Violating Settlement Agreement with SEC Does Not Bode Well for Elon Musk

By: Jonathan Huie

In response to Elon Musk’s tweets on February 19, 2019,[1] the Securities and Exchange Commission (hereinafter “SEC”) swiftly filed a motion asking a federal judge to hold Musk in contempt for violating a settlement agreement.[2]  The SEC previously charged Musk with securities fraud in September of 2018 for a series of misleading tweets regarding potentially taking Tesla private at $420 per share.[3]  The suit was quickly settled, but did not end well for the celebrity CEO – in addition to a $40 million penalty (to be paid by both Tesla and Musk) – Musk had to step down as Tesla’s chairman.[4]  Additionally, as a condition of the settlement, and most relevant to the SEC’s recent motion, Tesla had to implement additional policies to better control Musk’s communications. [5]  Practically speaking, this meant Musk had to obtain pre-approval before tweeting.[6]  This particular episode with Musk is a teaching moment for anyone dealing with securities – the SEC enforces settlements quickly and aggressively.

The SEC is empowered to take measures to protect public interests and investors pursuant to Section 10(b) of the Securities Exchange Act of 1934.[7]  Specifically, under this statutory provision, the SEC promulgated Rule 10b-5, which expressly prohibits fraud or materially false statements or omissions “in connection with the purchase or sale of any security.”[8]  According to the former SEC Chair Harvey Pitt, this prohibition has been interpreted to extend to statements made on Twitter.[9] 

In 2018, the SEC charged Musk with securities fraud when he floated the idea of taking Tesla private at $420 per share, but in reality had not discussed any specific deal terms with financing partners.[10]  His tweet caused market disruption – namely, causing Tesla’s stock price to surge six percent on the same day he made the statement.[11]  Musk later settled with the SEC with heavy consequence.[12]  However, on February 19, 2019, at around 7:15PM EST, Musk tweeted to his twenty-four million followers: “Tesla made 0 cars in 2011, but will make around 500k in 2019.”[13]  Later that night, at 11:41 PM EST, Musk tweeted a correction: “Meant to say annualized production rate at end of 2019  probably around 500k, ie 10k cars/week. Deliveries for year still estimated to be about 400k.”[14]  As it turns out, Musk’s counsel confirmed that the earlier tweet was not vetted by counsel and later worked with Musk to draft the corrected tweet.[15]  The SEC now asserts that such “deliberate indifference to compliance” with the settlement is grounds for holding Musk in contempt.[16]

While Musk now must contend with the consequences of violating his settlement agreement with the SEC, this unfolding drama demonstrates that the SEC strictly enforces adherence.  Anyone handling securities is well advised to ensure that they follow through with any settlement obligations with the SEC.  Failure to do so results in clear consequences.   


[1] See Elon Tusk [sic] (@elonmusk), Twitter (Feb. 19, 2019, 7:15 PM), https://twitter.com/elonmusk/status/1098013283372589056; see also Elon Tusk [sic] (@elonmusk), Twitter (Feb. 19, 2019, 11:41 PM), https://twitter.com/elonmusk/status/1098080063801585664.

[2] Mot. and Mem. of Law In Support of an Order to Show Cause, at 1, United States Sec. and Exch. Comm’n v. Elon Musk, No. 1:18-cv-8865-AJN-GWG (S.D.N.Y.).

[3] Press Release, SEC 2018-219, Elon Musk Charged With Securities Fraud for Misleading Tweets (Sept. 27, 2018), https://www.sec.gov/news/press-release/2018-219.

[4] See John Fingas, Elon Musk Settles with SEC over Fraud Charge, Engadget (Aug. 29, 2018), https://www.engadget.com/2018/09/29/elon-musk-settles-with-sec/.

[5] Press Release, SEC 2018-226, Elon Musk Settles SEC Fraud Charges; Tesla Charged With and Resolves Securities Law Charge (Sept. 27, 2018), https://www.sec.gov/news/press-release/2018-226.

[6] See supra note 2, at 1.

[7] 15 U.S.C. § 78(j) (2016).

[8] Employment of manipulative and deceptive devices, 17 C.F.R. § 240.10b-5 (2019).

[9] See CNBC (@CNBC), Twitter (Aug. 7, 2018, 12:49 PM), https://twitter.com/CNBC/status/1026918153467699200 (last visited Mar. 3, 2019).

[10] See supra note 3.

[11] Id.

[12] See supra note 5.

[13] Supra Musk, note 1.

[14] Supra Musk, note 1.

[15] See supra note 2, at 5-6.

[16] See supra note 2, at 12.

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