The Securities and Exchange Commission is on Twitter. And the regulators were following Elon Musk's, CEO and Chairman of Tesla, and his Tweets. Mr. Musk and Tesla entered into a settlement in October 2018 following Mr. Musk's Tweets that said Tesla was going private and that he had secured the funding for such. That kind of statement from the CEO of a publicly traded company does move markets. The statements were not true.
Under the terms of the settlement, Tesla was required to scrutinize Mr. Musk's Tweets prior to their publication in order to prevent the use of Twitter for posting information that could move markets. Such information should come through official company statements or regulatory filings such as 8-ks, 100Qs, and 10-Ks, or proxy statements.
Mr. Musk had a bad attitude about the settlement and had been using his Twitter account to goad the regulators, calling them "Shortseller Enrichment Commission." In addition, Mr. Musk gave an interview to "60 Minutes" in December 2018 in which he said: (1) That no one at Tesla was routinely review his Tweets; (2) Offered the following during his interview, "To be clear, I do not respect the SEC." and (3) "The only Tweets that would have to be, say, reviewed would be if a tweet had a probability of causing a movement in the stock. Otherwise, it's 'Hello, First Amendment' -- like Freedom of Speech is fundamental."
On February 19, 2019, Mr. Musk tweeted at 7:15 PM EST that Tesla would build 500,000 vehicles in 2019. The company's quarterly report, filed on January 30, 2019 said that Tesla would make as many as 400,000 cars in 2019. Later Mr. Musk issued a corrective Tweet, "Meant to say annualized production rate at the end of n2019 probably around 500k, ie 10k cars/week. Deliveries for year still estimated to be about 400k." Both Tweets occurred after the markets had closed.
Officers and directors of companies have information about their companies that should be released in a screened and universal fashion, with consistency in all statements, whether written or oral. The dissemination of overly optimistic or overly pessimistic information about a company are violations of 10b -- the statutory provision on fraud in the secondary market. Corporate release of information that inflates earnings or performance misleads investors and moves markets. The SEC's supervision of Tesla and Musk is a means of curbing Mr. Musk's overly optimistic releases of information via Twitter that are not supported by other corporate information.
The SEC was reading and caught Mr. Musk's successive tweets on production. The SEC contacted Tesla on February 20, 2019 and asked if anyone had reviewed the Tweets. The lawyers for Tesla responded that no one had approved the first Tweet, but lawyers had helped draft the second Tweet. Tesla named a new general counsel the next day (The company said the departure was already in the works).
The SEC then filed a motion in federal district court to have Mr. Musk held in contempt of court for violating the settlement agreement. In order to get Mr. Musk to comply with the terms of the settlement, a judge could bar him from being an officer or director of the company (or any public company) as the harshest sanction. Because the initial Tweet was self-corrected and the Tweets were made after-hours, the harshest sanction is unlikely. Or, the judge could simply impose additional requirements in order to rein Mr. Musk into compliance with the settlement terms. Tesla and Mr. Musk have until March 11 to respond to the motion.
Mr. Musk was tweeting away after the SEC filed its motion on February 25, 2019, stating, "SEC forgot to read Tesla earnings transcript, which clearly states 350k to 500k. How embarrassing . . . " The, later at 4:25 AM the next morning, Mr. Musk tweeted again, "Something is broken with SEC oversight." Agitating one's regulator may not be the most effective strategy.
Explain why dissemination of accurate corporate information is critical in the secondary markets.
How do a CEO's Tweets affect markets? What kind of Tweets should CEOs avoid?
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