Last week we posted a blog covering the breaking news that the SEC was suing Elon Musk for making false and/or misleading statements in tweets made from Mr. Musk’s verified Twitter account on August 7, 2018 stating that funding had been secured to take Tesla, Inc. private at $420 per share.
In a fairly stunning turn of events, on September 29, 2018, the SEC announced that Mr. Musk had agreed to settle the securities fraud charge brought by the SEC. The consequences of the settlement, for Tesla and Elon Musk are sweeping and include the following:
The removal of Elon Musk as Chairman of the board of directors of Tesla with the understanding that Elon Musk will not be eligible to be re-elected as Chairman for three years;
Tesla will be required to appoint two new independent directors to its board of directors;
Tesla will be required to establish a new committee consisting of independent directors and establish additional controls and procedures to oversee Elon Musk’s communications; and
Each of Elon Musk and Tesla will be required to pay a $20 million penalty which will be distributed to harmed investors, as approved by the court.
Those who have followed Elon Musk during his ascent as the founder and CEO of Tesla know that he is not one to go down quietly. Thus, the settlement announced by the SEC was quite astonishing and speaks more to the SEC’s enforcement powers than to Elon Musk’s ability to resist perceived injustice.
What can the SEC do to anyone it deems guilty of violating SEC rules for SEC reporting companies?
The SEC’s Division of Enforcement is charged with investigating possible violations of securities laws, recommending SEC action (either in federal or administrative court), and negotiating settlements on the SEC’s behalf. Although the SEC only can enforce civil actions, it works closely with criminal law enforcement agencies (such as the Department of Justice) to investigate and bring criminal charges due to criminal conduct. Once the SEC has conducted an investigation and brings a civil action, it may request an injunction if it feels future securities law violations are likely. The SEC may also request recovery of any ill-gotten profits that resulted from violations of securities laws such as insider trading. The SEC can also request from the courts an appointment of a receiver or special counsel to pursue claims against management of SEC reporting companies who violate securities laws. The SEC may levy fines against anyone found guilty of violating securities laws. Finally, in cases where criminal laws were violated, the SEC can request the Department of Justice to bring criminal action which could result in imprisonment.
On November 28, 2017, the Office of Chief Counsel of the SEC released an SEC Enforcement Manual which serves as a reference for the SEC’s Division of Enforcement in the investigation of potential violations of federal securities laws. Although only intended to provide guidance to staff of the Division of Enforcement, it can serve as a helpful resource for anyone who would like an inside look at SEC enforcement policies and procedures.
The SEC has a reputation for not bringing a lawsuit unless the probability of a successful outcome is high. Each year, the SEC publishes an annual report of its enforcement. Combined with broad enforcement powers, a reputation for high rates of success once an action is brought, and the SEC’s successful enforcement results just from 2017 alone, it’s no wonder Elon Musk settled so quickly.
Members of management of SEC reporting companies need to ensure they are aware of rules for SEC reporting companies, including their personal obligations as members of management, so they can ensure they will not violate SEC rules and be subject to SEC action. These rules can be complex and require someone with expertise in SEC reporting. Business Legal Advisors, LLC has over seven years of experience representing companies subject to SEC reporting rules and can assist companies with complying with securities laws and offer. Contact us for a free consultation today.