• Tue. Nov 29th, 2022

Can the SEC stand up to the richest man on the planet?

ByChad J. Johnson

Jun 4, 2022

Elon Musk hurled insults at and belittled the Securities and Exchange Commission and even expressed utter contempt for Wall Street’s top cop.

Musk called the SEC “bastards” at a recent conference. He tweeted a vulgar insinuation in 2020. He said, “I don’t respect the SEC,” in a 2018 interview. And after amassing a major Twitter stake this year, Musk filed the required documents 11 days late.

“You know, Elon Musk is basically saying, ‘Come to me. I dare you,'” said Christine Chung, a professor at Albany Law School. She was an attorney in the SEC’s Division of Enforcement.

Musk continues to goad the SEC even though the agency has taken several actions against him, from fine him millions of dollars at accusing him securities fraud. In a recent letterthe SEC asked Musk to provide details about the public comments he made about Twitter and also explain why he failed to file a mandatory statement on time.

All of this reignites a debate over whether the SEC has the teeth sharp enough to contain powerful and wealthy leaders like Musk.

Late filing is a ‘slam-dunk case’ against Musk

Much of Musk’s recent behavior has raised eyebrows. Former SEC commissioner Joseph Grundfest said it seems pretty clear that Musk broke the law with this late filing. When someone acquires more than a 5% stake in a public company, they have 10 days to tell the SEC, but Musk took his time.

“In practice, it strikes me as about as close to a slam-dunk case as you’re going to get,” says Grundfest, who is now a professor at Stanford Law School. “The most junior SEC attorney should be able to craft a very powerful complaint.”

But Grundfest isn’t convinced accusing Musk of a disclosure breach would do much. This offense is usually punishable by a fine of around $100,000.

“For a guy like Elon Musk, these are pocket fluff,” says Grundfest. “It’s loose change. It’s bupkis. You take it out of the petty cash.”

Musk, who is the richest person in the world, has an estimated net worth of $227 billion, according to the Bloomberg Billionaires Index.

“It really won’t make any difference,” adds Grundfest. “It’s not going to change the behavior. He’s going to laugh.”

The 60 minutes interview with Musk

In 2018, Musk mocked the SEC in a 60 minutes interview with correspondent Lesley Stahl, who asked the Tesla CEO about his decision to settle with the agency in a tweet.

“I want to be clear” Musk said in the interview. “I don’t respect the SEC. I don’t respect them.”

The The SEC sued him for sending “misleading tweets” that “resulted in significant market disruption”. Most famously, Musk tweeted that he was “considering taking Tesla $420 private”. He claimed he had the “secured funding” to do so. The SEC alleged that he did not.

Musk and Tesla agreed to pay $20 million each, and the electric car maker agreed to ‘implement additional controls and procedures to oversee Musk’s communications’, including his tweets, according to a SEC press release.

However, this kind of muzzling hardly worked. Musk has continued to publicly slander the SEC and he recently asked a court to throw out its settlement. In April, a federal judge refused.

Millions against billions and trillions

Former SEC officials question whether the agency is equipped to police a world where corporations are worth trillions of dollars, where the world’s richest people are worth hundreds of billions, and where tweets drive stock market movements.

Congress created the Securities and Exchange Commission nearly a century ago after many Americans lost money in the 1929 stock market crash. The primary mission of the SEC is “to protect investors,” according to its website.

It was supposed to be a powerful organization – both a regulator and a law enforcement agency. But in the face of market manipulation and other embezzlement, his options are limited. For example, he cannot institute criminal proceedings.

Chung says it’s worth asking: Is the SEC “executing its mission in a fair and equitable manner, regardless of your wealth and power?”

For example, following the financial crisis of 2008-2009, many Americans wondered why no CEOs had been prosecuted. And although financial institutions were forced to pay civil fines, those fines were pocket change for banks with trillions of dollars in assets.

“If people feel like the markets are rigged, or the markets are fundamentally unfair, and that your wealth and power can dictate what happens to you, they may be less inclined to trust what the market tells us about the value of companies like Twitter,” Chung argues.

And when it comes to resources, a wide chasm exists between the SEC and the executives and organizations it regulates. To put that into perspective, Musk’s net worth is more than 100 times the SEC’s annual budget.

“The SEC is kind of driving their Model T, while everybody else is out there in their sports cars,” Chung says.

poo emoji

Even if the SEC doesn’t press charges against Musk, the Tesla CEO is pushing boundaries and testing standards in ways we’ve never seen before, according to attorney Marc Fagel, who ran the SEC’s regional office. in San Francisco.

It sheds light on a recent Twitter back-and-forth between Musk and Twitter CEO Parag Agrawal.

What started as a substantial exchange about how the social media company counts its users ended with Musk posting a poop emoji.

“We have blunt tools in securities laws that are designed to penalize fraud,” Fagel said. “But if someone sends a poop emoji and investors decide to buy or sell stocks on it, securities laws aren’t really designed to protect them at that point.”

This particular tweet didn’t cause Twitter’s share price to move dramatically, but several other tweets from Musk did, including one in which he said his deal for the company was “temporarily suspended.”

Musk seems to have something figured out, Fagel says. In this new world, using the social media platform that Musk is trying to buy, you can play with the markets and it “doesn’t really rise to the level of fraud.”

Sure, that can hurt investors, but under current law there’s not much the SEC can do.

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