Monday, May 4, 2020

Were Elon's Tesla Tweets Illegal?

Musk tweeted, and Tesla crashed, but was it securities fraud?

Some background from The Verge:

Musk tweeted he’d sell “almost all” his physical possessions. Well, all right. Then, he tweeted that Tesla’s share price was too high, sending its shares down. Then he tweeted part of “The Star Spangled Banner,” America’s difficult-to-sing national anthem. He encouraged us all to “rage, rage against the dying of the light of consciousness,” which somewhat mangles the meter of Dylan Thomas’ best-known poem. He announced his girlfriend, the musician Grimes, was mad at him.

Tesla's stock crashed after these events, but did Musk act illegally?

The answer is probably no, based on these facts. Basic securities fraud by market manipulation requires an intent to impact the market by a false or misleading statement. So, first the SEC, or a private investor would have to prove that Musk acted with "scienter", that is that he acted with the knowledge that what he was doing was wrong. That is harder to prove unless Musk had some motivation to depress the price of the stock, like owning puts, or planning a stock buyback.

At the same time, is it illegal for an executive to state that his company's stock price is too high? Again, unless he is going to profit from it, probably not, and one could argue that he has an obligation to speak out.

One additional  twist. In his settlement with the SEC last year Musk agreed to have his tweets pre-approved by a company lawyer. If he did not, he may be in violation of the settlement, leading to a host of different problems.

Mark Astarita is a nationally recognized securities lawyer. He and his partners in his law firm, Sallah Astarita & Cox, LLC, are former SEC and brokerage firm attorneys, representing investors, corporate executives and financial professionals in securities fraud matters across the  country.

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