Court To Elon: No You Can’t Just Ignore The SEC’s Investigation Into Your Failure To Comply With The Law
As you may recall, almost two years ago, Elon Musk announced, somewhat out of the blue, that he had accumulated somewhere close to 10% of Twitter's equity, making him the single largest shareholder, and kicking off a chain of bizarre events that eventually put him in charge of the platform that he has rapidly driven to lose the vast majority of its value.
Many people pointed out at the time, that it appeared that Musk had pretty clearly and obviously violated the law, in missing an important regulatory deadline, by which he should have revealed that he had over 5% of the company's equity.
It's well known that Elon hates the SEC, going back to the fight he had with them regarding his dubious tweets about taking Tesla private, which resulted in a settlement that Musk seems to have mostly ignored, especially the bits about putting in place a committee to oversee Musk's tweets. Over the last couple of years, Musk has tried (unsuccessfully) a few times to get out from under that settlement, claiming it was coercive.
Anyway, last year, the SEC finally sent a subpoena to Musk regarding that failure to report his stake in Twitter in a timely manner, and Musk appears to have bailed out on a promised testimony in response to the investigation. At least according to a legal filing the SEC made last fall to compel him to show up. In typical Musk fashion, he started coming up with highly questionable excuses for refusing to show up:
Musk failed to appear for testimony on September 15, 2023, as required by the investigative subpoena served by the SEC, despite (1) in May 2023, agreeing to appear for testimony on a date nearly four months later, in September 2023, (2) having been served with a subpoena in May 2023 requiring his appearance for testimony in the SEC's San Francisco Regional Office on that mutually agreed upon date in September, (3) raising no objection to the subpoena at the time it was served or during the following months, and (4) approximately two weeks before his scheduled testimony, requesting and receiving an accommodation to move his scheduled testimony by one day. Instead, two days before his scheduled testimony, Musk abruptly notified the SEC staff that he would not appear. Musk attempted to justify his refusal to comply with the subpoena by raising, for the first time, several spurious objections, including an objection to San Francisco as an appropriate testimony location.
Musk's response (from his favorite lawyer, Alex Spiro) was to whine that this was all part of a pattern of abuse" by the SEC, and (hilariously) that enforcing the subpoena and requiring him to testify would violate the constitution" based on the appointments clause (which we've discussed in other contexts).
Over the weekend, the magistrate judge overseeing the case, said, um, no, that's not how this works, and ordering Musk to comply with the subpoena.
The court enforces the subpoena: the evidence is relevant and material to the SEC's investigation, and the testimony is not unduly burdensome. As to the argument that the subpoena exceeds the SEC's authority, the Exchange Act authorizes the subpoena, and the staff attorneys who issue subpoenas are not inferior officers subject to the Appointments Clause.
As the ruling notes, the SEC has broad subpoena authority and has documented reasons for seeking Musk's testimony. The idea that this was done in bad faith or to harass Musk just doesn't seem supported by the evidence:
Because the SEC issued its subpoena lawfully, the burden shifts to the respondent to prove that the subpoena was issued in bad faith or for an improper purpose, such as harassment or to pressure that person to settle a collateral dispute, Powell, 379 U.S. at 58, or is overbroad or unduly burdensome," EEOC v. Children's Hosp. Med. Center, 719 F.3d 1426, 1428 (9th Cir. 1983). The respondent has not met this burden. He did not object to the subpoenas initially and asked only for an accommodation for his schedule. Only later did he object to the testimony as irrelevant and harassing, in part because he testified twice previously. The SEC's view is that the timing suggests gamesmanship. But in any event, the contemplated testimony is about productions that post-dated his testimony.
It also notes that the SEC investigation goes beyond just the late filing" issue and may be even more serious, and is clearly legitimate to investigate:
The respondent also suggests that the SEC's investigation is overkill, pointing to its hijacking of the investigation into the respondent's SEC Rule 13d-1 disclosures and contrasting its ordinary practice of fines for Rule 13d violations with the extensive investigation here. But the investigation is about more than a late filing: there are eleven Section 13 filings from April to July 2022. Also, the SEC is investigating potential fraud in connection with securities transactions, in violation of 10(b) of the Exchange Act and Rule 10b-5, including the respondent's public statements about Twitter.
The other investigations are not demonstrably harassment: they are legitimate government investigations. Cf. SEC v. Musk, No. 22-1291, 2023 WL 3451402, at *2 (2nd Cir. May 15, 2023) (affirming district court's denial of the respondent's motion to terminate the 2018 SEC consent degree and rejecting claim of harassment).
At the very least, this suggests that this issue may be a bigger deal than Musk and his supporters are letting on.