Everyone has their passion. Taylor Swift writes music. Neil deGrasse Tyson likes outer space. Giannis Antetokounmpo plays basketball. And the Securities and Exchange Commission investigates Elon Musk, the richest person in the world, the newly contracted buyer of Twitter, and the longtime annoyer of America’s preeminent Wall Street regulator. The SEC and Musk have been at odds since 2018, almost without interruption, stemming from Musk’s untrue tweet that he had secured funding to take Tesla private. The SEC sued him for making false and misleading statements about his public company, the sides settled, Musk antagonized the agency, the SEC accused him of breaching their settlement, and around they’ve gone.
Now there is a new SEC investigation focused on Musk. There is also one at the Federal Trade Commission, according to the Wall Street Journal, which broke news of both on Wednesday.
The SEC probe revolves around Musk’s purchase of 9.2 percent of Twitter stock earlier this spring—specifically how he did and did not disclose those early purchases. They made him the company’s largest shareholder by around late March, before he made his bid to take control of the company. That the SEC is looking into Musk’s wheeling and dealing is a new development that tracks for two reasons. One is that the SEC adores investigating Elon Musk.
The bigger reason is that Musk’s own public filings about his first big run of Twitter stock purchases indicate that he broke the law in at least one black-and-white way, and maybe in another way that’s a little bit more gray. The SEC may have a different problem: It can’t do that much to bug someone who has as much money as Musk. For Musk, that bureaucratic limitation might be enough of a win on its own to make any new SEC action worth the hassle. We’ll see.
At issue is how Musk told the public about his aggressive move into Twitter stockholding. When someone buys a lot of stock in a company, the price goes up. When that someone is Elon Musk, a man who causes asset prices to rise by being anywhere in their general vicinity, a huge block of stock purchases is really, really, really going to make the price go up.
Relatedly, the United States has securities laws that require big stock buyers to tell the markets what they are doing. If an investor buys more than 5 percent of a public company, they need to file some paperwork with the SEC, which posts the documents on its website. The timing is important: The buyer is supposed to disclose their holding within 10 calendar days of crossing the 5 percent threshold.
“In investing, there’s the haves and the have-nots,” says Michael Dambra, an associate professor of accounting and law at the University at Buffalo School of Management. “There’s always a concern by the SEC to have an equal playing field between what we think of as mom-and-pop investors and these big institutions. These 5 percent positions would be of interest to people, because it could lead to a change in the firm, could lead to change in Twitter, or a potential acquisition of Twitter. And so, if you sort of had a hidden position for a while, you could build up stock on the cheap, and potentially investors can lose out on that inflated price if investors expect the sale to occur. The point of this 5 percent threshold is sort of a heads-up or a notification to our rank-and-file investors that something’s going on with the firm. It’s important.”
The first problem is obvious if you just go over and click on the actual filing Musk made with the SEC to tell the agency that he’d bought 9 percent of Twitter. Right at the top, it says the “date of event which requires filing of this statement”—in this context, the purchase of at least 5 percent of Twitter’s stock—is March 14. Securities law would have had Musk disclosing that stake no later than March 24, the 10th day after he hit 5 percent. But the disclosure is dated April 4, the same day the rest of the universe found out Musk had bought the shares. April 4 is 11 days later than March 24. He was not even close to meeting his filing deadline! A second filing a day later, also sitting there in public, matches up with this buying timeline.
“I think it’s pretty cut and dried that the SEC has a regulatory case that he filed the filing late,” Dambra says. “I mean, there’s not a lot of wiggle room here.”
Maybe Musk’s lawyers were locked out of both Microsoft Office and Google Docs and could not draft the papers on time. Maybe Musk, who has said on national TV that he does not respect the SEC, dragged his heels on purpose. Only he’ll ever know.
“Elon does what he does,” Dambra says. “I think he does like to troll the SEC, and historically the punishments for these delayed filings are small. And compared to someone with massive wealth, such as Elon, maybe that wasn’t a big interest in his mind to make sure that he got his paperwork done.”
At any rate, being late worked out great for Musk. He bought about 13.1 million shares between his 10-day filing deadline and April 4, when he actually filed. He picked up that stock for amounts between $38.20 and $40.30 per share. Combined, those post–March 24, pre–April 4 shares ran him about $513 million.
On April 4, Musk went public with his buying, and the stock went up. It closed at $49.47 per share, about $10 (or 27 percent) better than at the close of the previous trading day. You could reasonably surmise that everyone who sold Twitter stock in that intervening period sold it at $9 or $10 lower than they would have if Musk had disclosed his stake on the law’s schedule. Those 13.1 million shares would’ve cost him an additional $130 million or so, depending on your napkin math. (Dambra suggests a $120 million to $150 million range.) A group of Twitter shareholders has already sued Musk over the holdup. Unlike the billionaire, they filed within 10 days of learning that Musk had amassed his stake. The SEC would probably be looking into taking its own bite at the apple even if the investor in question weren’t Musk.
The other problem with Musk’s disclosures is the kind of paperwork he filed (late) with the agency. He submitted a “13-G” form, one meant for passive investors who do not intend to try to take over a company or throw their weight around in getting it to change its policies. That has struck a lot of people as a weird fit, given that Musk had been regularly tweeting his own performance evaluations of Twitter and was offered a board seat almost immediately after disclosing his stake. Then he bought the company. That does not feel especially passive, and the second Musk filing, the “13-D” he filed, on April 5, acknowledged he would be an activist. A little more than two weeks after that, Musk agreed to just purchase (almost) the whole blue bird.
The SEC may or may not be able to make any hay out of whether Musk filed the wrong form. “For the passive versus the activist, I think Elon could have made the argument that, ‘No, I am just passionate about Twitter. This is something that I want to invest in,’ and maybe he had a change of heart. You can’t really prove his intent at the time he made the share purchases,” Dambra says.
But on the timing issue, Dambra says, the violation looks overt. If the timeline in Musk’s own filings is right, he saved nine figures by coloring outside the lines of the law on the filing deadline alone. Of course the SEC was not going to miss a chance to look into that.
But it is less clear if the agency can give Musk anything more than a bee sting in response. When he and Tesla each paid $20 million fines and Musk agreed to a board demotion after his “funding secured” episode in 2018, he took a victory lap and said it was worth it. The fine was big, but it amounted to a speeding ticket for Musk. It may well be that it’s just not possible to hit someone with a $220 billion net worth hard enough to ruin more than an afternoon.
“From the SEC perspective, I’d be surprised if it’s anything beyond a fine,” Dambra says.
On another hand, even the world’s richest man only has so much in cash, and Musk took on billions of dollars in bank loans as part of his $44 billion Twitter pickup. Some of those loans are secured against his Tesla stock, which has done quite poorly (though most stocks have) in the weeks since Musk agreed to buy the social media company. Maybe the SEC could fine Musk enough to force him to sell more Tesla stock, pushing the price down even further and lessening the primary source of Musk’s wealth. That wouldn’t ruin Musk’s entire month, but maybe it would at least cause him to lose 15 or 20 minutes of sleep one night and curse a few times. Or, maybe, trying to dream up any consequence that bugs him even that much is highly wishful.
“It’s possible, but it would set a new precedent in that massive level of fine,” Dambra says. “I don’t think the fines by the SEC, at least historically, have been that large. If we get more class-action lawsuits, that could be enough to annoy Elon, where there’s not a dollar amount attached to it. Historically the SEC has altered fines based on ability to pay. They’re certainly gonna go after people that have more propensity to pay these things, but Elon’s gonna fight it. And so to the extent that the SEC wants to drag through regulatory proceedings, you know, is that in the SEC’s best interest? I’m not sure, but certainly some shareholders were damaged by the activities of Elon not revealing his position on time.”