The Case of Elon Musk: Securities Fraud and Being Careful with Your Tweets
Last year, Elon Musk, the CEO of Tesla, Inc., got himself in hot water with the Securities and Exchange Commission (“SEC”) about some statements he made and some tweets he sent. The SEC regulates securities in the US and is the agency assigned the task by Congress of regulating and punishing false and fraudulent information that affects stock prices. As part of the settlement of that 2018 investigation, Musk entered into a settlement agreement during which he agreed to be more careful with his tweeting and his public statements. In particular, he agreed that his tweets would be reviewed by an internal committee at Tesla.
It seems that Musk did not follow the new procedure as he is back in the news. Musk recently sent out a series of tweets on Twitter that have brought him back into court. See report here.
On February 19, 2019, Musk tweeted out:
“Tesla made 0 cars in 2011, but will make around 500k in 2019.”
As it turns out, that tweet was false. Musk corrected the tweet about four and a half hours later with this tweet:
“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.”
Any corporate CEO must be extremely careful about public statements like these because shareholders and potential investors use this sort of information in making decisions about investments. Was the information that Tesla would make “around 500k” automobiles a surprise? What that “news” to investors? Did that information prompt investors to buy or sell Tesla stock? Potentially, Musk committed securities fraud with his first tweet. Securities fraud is generally defined as a false statement or omission about a company or the value of its stock which causes others to make financial decisions — buying or selling stock — based on the false information. Usually, intent or reckless disregard is required for the statements to constitute “fraud.” Securities fraud is punishable as a crime and often leads to massive civil lawsuits. So, Musk’s false tweet can be bad for Musk and for Tesla.
The first legal lesson is be careful that your tweets are factually accurate, particularly if you are a corporate CEO. Note that the legal dangers are not just for big corporations; the legal risks are just as high for small corporations and businesses. Likewise, false statements and omissions are not just a concern for big publicly-held corporations. With small corporations and private placements, false disclosures and omissions must be studiously avoided. A San Diego corporate attorney with extensive experience in drafting and reviewing private placement memorandums should be retained.
The second legal lesson is that it is probably wise to not tweet about corporate performance at all. The SEC and state regulators require annual and quarterly reporting. Those reports are carefully and thoroughly vetted for accuracy by people in the company and by corporate attorneys. Those reports are the appropriate place for news and statements about performance; not off-the-cuff-send-it-quick tweets.
The Musk case will be interesting. Musk is arguing that, despite his inaccurate tweet, he did comply with the 2018 consent settlement since he has reduced the number and frequency of his tweeting. He also is claiming that his First Amendment free speech rights are being infringed. Neither argument is likely to succeed, particularly the second argument. No one has a free speech right to make false statements that are governed by the securities laws.
Contact San Diego Corporate Law
For more information, contact Michael Leonard, Esq. of San Diego Corporate Law. Mr. Leonard has the experience and dedication to provide all the legal services needed for private offerings, the sale/purchase of a business, and for mergers and acquisitions. Contact Mr. Leonard via email or by calling (858) 483-9200. Like us on Facebook.