Earlier this month we reported those $40 million in penalties looked set to be handed out to Tesla investors following a settlement by the U.S. Securities and Exchange Commission (SEC). On Friday, a US federal judge authorized the release of the Tesla funds, which resulted from 2018 civil settlements with Tesla, Inc. and its CEO Elon Musk.
U.S. District Judge Alison Nathan in Manhattan approved the shareholder payout plan. Musk’s lawyers had argued that the SEC neglected its court-ordered duty to transfer Tesla’s funds to investors by waiting nearly 3½ years.
[Full disclosure: I own some Tesla stock. Nothing in this article is investment advice of any kind.]
A confluence of events spurred the original SEC sanction.
In 2018the SEC ruled against Musk, saying he defrauded investors by Tweeter that he had “secured funding” to take Tesla private. Musk resigned as Tesla chairman as part of the resolution. The trigger was contained in the suggestion that he might take Tesla private at $420 per share. The SEC said Musk did not discuss the terms or price of the deal with any potential financial partners, and his tweets caused Tesla’s stock price to jump more than 6%, causing significant disruption to the market. Marlet.
Moreover, in November 2021Musk polled his audience on Twitter whether or not he should sell 10% of his Tesla (TSLA) stock. The SEC is investigating whether Tesla CEO Elon Musk and his brother Kimbal Musk broke insider trading rules because a day earlier Kimbal sold shares worth $108 million.
Some saw the survey as an invitation to crowdsourcing, but others decried it as a manipulation of stock valuations. Shortly thereafter, the value of the shares plummeted by around $60 million. The investigation coincided with Musk having to pay large tax bills on the stock options he held. Analysts estimated its tax liability at $10 billion to $15 billion.
At the time, Musk owned about 17% of Tesla’s billion outstanding shares, according to CBS News. Since then, Musk has sold more than 15 million Tesla shares worth around $16.4 billion.
Questions have arisen about whether the CEO breached his original agreement with the SEC, which determined that Tesla failed to provide disclosure controls and procedures regarding Musk’s tweets.
How did the SEC invest the Tesla funds it held?
The SEC explained that the payouts would go to investors who lost money in Tesla stock within 1½ days of Musk’s tweet.
On August 7, 2018, Musk uttered the infamous “Funding Secured” tweet. The closing value of Tesla shares was listed at $75.91having had a volume of 154,379,000.
As of August 9, 2018, the closing value was $70.49, with 85,919,000 shares trading that day. The stock fell 16% over the period, with the period low coming a month later at $52.65 – a loss of 30%.
Tesla funds available since the SEC fines have reached approximately $41.2 million, including interest.
COVID-19 has hit the United States. In response, the Federal Reserve lowered the federal funds rate between 0–0.25%. This caused other short-term and long-term rates to fall.
On August 11, 2020, Tesla announcement that its board of directors approved and declared a 5-for-1 split of Tesla common stock in the form of a stock dividend to make stock ownership more accessible to employees and investors. Each shareholder of record as of August 21, 2020 received a dividend of 4 additional common shares for each share then held, the adjusted basis of the stock split on August 31, 2020.
On Friday, March 25, 2022, Tesla stock was valued at the close at $1,010.64. Let’s have a little fun. If the SEC had been allowed to hold Tesla funds in Tesla stock (which is not allowed by federal rules and regulations), the financial gain would have been very different. You do the math. Would Tesla shareholders have done better if their investment – even at a loss after the “funding secured” tweet – stayed with Tesla?
The legal proceedings continue
Musk hasn’t given up on his efforts to throw out his 2018 legal settlement with the SEC. Citing free speech protections, he says the SEC’s requirement that a Tesla lawyer pre-approve any of his tweets that might be material to investors is illegal. Reuters reports that the SEC opposes Musk’s request.
But in the latest court filing, Musk says “funding was secured and there was investor support.” He says he felt pressure to settle the issue with the SEC or risk Tesla’s financial security. “Despite this, the relentless regulatory pressure from the SEC, combined with the collateral consequence of the SEC’s complaint against me, caused a scenario in which I was coerced into signing the consent decree in 2018,” Musk said. . “Tesla was a less mature company and the SEC action risked jeopardizing the company’s funding.”
“In 2018, to settle the SEC’s action against him, Musk agreed to comply with mandatory Tesla procedures requiring prior approval of certain of his Tesla-related public communications,” the SEC regulator replied. , Melissa Armstrong, in a case in federal court in Manhattan. “Musk can no longer reject the amended Final Judgment simply because he found following Tesla’s procedures to be less practical than he had hoped, or because he wants the SEC not to investigate for whether Tesla’s disclosure controls and procedures are actually maintained and followed.”
“Musk complains about the SEC’s ‘large number of requests’ from 2018 to present, which he calls harassment,” Armstrong explained. “But Musk’s own timeline of the alleged demands is both disappointing and reflects legitimate investigations into potentially violent new conduct by Tesla and Musk.” The account describes Musk’s motion to quash a subpoena seeking records regarding his Twitter poll last November on whether to sell some of his Tesla stock as “substantially without merit.”
SEC Regulators keep insisting they have the legal power to subpoena Tesla and CEO Elon Musk over his tweets. “As far as civil settlements are concerned, an agreement is an agreement, absent circumstances far more compelling than those presented here,” the SEC asserted.
The SEC is asking Judge Alison Nathan to deny Musk’s motion to dismiss part of the agency’s subpoena and get rid of the 2018 deal. Musk’s attorney, Alex Spiro, asked for verbal arguments in the case.
The cases are SEC v Musk, US District Court, Southern District of New York, No. 18-08865; and SEC v Tesla Inc in the same court, No. 18-08947.
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