On September 27, 2018, the United States Securities and Exchange Commission (“SEC”) charged Elon Musk, the Chairman and CEO of Tesla, Inc., a publically-traded California-based technology company that specializes in electric vehicles, with securities fraud in connection with an August tweet, on his personal Twitter page, regarding the possibility of taking Tesla private. Two days later, on September 29, the SEC announced that it had settled those charges, and had also settled a previously unfiled claim against Tesla itself, for failing to have required disclosure controls and procedures related to Musk’s Twitter activity. Tesla and Musk neither admitted nor denied the allegations, but each has agreed to pay a civil penalty of $20 million, and Musk has agreed to step down as chairman of the Tesla board for three years. Musk will remain CEO during this time. See SEC Press Release, available at https://www.sec.gov/news/press-release/2018-226 (Sept. 29, 2018).
The charges against Tesla and Musk relate to a series of tweets Musk published on his personal Twitter page on August 7, 2018, the first of which stated “Am considering taking Tesla private at $420. Funding secured.” Following this tweet, Tesla’s share price spiked. And according to the SEC, in the hours following Musk’s tweets, journalists and industry analysts contacted Tesla’s head of Investor Relations whose response seemed to further back up Musk’s tweets. The SEC claimed this series of tweets was false and misleading because, in truth, Musk knew that the potential transaction was uncertain and subject to numerous contingencies. According to the SEC, Musk had not discussed specific deal terms, including price, with any potential financing partners, and his statements about the possible transaction lacked an adequate basis in fact.
In its complaint against Tesla, the SEC notes that in its November 2013 Form 8-K filing, the company communicated to investors that it intended to use Musk’s Twitter account as a means of announcing material information to the public about Tesla and its products and services, and has encouraged investors to review information about Tesla published via Musk’s Twitter account. And since 2013, Musk has used Twitter to publish material information about Tesla, including forward-looking guidance regarding Tesla’s financial metrics, production forecasts and achievements, and new product releases. However, the SEC alleged that Tesla did not have disclosure controls or procedures in place to assess whether the information Musk published via his Twitter page was required to be disclosed in public filings, nor did it have processes in place to ensure that Musk’s statements about the company on Twitter were accurate or complete. The SEC alleged that until the August 7, 2018 tweets, Tesla had no corporate policies specifically addressing Musk’s use of Twitter, Musk did not consult with anyone at Tesla before publishing Tesla-related information via Twitter, and no one at Tesla reviewed Musk’s tweets prior to their publication.
Both Musk and Tesla have agreed to settle the SEC’s charges, with each agreeing to pay its own $20 million penalty. In addition, Musk has agreed to step down as Chairman for a period of three years, while Tesla has agreed to appoint two new independent directors to its board, establish a new committee of independent directors and put in place controls and procedures to oversee Musk’s public communications. Both settlements are subject to court approval.
This enforcement action speaks to the SEC’s willingness to find corporations liable for an executive’s “personal” social media posting, at least where the company has recognized and endorsed that social media profile as a source of material, company-related information.