Opinion: The SEC alone can’t control billionaire CEOs like Elon Musk

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It is well known that Musk has a tense history with the Securities and Exchange Commission. In 2018, the SEC alleged that Musk made “false and misleading” statements about Tesla’s privatization. Among other things, Musk agreed in a settlement with the SEC to pay a $20 million fine and step down as Tesla chairman for three years. But the settlement doesn’t appear to have deterred Musk from flouting the rules again.
Earlier this year, Musk waited 21 days to publicly disclose that he had acquired 9.2% of Twitter shares when, under SEC rules, investors are generally required to make such disclosures within 10 days. following the purchase of 5% or more of the shares of a public company. Such disclosure would have alerted other Twitter shareholders that a large block of shares was being accumulated, which would likely have boosted the stock price. Thus, the delay saved Musk the additional tens of millions of dollars he would have paid to purchase the additional shares he had acquired had he made an earlier announcement.

Musk’s policing puts the SEC in a difficult position. Any financial sanctions he is able to impose are likely to have little effect on someone as wealthy as Musk. And, given his importance to Tesla, further sanctions could potentially hurt shareholders, employees and others who have little or no say in who or how Musk chooses to choose. comply with securities laws.

Indeed, Musk’s shadow extends far beyond his companies and products. It affects thousands of others whose portfolios rise and fall based on his tweets (remember the Tesla privatization tweet that led to the 2018 SEC settlement) and who take his statements as cues to buy and sell stocks and other financial assets. In this case, Musk’s failure to comply with basic regulations looks less like entrepreneurship and more like mere recidivism and perhaps disrespect for the SEC.

One possible response from the SEC is to increase the size of the financial sanctions it imposes. But that may require a change in securities laws, and even then, in light of Musk’s net worth, no reasonable penalty based on his conduct to date is likely to be significant enough for the deter.

Preventing Musk from holding corporate office may be another response, which some call the “nuclear” option. The SEC may have been reluctant so far to pursue this option because of Musk’s value to Tesla and the likelihood of it hurting Tesla shareholders and others. Still, at some point, the SEC is likely to conclude that Musk’s importance to Tesla and its shareholders is no longer a reason not to bar him from office. Rockstar CEOs are a common feature of Silicon Valley companies, and their tweets and public persona attract significant attention, inflate stock prices and benefit shareholders. If a CEO crosses the line, and does so continuously, the SEC may think that an enforcement action should no longer come as a surprise to investors and removing him from his role as CEO should be the cost borne by shareholders for the share price increases they have enjoyed so far. Musk may have already crossed that line.
A third possibility is criminal prosecution. But the bar for successful prosecutions is considerably higher than for civil penalties. Nonetheless, the SEC’s investigation of Musk over his Twitter disclosures could be a first step in determining whether those disclosures included willful inaccuracies, which could be a predicate of criminal liability. Whether or not a criminal case is filed, the mere prospect of jail time — coupled with the nuclear option — may be the only way the SEC can stop Musk from breaking the rules.

That said, one of the most effective answers lies with Tesla himself. Musk’s failings must be a headache for Tesla’s independent directors. His actions potentially call into question the integrity of Tesla’s management, including its board of directors. As fiduciaries, independent directors must urge the CEO to comply with all applicable laws and remove him if he is unable to do so. Failure to address this issue raises a fundamental concern about the board’s ability to manage Tesla, and if the board also fails to clearly outline this risk in the company’s public disclosures, Tesla and the board should be held directly accountable.

More than financial or other penalties, the real remedy lies with Tesla’s directors, who should focus on what’s best for the company and its shareholders. Given the value Musk brings to Tesla, calling the CEO to task for failing to comply with federal securities laws should be high on the list.

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