Elon Musk and Tesla Might Not Have to Worry About the SEC
(Bloomberg Businessweek) -- Elon Musk’s tweet about taking Tesla Inc. private has brought intense scrutiny, mostly of Musk, but also of U.S. securities regulators. The Securities and Exchange Commission would seem to have a strong case that Musk was at the very least being misleading when he tweeted on Aug. 7 that he’d “secured” financing for a privatization deal. He appeared to indicate he hadn’t closed a deal in a subsequent blog post. That could be a violation of securities laws. Yet the probe is fraught with minefields.
Among them, ex-SEC officials say, is an understaffed and often outgunned enforcement team in San Francisco, which has a hard time competing for talent with top tech companies and law firms that offer big paydays. And the SEC has tread lightly at times when it comes to prominent tech executives. “There’s not quite as much trepidation about the SEC” in Silicon Valley, says Jonathan Macey, a professor at Yale Law School. Still, he says of Musk, “That doesn’t mean you can just say anything.”
In 2007 the agency sued two former Apple Inc. executives for backdating stock options to make them more valuable. But it didn’t sanction then-Chief Executive Officer Steve Jobs, who’d approved the awards and even got some himself. Jobs came under SEC scrutiny again in 2009, when the agency investigated whether Apple properly disclosed his health issues after announcing he would take a five-month medical leave. About a week earlier, Jobs had said he was getting a “relatively simple” treatment for a nutritional ailment. He ended up having a liver transplant. The SEC took no action.
The SEC lost a big fight in 2013 with celebrity tech investor Mark Cuban, after it accused the Dallas Mavericks owner of insider trading. Armed with a top-notch legal team, Cuban easily won at trial. Jurors delivered a verdict in under five hours.
When the SEC has won settlements from Silicon Valley companies, they’ve often come after the businesses have cratered. The SEC charged Theranos Inc. CEO Elizabeth Holmes with fraud in March, years after the Wall Street Journal identified problems with the company’s blood tests. Holmes, whom the U.S. Department of Justice later indicted, paid a $500,000 fine and was barred from serving as an officer or a director of a public company for 10 years. Also this year, the SEC fined Yahoo! Inc. $35 million to settle claims about a massive data breach it hid from investors. The penalty was paid by Altaba Inc., the company that was left after Yahoo sold its core internet business to Verizon Communications Inc.
Underpinning some of the SEC’s issues with the tech industry are the securities laws themselves, written in the 1930s and never fully overhauled to take into account things such as Twitter and Facebook. The agency’s forays into readjusting the guidelines for corporate disclosure have often been late to the game and come only after well-known Silicon Valley companies pushed the limits.
In 2005 the SEC passed rules to ease restrictions on corporate communications during an SEC-imposed “quiet period” before an initial public offering. The changes were put in place after Salesforce.com Inc. had to delay its IPO in 2004 because its CEO gave extensive comments to the New York Times. Google also ran into trouble that year for an interview co-founders Sergey Brin and Larry Page gave to Playboy magazine that was published after the company registered to sell shares.
The Musk case comes as SEC chief Jay Clayton has pushed for better relations with tech companies. He’s working to address excessive and outdated regulation with the goal of promoting more IPOs. Clayton brought on William Hinman, a prominent Silicon Valley lawyer, to run the agency’s corporate disclosure division. The SEC, which declined to comment, hasn’t acknowledged there is a Musk probe.
Musk’s tweet spotlights SEC rules governing executive communications. The agency in 2013 generally approved making corporate disclosures on social media, as long as investors are told the company will use such outlets to disseminate the information. The decision resulted in what became known as the Reed Hastings Rule, named for the Netflix Inc. CEO, who’d made a market-moving post about the company on his personal Facebook page late at night, infringing on a requirement that material information be broadly released. The SEC declined to punish Hastings. Instead, it updated guidance it issued in 2008 for making corporate announcements on company websites. That’s the only update it’s made to those rules in a decade—a lifetime in the tech sector.
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