January 15, 2025
Section 13(d): SEC (Finally) Sues Elon Musk
I mentioned yesterday that we have seen a number of announcements and settlements out of the SEC Enforcement Division over the past few weeks. When it comes to activity to cover on this blog, I have an embarrassment of riches.
Yesterday, the SEC filed a complaint against Elon Musk in D.C. federal district court, relating to how he reported his ownership stake in Twitter way back in 2022. The WSJ offered this summary:
The SEC’s lawsuit, filed in federal court in the District of Columbia, says Musk’s delayed disclosure of his ownership allowed him to save more than $150 million on buying Twitter stock.
The late disclosure hurt investors who sold at artificially low prices because they didn’t know about Musk’s plans, the SEC says.
The lawsuit comes after a long investigation that Musk sometimes delayed by not appearing for testimony. Musk, now closely aligned with President-elect Donald Trump, will likely ask the commission’s next leader to withdraw the case, teeing up a major test of the agency’s independence from the White House.
As you might remember, and as set forth in the complaint, Musk disclosed his ownership stake in Twitter on a Schedule 13G, more than 20 days after crossing the 5% threshold. The SEC alleges:
Musk understood that any substantial increase in Twitter’s common stock price would increase his costs to purchase shares. Accordingly, Musk’s wealth manager cautioned the broker to make the purchases in a way that would minimize any increase in Twitter’s stock price that might result from the purchases.
Musk and his wealth manager also understood that once Musk’s Twitter stake was disclosed to the public, Twitter’s common stock price might substantially increase.
By the time he filed the 13G, Musk owned 9% of the company’s outstanding common stock and had been in conversations with Twitter about possibly joining the board – and whether the company would consider going private. That’s why, at the time, most securities lawyers watching from the sidelines were surprised that the report was on Schedule 13G rather than Schedule 13D. In its complaint, the SEC also takes issue with that choice.
The SEC is seeking an injunction against further violations of Section 13(d) and Rule 13d-1, disgorgement plus interest, and a civil penalty. Obviously, this is a high-profile case – but if you’re thinking that the SEC wouldn’t spend time pursuing this type of action against people who are not Elon Musk, that’s not quite right. John blogged about a big enforcement sweep just a few months ago – and Meredith shared that the Staff has also been issuing comments. The WSJ also points out that Section 13(d) enforcement is not unusual – and that it’s a strict liability regime:
The new claims against Musk might be hard for a friendlier administration to immediately dismiss. That is because the measure Musk allegedly violated is what regulators call a strict-liability rule. Just as police officers don’t have to prove drivers intended to speed to issue a ticket, regulators don’t have to show an investor meant to violate 13D to bring an enforcement action.
The commission routinely enforces the 13D rule. For instance, in March regulators required HG Vora Capital Management, an investment adviser, to pay a $950,000 fine for violating the regulation. HG Vora disclosed an intent to take over trucking firm Ryder seven days after the 13D deadline, according to the SEC.
Marc Fagel, a former director of the SEC’s San Francisco office, said the need to deter others from doing the same thing may explain why the commission acted. “If you can get away with it when it’s front-page news, why bother to comply at all?” he said.
Keep in mind that the activities that are the subject of this complaint also preceded the amendments to Regulation 13D-G that were adopted a little over a year ago. Now, the deadlines are even tighter – and “machine readable” requirements have also kicked in.
– Liz Dunshee