Court sides with SEC, dashes Elon Musk’s attempt to quash consent decree
Judge Lewis J. Liman of the New York Southern District Court has dashed an attempt by Elon Musk to quash a consent decree dating back to 2018.
Today, the Court sided with the Securities and Exchange Commission (SEC) and denied a motion by Musk to quash the decree.
Musk is a party to a final judgment entered by the Court on October 16, 2018, after the SEC charged him in a complaint filed on September 27, 2018 with violating Section 10(b)(5) of the Securities Exchange Act of 1934.
The complaint alleged that Musk published a series of false and misleading statements to millions of people, including members of the press, using the social media platform Twitter. In particular, the SEC alleged that in August 2018, Musk tweeted to his then over twenty-two million Twitter followers that he could take Tesla, Inc. private at $420 per share (a substantial premium to its trading price at the time), that funding for the transaction had been secured, and that the only remaining uncertainty was a shareholder vote.
The tweet allegedly was false: Musk had not discussed specific deal terms with any potential financing partners, and he knew the potential transaction was uncertain and subject to numerous contingencies. His tweets caused Tesla’s stock price to jump by over six percent on August 7, 2018 and led to significant market disruption.
The judgment, which was filed with Musk’s consent, permanently enjoined him from violating Section 10(b) of the Exchange Act and Rule 10b-5 and ordered him to pay a civil penalty of $20 million. It also ordered him to comply with a series of undertakings.
In particular, Musk agreed to resign from his role as Chairman of the Board of Directors of Tesla and not to seek or accept an appointment as Chairman for a period of three years thereafter; to comply with all mandatory procedures implemented by Tesla regarding (i) the oversight of communications relating to Tesla made in any format including posts on social media (e.g., Twitter) and on Tesla’s website; and (ii) the pre-approval of any such written communications that contain, or reasonably could contain, information material to Tesla or its shareholders; and to certify in writing his compliance with the first undertaking set forth above.
At the same time, Tesla agreed to a consent judgment against it. The Tesla Consent contained the requirement that Tesla implement mandatory procedures to oversee and pre-approve Musk’s Tesla-related written communications made in any format including but not limited to Twitter posts that reasonably could contain information material to the company or its shareholders.
The judgment further required that Tesla set forth in its disclosure policies and procedures “the definition of, and the process to determine, which of [Musk’s] communications contained or reasonably could contain, information material to [Tesla] or its shareholders.”
In February 2019, within months of the entry of the consent judgments and on the SEC’s application, the Court issued an order requiring Musk to show cause why he should not be held in contempt of the Court’s judgment, after Musk tweeted: “Tesla made 0 cars in 2011, but will make around 500k in 2019,” without seeking or receiving pre-approval.
The tweet had to be corrected by a second, pre-approved tweet several hours later: “Meant to say annualized production rate at end of 2019 probably around 500k, ie 10k cars/week. Deliveries for year estimated to be about 400k.”
The SEC alleged that the first statement was inaccurate and that it was disseminated to over twenty-four million people. Approval of the tweet was required by Tesla’s Senior Executives Communications Policy, which defined the written communications requiring approval to include “projections, forecasts, or estimates regarding Tesla’s business.”
The Court ordered the parties to meet and confer in an effort to resolve the pending motion and to agree upon modifications to the consent judgment and Tesla’s Senior Executives Communications Policy; the parties then submitted a consent motion to modify the final judgment to require Musk to obtain pre-approval by an experienced securities lawyer employed by the Company of any one of a series of types of written communications, including “events regarding the Company’s securities (including Musk’s acquisition or disposition of the Company’s securities)” and “any event requiring the filing of a Form 8-K by the Company with the Securities and Exchange Commission.”
On November 6, 2021, Musk tweeted several times concerning his potential sale of a large portion of his holdings in Tesla without obtaining pre-approval for the tweets. The first tweet, at 12:17 pm PT, asked: “Much is made lately of unrealized gains being a measure of tax avoidance, so I propose selling 10% of my Tesla stock. Do you support this?”
Six minutes later, at 12:23 pm PT, he tweeted: “I will abide by the results of this poll, whichever way it goes.” Ultimately, over seven million votes were cast—57.9% of the votes, or 3,519,252 in total, answered yes.
The record does not reflect whether Musk abided by his public commitment.
The SEC served subpoenas on Musk and Tesla seeking, among other things, information about the tweets and the process that was employed before they were disseminated to the public. Specifically, on November 16, 2021, the SEC served a subpoena on Tesla requiring it to produce ten categories of documents, including all documents and communications concerning the two tweets as well as documents sufficient to determine whether the two tweets were submitted to Tesla’s General Counsel or Securities Counsel for pre-approval or review before they were published.
On March 8, 2022, Musk filed this motion to quash certain portions of the SEC subpoena and to terminate the consent decree.
Musk also asks the Court to terminate the consent decree pursuant to Federal Rule of Civil Procedure 60(b)(5). That rule permits a court to relieve a party from a final judgment if “applying it prospectively is no longer equitable.
Musk argues that the consent decree in this case should be terminated because (1) it “intrudes on Mr. Musk’s First Amendment right to be free of prior restraints”; (2) “has been misused to launch endless, boundless investigation of his speech”; and (3) was extracted from Musk through the exercise of economic duress. None of the arguments hold water, the Court finds.
With regard to the First Amendment argument, it is undisputed in this case that Musk’s tweets are at least presumptively “protected speech.” At the same time, however, even Musk concedes that his free speech rights do not permit him to engage in speech that is or could “be considered fraudulent or otherwise violative of the securities laws.” The consent decree thus does not impose obligations that have “become impermissible under federal law.”
The Judge says:
“Musk’s argument that the SEC has used the consent decree to harass him and to launch investigations of his speech is likewise meritless and, in this case, particularly ironic”.
The Supreme Court has instructed that “modification should not be granted where a party relies upon events that actually were anticipated at the time it entered into a decree.” Musk could hardly have thought that at the time he entered the decree he would have been immune from non-public SEC investigations. The SEC has a historic mission to “achieve a high standard of business ethics in the securities industry,” and to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.
The Court finds that the SEC cannot be faulted for the limited requests it has issued. Far from the “sheer number of demands” that Musk claims the SEC has made, the SEC has in fact made only limited requests. It has made only three sets of inquiries: inquiries related to the original enforcement actions that led to the consent decree here; inquiries related to the investigation that led to the amended final judgments; and the inquiries at issue in the investigation here, which arose after Musk tweeted about selling ten percent of his shares.
It is unsurprising that when Musk tweeted that he was thinking about selling ten percent of his interest in Tesla and that he planned to relinquish control over that decision to the majority opinion expressed by voters on his Twitter poll (or those who could muster control over the majority), the SEC would have some questions.
Finally, the Court notes that Musk’s claim that he was the victim of economic duress is wholly unpersuasive. Musk argues that “[a]t the time [he] signed the consent in this case, Tesla was in no position to weather a fight with the SEC,” because it “was a less mature company and the SEC’s action stood to jeopardize the company’s financing.”
But, even accepting as true that Musk was truly worried that engaging in a protracted litigation with the SEC would be financially ruinous for Tesla and felt that settling the lawsuit was the best thing for the company, that does not establish a basis for him to get out of the judgment he voluntarily signed.
It is a known fact that the commencement of a SEC lawsuit—just like any major litigation—can cause the distraction of management, lead to litigation costs, and ultimately be considered an undesirable event from the perspective of the subject company’s shareholders and other stakeholders.
The Court finds that Musk was not forced to enter into the consent decree; rather, “for [his] own strategic purposes, [Musk], with the advice and assistance of counsel, entered into these agreements voluntarily, in order to secure the benefits thereof, including finality.”
The Judge concludes that Musk cannot now seek to retract the agreement he knowingly and willingly entered by simply bemoaning that he felt like he had to agree to it at the time but now—once the specter of the litigation is a distant memory and his company has become, in his estimation, all but invincible—wishes that he had not.