Elon Musk 🆚 the SEC: Delays, Dollars, and Drama
My deep dive on the upcoming SEC showdown and why those five hours could alter Elon Musk’s path
Hello. Welcome.
Gather around and let me regale you with the latest chapter in the perennial saga of Elon Musk versus the Securities and Exchange Commission (SEC), a narrative as recurring as a Twitter feud and just as tempestuous.
regulators might ask a court to banish Elon Musk from serving as an officer or director of any public company.
Considering Elon Musk’s public persona, well-known recognition, and how folks hold such divergent opinions about him, it’s clear the latest episode will stir quite the buzz.
Don’t believe me? Well, there’s a fair chance the regulators might ask a court to banish Elon Musk from serving as an officer or director of any public company.
Do you think that would make the news?
Do you reckon it might shake up the stock?
So, here I am, your dutiful informant, to fully illuminate the situation so you can make wiser trading decisions or dazzle your family and friends with your newfound savvy.
Interested? Keep reading, then.
Our intrepid protagonist, Mr. Musk, CEO and self-appointed Technoking of Tesla (TSLA), is in the regulatory hot seat.
You need only cast your eyes upon the headline of an article published on June 17, 2024, by The Wall Street Journal: “Elon Musk and the SEC Are on a Collision Course Again.”
The article remembers that Mr. Musk chose to keep mum about his Twitter stake until it ballooned past 9%, and he had a seat at the boardroom table offered to him, as per court documents.
Elon ran afoul of Rule 13d-1(a) of the Securities Exchange Act of 1934.
So, let us break this down into small, easy-to-chew morsels.
Loading up on TWTR
According to the supplementary Schedule I of the General Statement of Acquisition of Beneficial Ownership reported by Elon Reeve Musk (yes, that’s his name) on April 5, 2022, these are all the open market purchases of TWTR stock Mr. Musk completed since the start of that year.
What was the problem?
Here’s the thing. Ol’ Elon ran afoul of Rule 13d-1(a) of the Securities Exchange Act of 1934.
This rule lays it out plain and simple: Anyone who scoops up more than 5% of a class of equity securities registered under Section 12 of the Act (in this case, TWTR stock) must file a Schedule 13D with the SEC within ten days of crossing that 5% line.
Elon Musk was as free as a bird to acquire as many TWTR shares as his heart desired. But once he crossed that magical 5% threshold, he had ten days to inform the SEC.
Well, he hit that mark on March 14, 2022, so he should’ve told the SEC by March 24. However, he didn’t file the required Schedule 13D until April 4.
This means there was an eleven-day gap, enough to make any regulator’s mustache twitch.
Why is that such a big issue?
Now, many of you will say that rules are rules, and everyone ought to toe the line, right?
But perhaps others among you might wonder if those eleven days — which, mind you, included two weekends when the market was closed— are really worth all the fuss.
I’m here to tell you that those rules are meant to protect YOU.
the rule ensures that all investors, even the small retail traders, are privy to the same information as the big institutional investors.
Sure, Rule 13d-1(a) works as an early warning system for other shareholders to safeguard them against hostile takeovers, but let me explain how it helps the broader investing public.
Ensuring market transparency
A prompt disclosure gives the market a heads-up on who’s amassing large stakes, hinting at potential power plays or strategic shifts that could stir the company's waters.
For instance, picture a renewable and sustainable green energy company, all sunshine and wind turbines, where the unsuspecting public has nary a clue that 80% of the shares and board seats are puppeteered by Big Oil.
Preventing market manipulation
This rule curtails the antics of bigwig investors who might otherwise manipulate stock prices to their favor by quietly amassing a large stake without anyone knowing and then revealing their holdings to send prices soaring, all while leaving the small retail traders to fry high and dry.
Musk allowed himself a lot more time to keep snapping up Twitter shares at a bargain price
For instance, imagine the Kardashians quietly stacking up 60% of a little-known cosmetic company without anyone being the wiser. Then, in a calculated move, they announce their interest to their millions of followers, whipping up a buying frenzy that sends the price skyrocketing.
While many unsuspecting buyers scramble to get a piece of the action, believing the Kardashians’ fame will propel the company for years to come, the savvy Kardashians are already slipping out the back door, offloading their shares to the star-struck crowd who will be left holding their bags.
Leveling the playing field
By mandating disclosure, the rule ensures that all investors, even the small retail traders, are privy to the same information as the big institutional investors. It reduces undue advantages large investors might otherwise enjoy by keeping their transactions under wraps.
For instance, picture a wealthy investor scheming to amass a 40% stake in a company, and a junior executive entrusted with handling the transactions lets slip the secret to his golfing buddies.
Those chums would then be poised to profit handsomely from insider knowledge not available to the public.
This is the issue with Elon’s failure to properly disclose his actions.
9.2% of the company — around 73.5 million shares, totaling a cool $2.64 billion
If things had been done properly
If Elon Musk had disclosed that he already owned 5% of Twitter shares, it would have made TWTR a much more enticing stock to purchase.
Why, you ask?
Because many traders would have assumed that if Elon Musk is buying a significant stake in Twitter, it means he either sees a golden opportunity in the company or has plans to build an even larger stake — perhaps even to acquire the whole shebang.
Either scenario would be bullish, prompting other traders to jump on the bandwagon. This would, in turn, send the stock price soaring.
After all, someone willing to part with TWTR shares at $36 might think twice if they knew Elon Musk had his eye on the company.
Elon protected Elon
By not filing the required Schedule 13D on time, Musk allowed himself a lot more time to keep snapping up Twitter shares at a bargain price, far lower than what they would have been if the market had known he was quietly amassing a significant stake.
That’s the issue.
Elon Musk’s delayed disclosure allowed him to potentially save over $143 million.
Once the news came out
On April 4, 2022, Elon declared that he already controlled 9.2% of the company — around 73.5 million shares, totaling a cool $2.64 billion, making him the largest shareholder.
Following this revelation, Twitter’s stock enjoyed the biggest intraday surge since the company’s initial public offering (IPO) in 2013, soaring by as much as 27 percent.
Once again, by not filing the required Schedule 13D on time, Musk ensured he would avoid the need to buy shares after the 27% jump that was triggered by the very news catalyst he himself set off.
the cult-like fandom around Musk and his company.
Why did Musk need time, though?
The volume of shares available for purchase at any given time is limited.
When the demand for those shares increases and eats up the limited supply available at the current price, the stock must go up to find more willing sellers.
That’s why swiftly buying up a large number of shares is bound to cause a significant spike in the stock price.
Furthermore, a sudden and unusual volume of shares traded sets off alerts for many automated algorithms, scalpers, day traders, and swing traders. We come swarming in to buy, driving the prices even higher in our wake.
Granted, we might not have known it was Elon Musk buying up the stock, but we would have noticed that a big cat had taken a keen liking.
That’s why Elon Musk, like many large investors, would naturally aim to avoid making waves when building a substantial stake in a company.
Mr. Musk wanted to keep the algorithms and other traders in the dark about his intentions.
And to keep his intentions secret, he needed to move unnoticed, slowly, spreading out his purchases over several days.
That’s why he needed time — time to slip through the market without drawing suspicion.
However, once that 5% threshold was crossed, he needed to report it.
He did, but it was eleven days after the regulatory deadline.
It saved him over $143 million
This 11-day delay meant he was able to purchase additional shares at prices between $38.20 and $40.31 per share.
By the time he finally disclosed his ownership, Twitter’s stock price had ballooned to nearly $50 per share, leading to significant savings compared to if the market had known about his stake earlier.
According to The Wall Street Journal and other sources, Elon Musk’s delayed disclosure allowed him to potentially save over $143 million.
there are hints of dark clouds on the horizon.
The SEC noticed right away
The SEC launched its investigation into Elon Musk’s tardy disclosure of his Twitter stake shortly after he unveiled his 9.2% ownership on April 4, 2022.
Musk, ever the busy magnate, provided some testimony in July 2022 via video conference.
SEC v. Elon Musk
In May 2023, the SEC’s investigation spurred the commission to issue its first subpoenas.
The SEC has already clipped his wings and curtailed his positions before.
However, despite initially agreeing to testify, Musk decided to play truant and refused to appear for a scheduled deposition in September 2023.
In response, on October 5, 2023, the SEC filed a subpoena enforcement action against the elusive magnate, seeking a court order to compel his testimony.
In that Litigation Release, the SEC states that despite agreeing to appear for testimony on a mutually agreed upon date without objection, Elon Musk changed his mind two days before his scheduled testimony date, raising “several spurious objections” for the first time.
Soon after, Musk filed his objections in San Francisco federal court, asking a judge to reject the SEC’s attempt to elicit more testimony for its investigation.
Musk’s attorneys claimed the SEC’s application was overly burdensome and argued that it oversteps the agency’s authority by seeking “irrelevant evidence.”
Musk is ordered to testify
In December 2023, U.S. Magistrate Judge Laurel Beeler ruled that Musk must testify again, rejecting his lawyer’s arguments against the SEC’s authority to issue subpoenas.
But he hasn’t testified…
Just a few weeks ago, on May 30, 2024, a court filing relating to Case № 3:23-mc-80253-JSC finally specified a meeting between both parties.
Whereas the parties have… agreed to conduct the testimony at one of four specified SEC offices on a date more than 60 days from the Court’s May 14, 2024 Order (the parties have agreed in writing to a particular date but have not included that date here for confidentiality purposes);
Elon, ever the master of his fate, will get to choose which of those four SEC offices best suits his fancy since he must appear in person.
They’ve also agreed that his testimony will not exceed five hours of questioning — a small mercy for our beleaguered billionaire.
At any rate, this saga is still unfolding, dear reader, but now you know what’s what.
Ok. So what could happen next?
First, let me be clear that despite all this regulatory rumbling, no formal enforcement action has yet been laid at Musk’s doorstep — aside from attending his scheduled testimony.
However, there are hints of dark clouds on the horizon.
Should the SEC decide to act, it could beseech a judge to remove Musk from his lofty positions, banning him from serving as an officer or director of any public company — a fate dire enough to make even the most audacious of billionaires quiver.
If so, such a ruling could potentially exile him from the helm of Tesla.
That seems extreme…
Perhaps. I’m not one to judge either way.
But it’s not as far-fetched because this would not be Musk’s first brush with the SEC’s stern hand.
Recall, if you will, the 2018 imbroglio over Musk’s blithe tweets about having “funding secured” to take Tesla private.
That kerfuffle ended with Musk relinquishing his role as Tesla’s Chairman and both he and Tesla forking over a combined $40 million in fines.
The SEC has already clipped his wings and curtailed his positions before.
Furthermore, the SEC made that resolution to stave off further market mayhem and safeguard the interests of shareholders.
And yet, here we are once more, with Elon Musk finding himself afoul of the SEC. Again.
The SEC is not an agency that takes kindly to repeat offenders.
⚠️ WARNING: I’ve concluded my deep dive into Elon Musk’s upcoming SEC showdown. I trust you now have a clearer picture of the whole situation.
Now, the following section will present my musings on how I might trade this catalyst. Be warned, for this next part is spun from my interpretation, not hard facts.
I’m not going to anticipate
Elon and Tesla are constantly in the headlines.
I’m not keen on trying to predict this upcoming catalyst because there can be other catalysts in the meantime.
Who knows what might happen between now and then?
I don’t even know when that fateful day might arrive.
Besides, hundreds of institutional analysts are already tracking TSLA, and they’re privy to the information I’ve shared — it’s all public knowledge.
I don’t have an edge there.
If the SEC charges Elon Musk
If so, they’d most likely send out a press release, just as they did back in 2018. Here’s what that one looked like.
I’m almost certain that if the SEC decides to file charges, they will seek to prohibit Musk from serving as an officer or director of a public company.
Why? Because they already tried that in 2018.
“Corporate officers hold positions of trust in our markets and have important responsibilities to shareholders,” said Steven Peikin, Co-Director of the SEC’s Enforcement Division. “An officer’s celebrity status or reputation as a technological innovator does not give license to take those responsibilities lightly.”
The SEC’s complaint… alleges that Musk violated antifraud provisions of the federal securities laws, and seeks a permanent injunction, disgorgement, civil penalties, and a bar prohibiting Musk from serving as an officer or director of a public company.
a fate dire enough to make even the most audacious of billionaires quiver.
To avoid causing market disruption, this press release will become public after the market closes.
I’m not going to chase after it, though.
By the time I get wind of it and manage to react, I’ll already be behind the curve since that game is for the algorithms and the elite day traders who can pounce within the first ten seconds. That’s not my style.
TSLA would take a plunge
The Securities and Exchange Commission charging the CEO of a company? Well, that’s as bearish as a grizzly in a bad mood.
However, while many traders are scrambling and running for the exit, I’d be on the hunt for a long position — probably calls.
Wait. What? You’d be bullish about this?
No, I wouldn’t be bullish. But the lure of playing a short-term bounce might just outweigh the risk.
Institutional investors have all this time to rebalance their holdings and update their risk models to account for the potential SEC charges.
Now, sure, many retail traders will be caught by surprise (as usual), but it won’t send the big players into a tizzy because they already know about this risk. It’s no secret.
Most importantly, it won’t catch Elon Musk napping.
He’ll likely be ready to counterbalance the fallout.
he’s bound to focus on soothing investors’ nerves
A trip down memory lane
The past is no crystal ball, of course, but let’s take a gander at what transpired when the SEC last squared off with Elon Musk.
The press release dropped after the market closed on September 27, 2018.
The next day, TSLA gapped down a whopping -12.20% and closed with a -13.90% loss.
However, Elon Musk and his lawyers reacted.
They immediately reached a settlement with the SEC.
Musk will step down as Tesla’s Chairman and be replaced by an independent Chairman.
Tesla will appoint a total of two new independent directors to its board;
Tesla will establish a new committee of independent directors and put in place additional controls and procedures to oversee Musk’s communications;
Musk and Tesla will each pay a separate $20 million penalty. The $40 million in penalties will be distributed to harmed investors under a court-approved process.
Now, let me tell you, that settlement wasn’t just a slap on the wrist.
Forget about the $40 million — Musk had to step down as Chairman of his own company and bring in independent directors.
And can you picture one of the richest men in the world having to ask securities lawyers for approval every time he wants to tweet about Tesla?
Nonetheless, the news of the settlement with the SEC swept away a significant cloud of uncertainty.
The market saw it as a resolution to the immediate crisis, with Musk’s continued leadership as CEO being a soothing balm for investors.
Consequently, the stock gapped up +15.58% and closed with a +17.34% gain the very next day.
That’s the play I might hunt
Because if the big players have had plenty of time to trim their risk, the SEC has laid out the charges, the unaware and panicked traders have already bolted, and the short-sellers are getting downright greedy… it seems likely that the next move will come from Elon himself. And he’s bound to focus on soothing investors’ nerves, hence the potential for a short-term bounce.
Obviously, my final decision would hinge on what else is brewing with Tesla and the overall market. But I wanted to outline why many traders who are unaware or go aggressively bearish after this catalyst could end up getting blown to smithereens.
At any rate, now you know what I know.
The crucial five hours
Considering the cult-like fandom around Musk and his company and the high stakes for his own legacy, those upcoming five hours of testimony are as crucial as a cat in a room full of rocking chairs.
Wouldn’t you agree, dear reader?
What do you think about the upcoming showdown?
And so, we reach the end of this story.
I trust you’ve found some nuggets of wisdom.
If not, I bid you a fond farewell with an image of my dog.
Stay curious, imaginative, and unaffected.
Have a great week, you tweeting towhees.
⚠️ Disclaimer: Now, let’s get one thing straight — this here article is meant for education and entertainment purposes only. I am not, by any stretch of the imagination, a financial advisor. Before you go flinging your hard-earned dollars into the stock market, do yourself a favor and do your own research. Consult with a professional. The stock market can be unpredictable, and what happened yesterday doesn’t guarantee what’ll happen tomorrow. Should you decide to take a leap based on these ramblings, any losses are your own burden to bear.
Don’t come knocking at my door with a sad story. 😭
