A primer on Elon Musk’s latest dumb fight with the SEC

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Elon Musk is a black hole. Information cannot pass through him and bends around him. He is incomprehensibly big and infinitely dull.

We’re obliged once again to contemplate Musk because on Thursday the SEC did something:

The US securities regulator is taking Elon Musk to court over his refusal to testify in an investigation into his purchases of Twitter stock and his statements surrounding the $44bn takeover of the social media platform.

In a filing in California federal court on Thursday, the Securities and Exchange Commission said it was conducting an “ongoing non-public investigation” into whether Musk had “violated various provisions of the federal securities laws” in connection with “his purchases of Twitter stock” and “his 2022 statements and SEC filings relating to Twitter”.

The filing is here and, like so much in the Muskoverse, it’s less interesting than first impressions might suggest. Mostly it’s bureaucracy, relating to disclosure of share purchases in the days leading up to Musk’s Twitter takeover offer.

FTAV has nerded on the details more than once already, but to summarise:

• Musk started buying Twitter stock on the last day of January 2022.

• On March 14 his stake tipped over 5 per cent, so had a deadline to disclose the purchase of 10 calendar days.

• March 24 came and went while he continued to regularly buy Twitter stock.

• On March 26, Musk contacted Twitter directors including founder Jack Dorsey to talk about his stake and whether there was a place on the board for him.

• These conversations continued into early April. Walter Isaacson reports in his Musk biography that on March 31, Twitter staff booked an Airbnb farmhouse (with “tractors and donkeys”) near San Jose airport so that CEO Parag Agrawal and board chair Bret Taylor could talk terms with Musk.

• On April 3, Twitter invited Musk to join its board and sent over its standard contract.

• On April 4, Musk disclosed a 9.2 per cent stake in Twitter. He did it via n backdated Schedule 13G, which is a form that’s for passive shareholders.

• Also on April 4, Musk told Twitter he didn’t like the idea of being muzzled but would be willing to put a cap on his share purchases of 15 per cent. The Twitter board agreed to his demands.

• Twitter announced on April 5 that Musk would join its board (pending routine background checks, etc, which would take a few days).

• Also on April 5, Musk filed a Schedule 13D, a long-form disclosure of holdings for investors who aren’t passive.

• Musk told Twitter on April 9 that he wouldn’t be joining the board and instead intended to take the company private. Twitter announced the first part to shareholders on April 10 and hired Goldman Sachs to deal with the second part.

• Musk made his formal offer to buy Twitter on April 13 then made the letter public on April 14.

An obvious issue from the above is the extra time Musk had to buy Twitter shares. The stock rose 27 per cent when his holding was belatedly made public so tardiness probably saved some money — albeit not that much.

An investor, Marc Bain Rasella, last year sued Musk for unspecified damages saying the late filings meant Twitter shareholders had sold the stock at “artificially deflated prices”. His first complaint estimates that Musk saved approximately $143mn by filing 11 days late, with a second raising the figure to $200mn, but neither shows detailed working. Our own back-of-the-envelope estimates are a bit lower but no matter: the sums don’t seem particularly significant for a person who was simultaneously making $3bn bets on dogecoin.

But of course, principles of market sanctity matter more than profit. How much are those worth? The SEC last month charged six investors for repeated late filing of transaction forms that had an aggregate value of $90mn, without showing any evidence that they had benefitted financially. Penalties for individuals ranged from $120,000 to $150,000.

A second issue relates to the appropriate paperwork. Using a Schedule 13G was in effect a pledge from Musk that he wasn’t going to be “influencing the control of the issuer”. The SEC has a high threshold for what counts as influence though, and campaigning for user interface changes probably doesn’t cross it.

Company directors can’t get by on abbreviated 13G disclosures, obviously, and neither can shareholders who talk to management about significant corporate actions like asset sales. But could Musk? It’s possible, since by the time he made the stake disclosure the board invite had only just arrived, but sequence of events in late March and early April make it hard to say for sure.

Moreover we could find no SEC enforcement orders related to filing a 13G instead of a 13D. Kristin Giglia, writing in Columbia Law Review, calls 13G misuse “a seemingly accepted but unaddressed facet of securities markets.”

The third issue is that in Musk’s first form didn’t include the required boilerplate in 13G Item 10 about pledging not to seek to influence control of the issuer. (The SEC’s Office of Mergers and Acquisitions asked about this at the time. Musk has not responded publicly.)

Was the form thing a mistake or an attempt to exploit a loophole? We’ve no way of knowing, and neither most likely would a prosecutor — though Musk’s defence in the Rasella class action lawsuit has cited the blurb’s absence as evidence the 13G was not misleading to investors, “much less intentionally.” Maybe the boilerplate question is more important than it looks, because it doesn’t look very important.

What we have then is a low-stakes standoff. Musk was scheduled to provide testimony to the SEC in San Francisco on September 15, but failed to turn up. He was then offered an opportunity to testify nearer his home in Texas, but gave what the regulator calls “several spurious objections”.

After the SEC issued its subpoena, Musk tweeted:

The SEC began investigating Musk’s Twitter purchases in May 2022. Having provided testimony twice already Musk is now accusing the SEC is using subpoena powers to harass him, which isn’t such a wild accusation given his ostensible guilt.

An investigation of late disclosure alone could’ve been closed a few moments after it was opened simply by referencing a calendar. Presumably the additional possible infractions are complicating things, however, though to what end this extra work serves isn’t clear. Whatever the SEC concludes, Musk will ignore it and keep playing to the online gallery, because that’s what he does.

“Enough is enough,” Alex Spiro, an attorney for Musk, said yesterday. Seconded.