SEC Sues Musk Over Stealth Twitter Stock Grab, Years Too Late
In what is almost certainly a case of too little, too late, the SEC on Tuesday sued Elon Musk for failing to file a public announcement about his secretive Twitter equity position. The lawsuit, coming nearly three years after Musk's alleged violations, highlights the billionaire's brazen flouting of disclosure rules and the SEC's glacial pace in holding him accountable. It was widely reported on at the time that Elon Musk waited until he had nearly 10% of Twitter's equity before publicly revealing his stake. That's a problem because, by law, you have to file something publicly when you have 5%.
As the SEC notes, keeping his growing stake hidden allowed Musk to save many millions of dollars:
The Securities and Exchange Commission announced today that it has filed an action against Elon Musk alleging that he failed to timely file a beneficial ownership report with the Commission after acquiring beneficial ownership of more than five percent of the outstanding shares of Twitter, Inc. common stock, in violation of the beneficial ownership reporting requirements under the Securities Exchange Act of 1934 (Exchange Act"). According to the SEC's complaint, Musk saved at least $150 million at the expense of Twitter shareholders by failing to timely file the beneficial ownership report.
Congress enacted the beneficial ownership reporting requirements to, among other things, help investors make informed investment decisions by providing information about accumulations of certain classes of equity securities by persons who have the potential to change or influence control of the issuer companies.
According to the SEC's complaint, after Musk failed to timely file a beneficial ownership report by March 24, 2022, he purchased more than $500 million worth of Twitter common stock between March 25, 2022 and April 1, 2022. As alleged, because Musk failed to timely file a beneficial ownership report with the SEC, he was able to make these purchases of Twitter common stock at artificially low prices from the unsuspecting public, who had not yet priced in the undisclosed material information of Musk's beneficial ownership of more than five percent of Twitter common stock and investment purpose. According to the SEC's complaint, Musk underpaid by at least $150 million for his purchases of Twitter common stock in this period. The complaint further alleges that, due to Musk's failure to timely file a beneficial ownership report with the SEC, investors that sold Twitter common stock between March 25, 2022 and April 1, 2022 did so at artificially low prices, thereby suffering substantial economic harm.
The SEC's complaint is pretty straightforward because this is a clear-cut case. The law unambiguously says you have to make a filing if you own 5% of a company and Musk did not. His failure to do so allowed him to buy up far more shares without the market realizing that he was angling to take over Twitter (or at least take on a large enough share to have a strong say in the business).
What's particularly crazy is that this has been a straightforward case for almost three years. Musk's skirting of the disclosure rules had been widely discussed at the time. And, yes, Elon stonewalled the SEC and tried to ignore their investigation, but that seems like a pretty poor excuse to wait nearly three years to bring this case.
And, of course, we're mere days away from Donald Trump being inaugurated, and many people (including, potentially, Elon Musk) fully expect that he'll instruct various parts of the government that might have been investigating Musk to stand down. So there's a significant chance this case disappears in a week.
Yes, the apparent theme of the incoming Trump administration (led by the convicted felon Donald Trump) is that there shall be no consequences for anything supporters of Donald Trump (up to and including Donald Trump himself) do that might violate the law. So it seems unlikely that this case is going to matter much, even as it seems like one of the most straightforward and obvious violations of law.
The law is not subtle on this. There aren't things to debate. It says:
Any person who, after acquiring directly or indirectly the beneficial ownership of any equity security of a class which is specified in paragraph (i)(1) of this section, is directly or indirectly the beneficial owner of more than five percent of the class shall, within five business days after the date of the acquisition, file with the Commission, a statement containing the information required...
That wasn't done. Thus there's a blatant violation.
You could claim this isn't a huge deal, but I imagine it was a pretty big deal to the Twitter shareholders who sold him their shares without knowing he was involved in a surreptitious takeover attempt.
So the fate of the case will be at least a quick litmus test for just how lawless the Trump administration will allow its loyalists to be based on what happens and how quickly.