U.S Court, on October 16, 2018, approved Tesla Inc and Chief Executive Elon Musk’s settlement with the U.S. Securities and Exchange Commission (SEC) for securities fraud they had charged the company and its former CEO with.
On August 7, 2018, Tesla CEO Elon Musk tweeted to his 22 million followers “Am considering taking Tesla private at $420, Funding secured.” Following the tweet, shares surged by nearly 13% and trading was halted. SEC quickly opened an investigation which went on at an unusual speed, questioning Musk, Tesla’s board and other executives.
The SEC concluded that the claims in Musk’s tweet were false and misleading, and on September 27, 2018, charged Elon Musk with securities fraud for a series of false and misleading tweets about a potential transaction to take Tesla private. The rationale behind the decision was that the companies and corporate insiders must act responsibly when making statements, and must ensure that the statements are not false or misleading for an investor.
Musk and Tesla agreed to resolve the dispute with SEC, however, they did not admit or deny any allegation. The settlement called for $20 million by Elon and another $20 million by Tesla, which will be distributed to harmed shareholders through a court-approved process. Further, Musk will hold onto his CEO position but give up Tesla’s chairmanship for at least 3 years. The deal also calls for a new Chairman to be appointed and the naming of two new independent directors. He now has 45 days to leave his role as Chairman of Tesla. With Tesla separating the roles of CEO and Chairman, Elon Musk’s power within the company may be limited.
- As per SEC rules for appropriate disclosure, companies are allowed make announcements on social media, but under certain circumstances. The investors in the companies must know of the appropriate channels for such communication. Hence, in addition to the fines, Musk will also have to comply with company communications procedures when tweeting about the firm.
- Even after the settlement with SEC, Musk tried to muddle the process by insulting the SEC in a series of tweets, his tweets could be seen as a denial of wrongdoing by Musk. However, the decision by the Court was expected.
- In a similar controversy revolving around the announcement on social media, Netflix CEO, Reed Hastings, in 2012, announced that Netflix subscribers passed one billion hours of content watched. There were some fingers pointed at Hastings but SEC declared that Hastings did not violate Regulation Fair Disclosure, which requires companies to distribute information regarding their financial success in ways that are widely accessible.