SEC Sues Elon Musk for Violating Beneficial Ownership Disclosure Rule
Commentary by Andrew Lom
The SEC sued Elon Musk for failing to timely disclose his beneficial ownership of Twitter shares after exceeding the 5 percent ownership threshold. The SEC alleged that Mr. Musk's delay in filing allowed him to continue purchasing Twitter shares at artificially low prices, resulting in an underpayment of at least $150 million.
According to the Complaint, filed in the United States District Court for the District of Columbia, Mr. Musk began acquiring Twitter shares in early 2022 and, as of March 14, 2022, had acquired beneficial ownership of more than 5 percent of Twitter's outstanding shares. The SEC said Mr. Musk was required to disclose this by filing a Schedule 13D or Schedule 13G within ten calendar days, (i.e. by March 24, 2022). The SEC said that Mr. Musk failed to do so and continued purchasing shares, reaching ownership of over 9 percent by April 1, 2022.
The SEC stated that Mr. Musk ultimately disclosed his holdings on April 4, 2022, filing a Schedule 13G, which certified that the shares were not acquired with the purpose of influencing control of Twitter. However, the SEC alleged that this certification was inaccurate, as Mr. Musk’s discussions with Twitter Board members and his stated interest in potentially acquiring the company indicated otherwise. The SEC further alleged that the delayed disclosure harmed investors who sold shares at prices that did not reflect the material information about Mr. Musk's holdings.
The SEC charged Mr. Musk with violating SEA Section 13(d) ("Periodical and other reports") and SEA Rule 13d-1 ("Filing of Schedules 13D and 13G").
The SEC is seeking, among other things, (i) an injunction against future violations, (ii) disgorgement of profits and (iii) civil penalties.
Commentary
In the Complaint, the SEC asserted that the dispositive event demonstrating Mr. Musk's control purpose was when he began engaging with Twitter's Board of Directors about his potential role and acquisition plans. Specifically, the SEC highlighted that on March 27, 2022, Mr. Musk "privately informed a member of Twitter's Board of Directors ... that he owned at least seven percent of Twitter's outstanding common stock" and asked "whether [the director] had ever considered taking Twitter private." Additionally, the SEC alleged that on March 31, 2022, Mr. Musk discussed "potentially joining Twitter’s Board of Directors" and stated that he was "considering, among other options, acquiring Twitter."
There can always be questions of judgment as to when intent changes from being that of a passive investor to one that has a control purpose. The enforcement action illustrates the significance of being mindful of events that do demonstrate a change of purpose.