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Elon Musk, Twitter and Disclosure Controls and Procedures

by   |   September 29, 2018

In perhaps the fastest moving SEC enforcement action of all time, the SEC charged Elon Musk with securities fraud on September 27, 2018 after settlement agreements reportedly fell apart.  Selecting the nuclear option, one of the remedies the SEC sought was to bar the iconic Mr. Musk as serving as an officer or director of a public company. By September 29, 2018, the action against Mr. Musk and a separate action against Tesla were settled.

According to the SEC, the settlement terms were as follows:

  • Musk will step down as Tesla’s Chairman and be replaced by an independent Chairman. Musk will be ineligible to be re-elected Chairman for three years;
  • 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 MR. 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.

On November 5, 2013, Tesla filed a Form 8-K disclosing that Mr. Musk’s Twitter account would be used to disseminate material information about the company. In the complaint against Tesla, the SEC alleged Mr. Musk did not routinely consult with anyone at Tesla before publishing Tesla-related information via his Twitter account. Likewise, no one at Tesla reviewed Mr. Musk’s tweets prior to publication.

The SEC charged Tesla with violating Rule 13a-15 of the Exchange Act because:

  • Tesla failed to maintain controls and procedures designed to ensure that information required to be disclosed in the reports that it files or submits pursuant to the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the Commission’s rules and forms.
  • Tesla also failed to maintain controls and procedures designed to ensure that information required to be disclosed in the reports that it files or submits pursuant to the Exchange Act is accumulated and communicated to its management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Devoid from the complaint against Tesla is any allegation whatsoever that Tesla improperly failed to file a required SEC report or filed an incorrect SEC report. The fact that there were no disclosure controls and procedures is enough.

So the message to public companies is clear: If you have executives out there communicating material information on social media, you need to have disclosure controls and procedures in place to review the information before and after publication. Or at least one or the other.

It would seem the White House would benefit from a similar rule.