material to investors is illegal. Reuters reports that the SEC opposes Musk’s request.
But in the newest court filing, Musk claims that “funding was secured, and there was investor support.” He says that he felt pressure to settle the issue with the SEC or risk Tesla’s financial security. “Despite this, the SEC’s unrelenting regulatory pressure, combined with the attendant collateral consequence of the SEC’s complaint against me, caused a scenario in which I was forced to sign the consent decree in 2018,” Musk said. “Tesla was a less mature company, and the SEC’s action stood to jeopardize the company’s financing.”
“In 2018, to settle the SEC’s action against him, Musk agreed to comply with Tesla’s mandatory procedures requiring pre-approval of certain of his Tesla-related public communications,” countered SEC regulator Melissa Armstrong in a filing in the federal court of Manhattan. “Musk cannot now cast off the Amended Final Judgment simply because he has found complying with Tesla’s procedures to be less convenient than he had hoped, or because he wishes the SEC would not investigate whether Tesla’s disclosure controls and procedures are actually being maintained and followed.”
“Musk complains about ‘the sheer number of demands’ by the SEC from 2018 to the present, which he characterizes as harassment,” Armstrong explained. “But Musk’s own chronology of alleged demands is both underwhelming and reflects legitimate inquiries as to new potentially violative conduct by Tesla and Musk.” The narrative describes Musk’s motion to quash a subpoena requesting records concerning his Twitter poll last November over whether to sell some of his Tesla stock as “substantively meritless.”
SEC regulators continue to insist they have legal authority to subpoena Tesla and CEO Elon Musk about his tweets. “When it comes to civil settlements, a deal is a deal, absent far more compelling circumstances than are here presented,” the SEC affirmed.
The SEC is asking Judge Alison Nathan to deny Musk’s motion to throw out part of the agency’s subpoena and get rid of the 2018 agreement. Musk’s attorney, Alex Spiro, has asked for verbal arguments in the case.
The cases are SEC v Musk, U.S. District Court, Southern District of New York, No. 18-08865; and SEC v Tesla Inc in the same court, No. 18-08947.
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