Can the SEC stand up to the richest man on the planet?
Elon Musk has hurled insults and belittled the Securities and Exchange Commission and has even expressed complete disdain for Wall Street's top cop.
Musk called the SEC "bastards" at a recent conference. He tweeted a vulgar innuendo in 2020. He said, "I do not respect the SEC," in a 2018 interview. And after he amassed a significant stake in Twitter this year, Musk filed required paperwork 11 days late.
"You know, Elon Musk is basically saying, 'Come at me. I dare you,'" says Christine Chung, a professor at Albany Law School. She used to be a lawyer in the SEC's Division of Enforcement.
Musk continues to goad the SEC even though the agency has taken multiple actions against him, from fining him millions of dollars to accusing him of securities fraud. In a recent letter, the SEC asked Musk to elaborate on public comments he made about Twitter and to also explain why he didn't file a mandatory disclosure on time.
All this is reigniting a debate about whether the SEC has sharp enough teeth to rein in powerful and wealthy executives like Musk.
Late filing is a "slam-dunk case" against Musk
A lot of Musk's recent behavior has raised eyebrows. Former SEC Commissioner Joseph Grundfest says that it seems pretty clear-cut Musk broke the law with that late filing. When someone amasses more than a 5% stake in a public company, the person has 10 days to tell the SEC, but Musk took his time.
"As a practical matter, it seems to me that this is about as close to a slam-dunk case as you're going to find," says Grundfest, who is now a professor at Stanford Law School. "The junior-most lawyer at the SEC should be able to write up a very powerful complaint."
But Grundfest isn't convinced that charging Musk with a disclosure violation would do much. That offense usually carries a fine of about $100,000.
"To a guy like Elon Musk, that's pocket lint," says Grundfest. "That's chump change. It's bupkis. You take it out of petty cash."
Musk, who is the world's wealthiest person, has an estimated net worth of $227 billion, according to the Bloomberg Billionaires Index.
"It's really not going to make a difference," Grundfest adds. "It isn't going to change behavior. He'll chuckle."
The 60 Minutes interview with Musk
In 2018, Musk laughed at the SEC in a 60 Minutes interview with correspondent Lesley Stahl, who asked the Tesla CEO about his decision to settle with the agency over a tweet.
"I want to be clear," Musk said in the interview. "I do not respect the SEC. I do not respect them."
The SEC had sued him for sending "misleading tweets" that "led to significant market disruption." Most famously, Musk tweeted that he was "considering taking Tesla private at $420." He claimed he had the "funding secured" to do so. The SEC alleged he didn't.
Am considering taking Tesla private at $420. Funding secured.— Elon Musk (@elonmusk) August 7, 2018
Musk and Tesla agreed to pay $20 million each, and the electric-carmaker agreed to "put in place additional controls and procedures to oversee Musk's communications," including his tweets, according to an SEC news release.
However, that sort of muzzling has hardly worked. Musk has continued to malign the SEC publicly, and he recently asked a court to throw out his settlement. In April, a federal judge refused.
Millions vs. billions and trillions
Former SEC officials wonder 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 moves.
Congress created the Securities and Exchange Commission almost a century ago after many Americans lost money in the 1929 stock market crash. The SEC's primary mission 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 malfeasance, its options are limited. For instance, it can't bring criminal charges.
Chung says it's worth asking: Is the SEC "carrying out its mission in a way that is fair and equitable, regardless of how wealthy and powerful you are?"
For instance, in the wake of the 2008-2009 financial crisis, many Americans wondered why no chief executives were prosecuted. And though financial institutions were forced to pay civil penalties, those penalties were pocket change for banks with trillions of dollars in assets.
"If people feel that markets are rigged, or that markets are fundamentally unfair, and that your wealth and power can dictate what happens to you, they may be less likely to trust what the market is telling us about the value of companies like Twitter," Chung argues.
And when it comes to resources, a wide gap exists between the SEC and the executives and organizations it regulates. To put this into perspective, Musk's net worth is more than 100 times the SEC's annual budget.
"The SEC is sort of driving their Model T, when everybody else is out there in their sports cars," Chung says.
The poop emoji
Even if the SEC doesn't bring charges against Musk, the Tesla CEO is pushing boundaries and testing norms in a way that we haven't seen before, according to lawyer Marc Fagel, who used to run the SEC's San Francisco Regional Office.
He highlights a recent back-and-forth on Twitter between Musk and Twitter CEO Parag Agrawal.
What started out as a substantive exchange about how the social media company counts its users ended with Musk posting a poop emoji.
💩— Elon Musk (@elonmusk) May 16, 2022
"We have blunt tools in the securities laws that are designed to penalize fraud," Fagel says. "But if somebody sends a poop emoji and investors decide that they are going to buy or sell stock on that, the securities laws aren't really designed to protect them at that point."
That particular tweet didn't lead to a dramatic move in Twitter's stock price, but several of Musk's other tweets have, including one in which he declared his deal for the company was "temporarily on hold."
Musk seems to have figured out something, Fagel says. In this new world, using the social media platform that Musk is trying to buy, you can mess with markets and it "doesn't really rise to the level of fraud."
Sure, that can hurt investors, but under current law, the SEC can't do much.
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