KMK Law Corporate & Securities Blog

On September 29, 2018, the Securities and Exchange Commission (the “SEC”) announced that CEO and Chairman of Tesla, Elon Musk, had agreed to settle securities fraud charges brought by the SEC and that Tesla had agreed to settle SEC charges that it failed to have required disclosure controls and procedures covering Mr. Musk’s tweets. The settlement will force Mr. Musk to step aside as chairman for three years and pay a $20 million fine. In addition, Tesla will add two independent directors to its Board of Directors and appoint an experienced securities attorney to monitor Mr. Musk’s communications with investors. It will also create a permanent committee of independent directors to monitor disclosures and potential conflicts of interest.

In August, Mr. Musk made a market-moving tweet on his personal Twitter account saying that he had secured funding for a buyout to take Tesla private at $420 per share. The tweet boosted Tesla’s stock price by about six percent to close at $379.57 that day. According to the SEC, Mr. Musk had not actually secured funding, misleading investors into thinking the deal was more finalized than it actually was. Additionally, no potential funders had agreed to the $420 share price. Days later Mr. Musk tweeted that Tesla would remain a public company. Shares subsequently fell more than 15% below their worth when Mr. Musk tweeted about the potential privatization. Harmed investors will be compensated with the settlement funds.

SEC Chairman Jay Clayton said: “This matter reaffirms an important principle embodied in our disclosure-based federal securities law. Specifically, when companies and corporate insiders make statements, they must act responsibly, including endeavoring to ensure the statements are not false or misleading and do not omit information a reasonable investor would consider important in making an investment decision.”

This case provides an example of the ongoing challenges of using social media and other non-traditional media to make company-related disclosures. Companies should review their disclosure controls and procedures to ensure that they remain current and comprehensive in light of new social media technologies.