Elon Musk welcomes you to Meltdown May. He is its mascot.
True, May only started today and Musk has been melting down all week. For instance, there was the unhinged ranting on his earnings call about the “fascist” stay-home
orders California implemented to slow the coronavirus spread. “We are a bit worried about not being able to resume production in the Bay Area, and that should be identified as a serious risk,” Musk began on the call. (Six Bay Area counties jointly extended the shelter-in-place orders affecting Tesla’s Fremont factory through May 31st, with only some minor relaxing of restrictions
.) Then he went on: “The expansion of shelter-in-place, or as we call it, forcibly imprisoning people in their homes, against all their constitutional rights, is, in my opinion, breaking people’s freedoms in ways that are horrible and wrong, and not why people came to America and built this country. What the fuck!”
More than a million people in the US have been confirmed to have COVID-19
, as of April 28. This is almost certainly an undercount, since these case numbers are artificially constrained by a lack of widespread testing for the illness.
So Musk spent March being wrong about COVID-19. Okay. That’s not illegal. But securities fraud is. Ladies and gentlemen, my fellow dirtbags, and everyone else: the SEC disrespector
has logged on.
It is not immediately obvious to me whether tweeting that Tesla is overpriced is securities fraud, because I am not a lawyer. So I called some. “I don’t see anything actionable here,” says Evelyn Cruz Sroufe, a partner at Perkins Coie
who specializes in corporate governance. For today’s tweets to qualify as securities fraud, the SEC or a plaintiff would have to show that Musk would have profited from a drop in the stock price by — for instance — having a short position or a put. “This looks instead to be just Musk sounding off,” she says in an email. “His use of ‘imo’ also puts his statement into the realm of personal opinion, for which there is latitude.”
Usually, when a company wants to convey to its shareholders that it may be overvalued, it does so by providing facts and risk factor, says Alma Angotti, a partner and co-head of the global investigations and compliance practice at Guidehouse
who’s previously worked in enforcement at the SEC, among other agencies. “You give facts so the market can analyze those facts,” she says. “There’s not a good reason for him to say he thinks it’s overvalued that I can think of, especially in an informal way.”
According to Angotti, market manipulation — that is, when someone takes steps to artificially affect the prices of a security — requires only intent. “He doesn’t need to benefit, though benefit is often how the government proves intent,” she says. And the SEC is already watching him because of his previous actions.
John Reed Stark, president of John Reed Stark Consulting
, who previously worked in SEC enforcement, doesn’t see it the same way as Agnotti. “Intent is a hard thing to prove,” Stark says. Greg Shill, a law professor at the University of Iowa
, told me bluntly that he doesn’t know if this counts as securities fraud or not. “It’s uncommon but not necessarily illegal for a public company CEO to essentially call on the market to mark down the value of his company’s stock,” Shill says.
The worst circumstances for Musk would be if he were buying shares of Tesla, or the company were participating in a buyback program, says Steve Diamond, a law professor at Santa Clara University. “I assume neither is the case,” Diamond says.
What about that SEC settlement and scrutiny, though? Perhaps you recall, in the depths of very recent history, that on August 7th, 2018, Musk tweeted
: “Am considering taking Tesla private at $420. Funding secured.” Funding was not, in fact, secured, the SEC investigation found — Musk had a few meetings with Saudi Arabia’s sovereign wealth fund but hadn’t discussed a go-private transaction. “In truth and in fact, Musk had not even discussed, much less confirmed, key deal terms, including price, with any potential funding source,” the SEC wrote in its complaint
Anyway, they settled, and then on February 19th, Musk tweeted a prediction for the number of Model 3s the company would make that wasn’t the same as Tesla’s official guidance. One of the provisions of the settlement was that Musk have his tweets about Tesla pre-approved by an in-house lawyer. And when the agency inquired whether this in-house lawyer had approved the February 19th tweets, the answer was that Musk had not had any
of his tweets about Tesla pre-approved. After several weeks of jockeying, the two parties came to an agreement
: Musk must have a company lawyer pre-approve tweets about Tesla’s financial health, sales, or delivery numbers.
Do the Meltdown May tweets violate that? The Wall Street Journal contacted Musk to ask if he was joking or if anyone had vetted his tweet before posting it. “No,” Musk replied in an email.
“If it was not vetted, he’s at risk of being hauled into court again by the SEC,” says Diamond. “The process was meant to catch these kinds of tweets before they went out. If he did it spontaneously, I think he’s gonna have an issue.”
Jay Dubow, a partner at Pepper Hamilton who focuses on white collar litigation, thinks the SEC is in a tough position. On the one hand, Musk is openly flouting their settlement if he didn’t get his tweets approved. On the other hand, if the SEC goes so far as to force Musk to dissociate himself from Tesla, that potentially hurts the shareholders who bought into the stock because they believe in him. “They’re going to have to react and do something,” Dubow says. “Because this was a clear violation of the order and I don’t know how they’re going to let that go.”
Shill also views it as a challenge to the agency. “It would be prudent for the SEC to request confirmation that the settlement agreement was complied with,” Shill told me. “Right now he’s arguably delivering to Tesla shareholders what they want: a really unrestrained, unfiltered CEO. When you buy Tesla, that’s arguably what you’re buying — but that’s not what the SEC settlement says.”
If it is a violation of the settlement agreement, Tesla is also implicated because the company was meant to control him, Angotti says. Tesla’s board of directors may be held responsible for Musk’s actions — a trend in corporate governance is making sure the board is accountable for compliance at an organization, she tells me. “If they can’t control the CEO, they’re not ensuring a very good culture of compliance at that company,” Angotti says. “They can say it all day but if they don’t enforce it, it doesn’t mean anything.”
Trying to hold Musk accountable may be awkward for the board, though. Tesla has dropped its directors and officers liability insurance, it said in an April 28th regulatory filing
. This policy keeps companies, board members, and executives from having to pay their own fees for defense, settlement or judgement when they face lawsuits. Instead, Musk will “personally provide coverage substantially equivalent to such a policy for a one-year period.”
One more thing: while I was working on this story, the Environmental Protection Agency got back to us
, because I guess everyone loves Meltdown May. So earlier this week, Musk said on Tesla’s earnings call
that the Tesla Model S Long Range should be the first electric vehicle to sport a 400-mile range. The EPA rating, a range of 391 miles, happened after someone left the keys in the vehicle and the door open overnight, depleting 2 percent of the vehicle’s battery, Musk said on the call.
“We can confirm that EPA tested the vehicle properly, the door was closed, and we are happy to discuss any technical issues with Tesla, as we do routinely with all automakers,” an EPA spokesperson said in a statement to The Verge.
Can’t wait to see what other government agencies decide to celebrate Meltdown May with us all. And if you fear being tangled up in its grips, one good way to avoid it is dead simple: never tweet.