SEC Rejects Elon Musk's Attempt To Escape Its Funding Secured Settlement

The SEC argued this week in a letter to the U.S. Court of Appeals for the Second Circuit in New York that Tesla CEO Elon Musk still needs a so-called "Twitter sitter," and that a settlement agreement between them earlier this year is fully valid and constitutional.

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The now centi-billionaire Musk wrote a tweet in 2018 in which he announced on Twitter that his electric vehicle company, Tesla, had been “funding secured” for a $420 per share takeover and that “investor support” for such an action had been “confirmed.” As a result, Tesla stocks halted trading, and the price of shares in the company fluctuated.

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Musk and Tesla reached a settlement as a result of the SEC charging him with civil securities fraud in response to those tweets. Musk and Tesla signed a revised consent decree in 2019 in response to the SEC's charges. As part of the settlement, each of Tesla and Musk agreed to pay a $20 million fine, and Musk also agreed to relinquish his position as Tesla's chairman of the board for a period of three years as part of the settlement.

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Musk, as a part of his agreement, agreed to be a "Twitter sitter," as it's called colloquially. In every instance where his tweets might contain material business information about Tesla, he was supposed to work with a Tesla securities lawyer who would review and approve the tweets before they were posted.

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Musk said in a series of press interviews and depositions that he does not respect the Securities and Exchange Commission (SEC), and he has repeatedly stated that he does not review his tweets before they are posted and that no one looks at them before they are published.

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Since the settlement was reached, Musk and his lawyer, Alex Spiro, have argued that the SEC has effectively intimidated Musk into signing it, as the terms of even the revised consent decree amount to an "unconstitutional" infringement of Musk's rights to free speech.

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This appeal in the Second Circuit is Musk's attempt to undo at least some of the terms of the earlier settlement agreement he reached with the Securities and Exchange Commission.

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Earlier this week, Spiro sent a letter to the federal court in New York urging it to take into account the jury verdict in the separate, shareholder class action trial that concluded recently in a San Francisco federal court as it considered whether or not to appeal the verdict. A jury found Tesla CEO Elon Musk not guilty of violating certain securities laws with his tweets in 2018 during the shareholder class action trial conducted by Spiro and Musk.

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In its reply letter this week, the SEC argued that “Musk waived his opportunity to test the Commission’s allegations at trial when he voluntarily agreed (twice) to a consent judgment.”

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Furthermore, they argue that the San Francisco verdict does not indicate that a negotiated settlement term remains in the public interest, and that Musk can still tweet accurately about Tesla and other topics. Instead, Tesla must review Musk's Tesla-related communications before publication, including through Musk's Twitter feed, which Tesla designates as a means of communication..”

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SEC lawyers also questioned whether there was a legal basis to undo the settlement years later.

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There has been no final date set for the oral argument on this appeal, but it is expected to take place sometime this spring.

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