* Judge's remarks in 2019 knocked SEC's confidence court
* Core issue - what is "material" information - was left to
and Tesla to decide
* As some tweets went unvetted, SEC opted to urge Musk to
rather than go to court
* SEC was also uneasy about risk of starting litigation
WASHINGTON, May 24 (Reuters) - U.S. securities regulators
have pulled their punches in dealings with Elon Musk largely
because an April 2019 court hearing on a statement he made about
Tesla on Twitter didn't go their way, according to four sources
with knowledge of the matter.
The U.S. Securities and Exchange Commission (SEC) asked the
court to hold the billionaire in contempt, saying a tweet by the
Tesla Inc. CEO - which forecast production at the
carmaker - violated a court agreement Musk signed the previous
year to have some of his communications vetted by a lawyer.
By trying to rein in his comments, the SEC was veering into
relatively uncharted territory. SEC rules require that public
companies and their executives disclose accurate information
that may be material to investors via channels that investors
know to monitor. It doesn't usually specify how companies should
But the 2019 remarks by judge Alison Nathan who found the
terms of the agreement between Musk and the SEC to be "soft" and
urged them to reach an understanding knocked confidence among
officials overseeing the case that the courts would support them
if they attempted to prosecute his activity on Twitter,
the four sources said.
Interviews with individuals familiar with the situation as
well as a review of court documents, SEC and Tesla emails
obtained by the media through a public records request showed
that in the wake of Nathan's comments, SEC officials opted to
urge Musk to comply with the agreement, rather than pursuing
enforcement through the courts.
Spokespeople for the SEC declined to comment on its
enforcement dealings with Musk. Spokespeople for Tesla and
Twitter and a representative for Judge Nathan did not respond to
requests for comment for this story.
Musk's attorney, Alex Spiro, did not respond to requests for
comment on the SEC's deliberations, but court records and Tesla
emails show he and other lawyers for the Tesla boss dispute that
Musk's tweets violated the agreement.
With Musk's use of social media under scrutiny after he bid
to purchase Twitter, the interviews and documents shed light on
the regulator's view of its relationship with the billionaire,
now the world's richest man. He has 95 million Twitter followers
and called the SEC "bastards" in an interview in April
The sources said they are not familiar with the current
thinking of the SEC, which has been under new leadership since
President Joe Biden took office in January 2021. Under new
Chair, Gary Gensler, the agency has pledged to crack down on
repeated misconduct and push for tougher penalties.
It recently opened more investigations into Musk. Among
them, a probe into two of his November tweets asking if he
should sell shares in Tesla, court documents regarding Musk's
settlement with the SEC show.
Nathan was promoted to the New York-based 2nd U.S. Circuit
Court of Appeals in March. A newly assigned judge in the case,
Lewis Liman, ruled in the SEC's favor last month.
The SEC's fight with Musk started on Aug. 7, 2018, when the
CEO, whose company had been telling investors to monitor his
Twitter feed since 2013, sent Tesla shares soaring by tweeting
"funding secured" to take the publicly listed company private.
The SEC opened an investigation: It found Musk at the time had
not even discussed key deal terms with any potential funding
source, SEC court filings later showed.
Musk says funding was secured.
In September 2018, agency officials told Musk he had a
choice: Fight stiff charges over the tweet in court or settle
and suffer lesser penalties, one of the sources said. Tesla
shares were around $300 compared with more than $630 today after
a five-for-one stock split in 2020. Musk agreed to settle.
During the April 4, 2019 hearing, in comments to the SEC
about the settlement's language on what tweets should be vetted,
Nathan said, "This case is unusual." Her exploration of the
terms of the settlement has not previously been reported in
The settlement required Tesla to establish a process for
overseeing all of Musk's communications about the company,
including hiring or designating an "experienced securities
lawyer" to vet social media posts. Musk also agreed that he
would certify in writing that he had complied, and provide
proof; and to step down as Tesla chair while remaining CEO. No
end-date was set for the arrangement.
The vetting process required that Musk seek pre-approval for
written communications including tweets that contained "or
reasonably could contain" information material to Tesla
But the decision on whether they contained material
information was left to Musk and Tesla.
Less than six months later, on Feb. 19, 2019, Musk tweeted
that Tesla would make "around 500k" cars that year. If unvetted,
this was arguably a violation of the settlement because
production figures can be market sensitive information, SEC
officials said in court filings.
The SEC staff asked Tesla whether Musk had submitted the
tweet for vetting. He had not, Tesla attorneys told the SEC.
The SEC said in the court complaint that when it looked into the
Feb. 2019 tweet, it found Musk had not sought pre-approval for
any Tesla-related tweets since the vetting system started. Its
attorney told the court, "Mr. Musk has tweeted upward of 80
times about Tesla, and the SEC thought nothing of it. We assumed
that everyone was proceeding in good faith."
Tesla attorneys said in a court filing Musk had not sought
pre-approval because he "has not tweeted material information
For SEC officials, Musk's violation was clear, four of the
sources told Reuters.
In April 2019 they went to the New York court to argue that
Musk should be held in contempt of court a serious charge that
can result in fines or jail. The SEC wanted the court to order
Musk to report monthly to the agency on his compliance and
enforce escalating fines for violations, its lawyer told the
judge at the hearing.
SEC officials felt they had the upper hand because they
believed the violation was unambiguous, said the four sources,
two of whom have direct knowledge of the matter.
Following a 1976 Supreme Court ruling, the SEC's rules have
defined material information that a public company must disclose
as matters "a reasonable investor" would likely consider
important. The regulator's requirement in the deal with Musk was
broader than that, it told the court: "We would argue it
essentially means unless something is obviously immaterial, it
needs to get pre-approval."
Musk's lawyers told the court the SEC's interpretation of
the settlement's vetting requirements was "incorrect" and
Judge Nathan challenged what she described as the
settlement's "soft" standard for assessing when a tweet was
material, the court transcript shows; she also agreed with
Musk's lawyer that the SEC should have tried to resolve the
issue out of court, saying, "This screams of working it out."
Nathan did not conclude whether the tweets were material, or
rule on the contempt motion, saying: "My call to action is for
everybody to take a deep breath, put your reasonableness pants
on, and work this out."
SEC officials felt they had no choice but to revise the
settlement, according to the four sources. The SEC, Tesla and
Musk agreed to be more specific about what comments must be
pre-approved including statements about Tesla's financial
condition, proposed or potential deals, production numbers, and
Nathan approved that revised agreement on April 30, 2019.
THE TWEETS GO ON
In the following months, SEC officials felt Musk pushed the
boundaries of the revised settlement but were reluctant to
return to court, fearing Nathan might reject their complaint and
admonish them for bringing the issue back, three sources said.
On July 29, 2019, Musk tweeted that he was hoping to
manufacture "1,000 solar roofs" a week by year-end; and on May
1, 2020 that Tesla's stock price was "too high." Each tweet
prompted the SEC to contact Tesla and Musk's attorneys seeking
information on whether they had been pre-approved, according to
SEC correspondence sent to Tesla on the matter obtained by
public records requests.
Musk had not sought pre-approval; Tesla's attorneys argued
in the emails to the SEC it wasn't necessary. The regulator
disagreed. The SEC said in emails it was trying to work out the
dispute "in the spirit of the Court's directive" but that Tesla
and Musk's attorneys had declined to provide requested
documents, or have a "productive dialog" with SEC staff.
In June 2020, the SEC emailed Musk advising him it was the
"SEC's position that you violated" the settlement.
Instead of returning to court, however, the SEC said: "Going
forward, we urge you to comply."
Some SEC officials felt the settlement constrained Musk to
some degree, which helped protect investors, said the four
The SEC also was uneasy about the risks of the most extreme
step scrapping the deal and starting litigation given Musk's
resources, four of the sources said.
In addition, Musk was and remains Tesla's largest
shareholder, with roughly 16% of the stock as of late April, so
it might be hard to argue that barring him as a public company
director or officer was in shareholders' interests or would
loosen his grip on Tesla, two of the sources said.
In March, Musk asked the court to void his settlement with
The new judge in the case, Liman, rejected Musk's appeal in
April. He found the billionaire was "bemoaning" the 2018 deal
now that he felt Tesla was "invincible." A
representative for the court said Liman would not comment.
(Additional reporting by Katanga Johnson in Washington, Hyunjoo
Jin in San Francisco, and Jonathan Stempel, Jody Godoy, Gui Qing
Koh and Herbert Lash in New York; Edited by Paritosh Bansal,
Sara Ledwith and Daniel Flynn)