Will Musk be fined for saying on Twitter that “Tesla’s stock price is too high” to cause a big drop?

In recent days, Us tech tycoon Elon Musk has tweeted a number of tweets about Tesla and the new coronavirus outbreak, pushing the company’s share price down. So are these tweets against the law? Legal experts are divided, but the move is undoubtedly a violation of the settlement with the Securities and Exchange Commission.

On Friday, local time, Musk sent a message saying he would sell “all physical assets” and then saying “Tesla’s share price is too high”, sending the company’s shares down. In a conference call for the latest earnings report, Musk blasted California’s “in-place isolation” ban to slow the spread of the new corona virus, saying the failure to resume production should be seen as a major risk to Tesla and a violation of the constitutional rights of U.S. citizens. It’s unclear whether the tweet that Tesla’s stock price is too high is a securities fraud, and legal experts disagree.

“I don’t see any signs of breaking the law,” said Evelyn Cruz Sroufe, a partner at Perkins Coie, a law firm that specializes in corporate governance. “To charge Musk with securities fraud, the SEC or other plaintiffs must prove that Musk will profit from a share price decline by holding short positions or put options.” “On the contrary, it seems like Musk is bragging!” Slough said by email. He used the phrase ‘in my opinion’ in his tweet, only to express his personal opinion, so there was room for it. “

‘Usually, when a company wants to convey information to shareholders that its stock may be overvalued, it does so by providing facts and risk factors, ‘ says Alma Angoti, partner at Guidehouse and co-head of global research and compliance. “You give the facts so the market can analyze them,” said Angleti, who previously worked in law enforcement at agencies such as the SEC. Musk did not give a good reason why the share price was too high, and his comments were made informally. “

In Mr Angotti’s view, market manipulation (i.e. someone taking steps to artificially influence the price of securities) requires specific intent, and “Musk does not need to benefit from it, although it is often the way the government proves its intentions”. Because of Musk’s previous behavior, the SEC is already watching him.

John Reed Stark, president of John Reed Stark, a consulting firm that previously worked for SEC law enforcement, disagrees with Agnotti. “Musk’s intentions are hard to prove,” Stark said. “

Greg Hill, a law professor at the University of Iowa, said bluntly that he didn’t know it was a securities fraud. “It’s not unusual for a CEO of a public company to call on the market to reduce the value of its stock, but it’s not necessarily illegal,” Hill said. “

Steve Diamond, a law professor at Santa Clara University, said the worst-case scenario for Musk was that he was buying shares in Tesla or that the company was involved in a share buyback program. But he doesn’t think Musk is involved in any of these at the moment.

However, this may be related to the SEC’s settlement and review. On August 7, 2018, Musk tweeted: “I’m considering privatizing Tesla for $420. The money is in place! However, the SEC investigation found that, in fact, the funds were not in place. Although Musk held several meetings with the Saudi sovereign wealth fund, no privatization deals were discussed. “In fact, Musk has not even discussed key terms, including price, with any potential source of funding, let alone confirmed that the funds are in place,” the SEC wrote in the indictment. “

In any case, Musk reached a settlement with the SEC. But on February 19th he tweeted that Tesla would produce the Model3, which was different from Tesla’s official expectations. The terms of the settlement state that Musk’s tweets about Tesla should be approved by an in-house lawyer in advance. When the agency asked its in-house lawyers if they approved the February 19 tweet, the answer was that none of Musk’s tweets about Tesla had been pre-approved. After weeks of fighting, a new agreement was reached: Musk’s tweets about Tesla’s financial health, sales or delivery of figures must be pre-approved by the company’s lawyers.

So, did Musk’s latest tweet violate the agreement? U.S. media recently contacted Musk to ask if he was joking or if someone censored his tweets before they posted them. Musk responded by email saying “no.”

“If it is not reviewed, Musk risks being taken to court again by the SEC,” Diamond said. The purpose of this process is to capture such tweets before they are posted. If Musk is free to tweet, I think he’ll be in trouble. “

Jay Dubow, a partner at Pepper Hamilton’s law firm, which specializes in white-collar litigation, says the SEC is in a tough spot. On the one hand, if Musk’s tweets aren’t approved by lawyers, he’s publicly flouting the settlement with the SEC. On the other hand, if the SEC forces Musk to draw a line under Tesla, it could hurt shareholders who bought Tesla shares because they trusted him. “The SEC will have to react or do something,” Dubo said. I don’t know how they acted because it was a clear violation of the settlement agreement. “

Hill also sees Musk’s tweet as a challenge to the SEC, saying, “It would be prudent for the SEC to ask for confirmation that the settlement agreement is being complied with.” For now, Musk is arguably offering Tesla shareholders what they want: a truly uninhibited, undisguised chief executive. When you buy Tesla stock, you can say that’s what you’re buying. But the SEC’s settlement has more restrictions. “

Mr. Angotti said Tesla would be implicated if Mr. Musk’s tweets violated the settlement because the company had been asked to rein in Mr. Musk’s remarks. She said Tesla’s board of directors may be responsible for Musk’s actions. “If they can’t control the CEO, they can’t make sure the company has a very good compliance culture,” Angotti explains. If they don’t implement the agreement, it doesn’t make any sense. “

But trying to hold Mr Musk accountable could be embarrassing for the board. Tesla said in its Regulatory Filing on April 28 th that it had waived liability insurance for directors and senior managers. This policy eliminates the need for companies, board members, and executives to pay their own defense, settlement, or judgment costs in the face of litigation. Instead, Musk will “personally provide insurance that is essentially equivalent to such a one-year policy”.