Tesla CEO Elon Musk is sick and tired of having to pause before tweeting to consider the potential implications on his company’s stock price. The celebrity executive is urging a federal appeals court to throw out a provision in his 2018 consent decree with the U.S. Securities and Exchange Commission (SEC) that requires him to get pre-approval from Tesla lawyers for certain Tesla-related public communications.
The appeal comes a month after a federal judge quashed Musk’s motion to end the same SEC settlement provision.
In the brief, which was filed on Tuesday with the 2nd U.S. Circuit Court of Appeals in Manhattan and reported by Reuters, Musk’s lawyers call the mandate a “government-imposed muzzle,” the effect of which is “to inhibit and chill Mr. Musk’s lawful speech.” They say the provision violates the First Amendment and restricts Musk’s speech on a broad range of topics that are unrelated to the statements that gave rise to the SEC’s 2018 lawsuit.
The lawyers also claim that the SEC can’t show that the provision meets any compelling government interest and is, thus, unenforceable.
How did we even get here? It all started with a tweet from Musk that ran up Tesla’s stock price, causing the SEC to get involved.
In August 2018, Musk tweeted:
Tesla’s stock jumped by over 6% after that tweet, leading to significant market disruption, according to regulators.
A few weeks later, the SEC filed a complaint alleging securities fraud because, the agency said, the buyout was not at all close and was “subject to numerous contingencies,” according to the SEC. Regulators said the claims constituted fraud because they were false and misleading — a sentiment that’s increasingly being associated with Tesla. Apparently Musk hadn’t talked to any potential financing partners about the deal terms or price.
After much verbal foot-stomping, trolling on Twitter and complaints that the SEC’s actions were unjustified, Musk ended up settling with the SEC in October 2018. The settlement saw both Musk and Tesla pay separate $20 million fines. Musk also had to step down as chairman of Tesla, and agree to the provision to have some of his tweets and social media communications checked by a lawyer to ensure no more stock market seesawing would occur.
The tweets continue
In November 2021, Musk asked his Twitter followers if he should sell 10% of his stake in Tesla to cover tax bills on stock options. The result was a sharp decrease in Tesla shares. Last year, he ended up selling $16 billion worth of shares, and another $7 billion in August, probably in relation to his decision to acquire Twitter for $44 billion.
(Separately, Musk is trying to kill that deal, saying the company misled him about the number of bot accounts on the platform. Twitter has sued Musk to force him to complete the merger at the agreed-upon price. A trial is scheduled for October 17.)
Shortly after the November tweet, the SEC issued a subpoena to determine if Musk was complying with the previous settlement. The agency issued a second subpoena in June this year that asked for governance processes around compliance, according to a regulatory filing. This came after Tesla posted earnings for the second quarter while disclosing that most of its bitcoin had been sold off, leaving the company with $222 million in digital assets.
In August, a federal judge denied Musk’s attempt to terminate the provision in the 2018 settlement regarding his Tesla-related tweets. Musk’s lawyers argued at the time that the SEC had misused the settlement to launch an “endless, boundless investigation” of Musk’s speech and that the consent decree was “extracted from Musk through the exercise of economic duress.”
Musk’s net worth was $24.6 billion in 2018.
U.S. District Judge Lewis Liman said at the time that Musk’s argument didn’t hold any water and denied the motion, bringing us to the appeals court.
In Tuesday’s filing, Musk’s lawyers said the SEC needed to be reined in from keeping the executive under “constant threat” that it might reject his view of which disclosures need pre-approval.
“Under the shadow of the consent decree, the SEC has increasingly surveilled, policed, and attempted to curb Mr. Musk’s protected speech that does not touch upon the federal securities laws,” the lawyers wrote. “Any objective served by the pre-approval provision has been served.”
Even if somehow this provision were thrown out, which is unlikely, Musk would still be subject to scrutiny by Tesla’s own disclosure and controls procedures because he uses his own personal Twitter account to disclose news and information to investors. Tesla disbanded its press office in 2020.
“So long as Musk and Tesla use Musk’s Twitter account to disclose information to investors, the SEC may legitimately investigate matters relating to Tesla’s disclosure controls and procedures, including Musk’s tweets about Tesla, as well as the accuracy of Tesla’s public statements about its controls and procedures,” wrote SEC regulator Melissa Armstrong in a filing in the federal court of Manhattan earlier this year.