Tesla CEO Elon Musk and the company itself may have little to fear from U.S. regulators according to legal analysts, despite Musk’s failure so far to back up his early August tweet saying he had “funding secured” for his plan to take the electric car maker private.
The U.S. Securities and Exchange Commission under President Donald Trump has moved away from the practice of leveling huge monetary penalties against corporations.
That enforcement trend, according to four experts, could benefit Tesla as the company faces an SEC investigation of CEO Elon Musk’s Aug. 7 tweet about “secured” financing for a private buyout of the company.
“I expect Tesla to pay zero,” said Georgetown law professor Urska Velikonja, who is engaged in an ongoing analysis of SEC enforcement trends against companies and individuals.
SEC Chair Jay Clayton has emphasized accountability for individual wrongdoers, rather than holding corporations responsible for employees’ misconduct.
Even if the commission ultimately concludes Musk's tweet was unfounded, the Tesla CEO's potential penalty would probably be less than $200,000, according to two securities law professors and a defense lawyer who tracks SEC enforcement at the SEC Actions blog.
Tesla declined to comment on the experts’ assessment of potential exposure to the SEC.
Lawyers from Wachtell Lipton Rosen & Katz, which represents Tesla CEO Musk, did not immediately respond to an email request for comment. The SEC declined to comment.
SHARP DROP IN PENALTIES
Last year, Georgetown's Velikonja documented a sharp drop in total penalties assessed by the commission after Clayton took over as chairman. This year – Clayton’s first full year as SEC chair – the decline is even more notable.
According to Velikonja, the agency has assessed about $592 million in monetary penalties in cases settled in the first 10.5 months of fiscal year 2018, which ends next month. Those are the lowest aggregated SEC penalties in at least a decade, Velikonja said. The previous low, according to the Georgetown professor, was $656 million over the same 10.5 month-period in fiscal year 2012.
The drop in penalties reflects the SEC’s pivot away from the quasi-prosecutorial role it adopted after big financial frauds in the 2000s.
“The Clayton administration is trying to bring the agency back to its roots in civil enforcement,” said securities defense lawyer Stephen Crimmins of Murphy & McGonigle. “The focus is on putting in place structural changes” to avert future misconduct, according to Crimmins.
The commission has also emphasized penalizing individual wrongdoers rather than corporations, on the theory that shareholders should not bear the cost of their own deception. As a company, said Michigan law professor Adam Pritchard, Tesla issued a “measured and responsible” statement after Musk tweeted his go-private plan.
“Tesla should not and won’t be sanctioned,” Pritchard said.
What about Musk himself?
The full story behind Musk’s tweet about the financing of a buyout is not publicly known, though Tesla on Monday posted a blog entry in which the CEO said he was referring to funding assurances from the Saudi Arabian sovereign wealth fund.
Defense lawyer Crimmins said SEC investigators will likely look for documentary evidence and testimony to back or refute Musk’s assertion that he reasonably believed the Saudi fund would finance his contemplated buyout.
SEC investigations can take years but Crimmins said this inquiry seems straightforward and could be concluded quickly.
Thomas Gorman, a securities defense lawyer at Dorsey & Whitney who authors a blog about SEC enforcement, said the facts that have already emerged make it unlikely the SEC will bring a case against Musk.
“NOT THE STUFF OF GOVERNMENT ACTION”
“While one might select better language if the sentence was wordsmithed, that (tweet) is not the stuff of a government enforcement action,” Gorman said.
If the SEC does conclude Musk’s tweet was misleading, three experts said, his penalty will probably be a relatively paltry amount - less than $200,000.
That amount could be higher, according to Crimmins, if the commission determines Musk’s tweet was fraudulent, not merely negligent.
The SEC has so far targeted 63 individuals for reporting violations in fiscal year 2018, according to Velikonja’s analysis. They have paid on average a $75,000 penalty.
Federal regulations permit the SEC to seek up to $160,000 from individuals for each securities violation. The SEC has in the past devised ways to multiply violations to increase penalties but defense lawyer Gorman and law professors Velikonja and Pritchard said the commission would probably count Musk’s tweet as a single violation if it determined the assertion of secure funding to have been misleading.
“The value of the case for the SEC is sending a message,” said Velikonja. “This would be the SEC saying, ‘We’re going to go after the biggest guys. We’re not afraid of Elon Musk.’”
The commission can also seek injunctions. The most extreme punishment the SEC can impose is a prohibition on serving as an officer or director of a public company. Experts do not expect such a draconian penalty in the Tesla case, especially, according to Crimmins, because Musk is so integral to the company’s prospects.
But if the commission finds a violation, the SEC could enjoin Musk and Tesla from future misleading communications. That sort of prohibition, said Michigan prof Pritchard, would mean more severe consequences for subsequent breaches of securities law.
The SEC can even insist that Musk and Tesla agree to vet future market-moving tweets with securities lawyers before they’re posted, according to Crimmins.
“That would be an elegant solution,” he said.