Elon Musk has agreed to end his legal standoff with Twitter Inc., but that doesn’t mean his lawyers will take it easy.
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“There were clearly missteps along the way by Elon Musk in terms of his reporting obligations to the SEC,” Alon Kapen, a corporate transactions lawyer at the law firm Farrell Fritz, told MarketWatch.
Musk began building a stake in Twitter on Jan. 31, and securities filings show that he owned more than 5% of the company by March 14. Investors in public companies must disclose when they accumulate more than 5% of a company’s stock within 10 days of passing that threshold, but Musk waited until April 4 to disclose his stake.
By the time he made his stake public, he owned 9.2% of the company. Because news of Musk’s interest caused the stock to rise more than 25%, “he was able to make those purchases [between March 24 and April 4] at a discounted price,” Kapen said.
Furthermore, Musk represented himself to the SEC as a passive investor on April 4, which enabled him to disclose less information about his Twitter stock purchases, even though on April 5, Twitter disclosed that it had offered Musk a board seat. That same day, Musk filed the correct paperwork to reflect his role as an active investor.
The SEC revealed that it was investigating these potential violations in an April letter which requested Musk to explain his failure to report his 5% stake within the 10-day threshold.
The SEC appeared to expand its inquiry into the deal in June, issuing a letter inquiring about Musk’s statement that the Twitter deal “cannot move forward,” and why he did not amend his previous filings to indicate he was exercising a legal right to not complete the acquisition.
Mike Ringler, a lawyer for Musk, responded to the SEC’s letter stating that Musk’s tweets were simply an attempt to “obtain information” and that “there was no material change” to Musk’s plans to buy Twitter.
The correspondence between the SEC and Musk does not indicate that any enforcement actions will be brought, but their history together may encourage the regulator to take a hard line, Kapen said. Musk and the SEC have been engaged in litigation for years over his 2018 statement on Twitter that he had secured funding to take Tesla private, even though the potential transaction was highly uncertain.
Musk settled with the SEC without admitting or denying the fraud allegations, agreeing to step down as Tesla’s chairman and to submit potentially material tweets for preapproval by Tesla lawyers.
But Musk subsequently sued the SEC to end oversight of his tweets, claiming the consent decree is unconstitutional. A federal judge upheld the agreement in April, but Musk appealed the decision in a brief filed last week.
The Tesla CEO has also ridiculed the SEC publicly, saying “I do not respect the SEC,” and making crude jokes about the agency on Twitter.
Kapen argued that this history makes it more likely the SEC will go after Musk once again.
“Elon has a pretty checkered past with the SEC, a history of outright mocking them, and the SEC doesn’t take it kindly,” Kapen said. “I think the SEC has filed these things away and at a time of its choosing may or may not do something about it.”