On Tuesday, the SEC filed a complaint in the D.C. federal district court alleging that Elon Musk ignored the Section 13(d) beneficial ownership reporting deadline when, in March 2022, he acquired more than 5% of outstanding Twitter shares. Because Musk failed to timely file the report with the SEC, the SEC alleged, he was able to continue to make purchases of Twitter common stock at artificially low prices, allowing him to underpay for the shares by at least $150 million Hmmm. Think this case will be pursued after the SEC comes under new management?
At the time of these events, Schedule 13D or, for a passive investor (a person that acquired the securities “in the ordinary course of the person’s business and not with the purpose nor with the effect of changing or influencing the control of the issuer….”), Schedule 13G, was due within ten calendar days after crossing the 5% threshold. (As you know, those rules were amended in 2023 to accelerate the filing deadlines. See this PubCo post) However, the SEC alleged, Musk failed to file until eleven days after the report was due, at which point he held 9% of Twitter’s outstanding common stock. On disclosure of the filing, the complaint stated, the stock price increased more than 27% over its previous day’s closing price. As alleged in the complaint, “[b]ecause Musk failed to timely disclose his beneficial ownership, he was able to make these purchases from the unsuspecting public at artificially low prices, which did not yet reflect the undisclosed material information of Musk’s beneficial ownership of more than five percent of Twitter common stock and investment purpose. In total, Musk underpaid Twitter investors by more than $150 million for his purchases of Twitter common stock during this period. Investors who sold Twitter common stock during this period did so at artificially low prices and thus suffered substantial economic harm.” The complaint categorizes Section 13(d) as a strict liability statute.
Background. According to the complaint, at the end of January 2022, Musk’s personal wealth manager, at Musk’s direction, instructed a broker to purchase up to 5% of Twitter shares “in a way that would minimize any increase in Twitter’s stock price that might result from the purchases.” The SEC alleged that “Musk and his wealth manager also understood that once Musk’s Twitter stake was disclosed to the public, Twitter’s common stock price might substantially increase,” and that, a beneficial ownership report could be required if the 5% percent threshold were crossed. The purchases continued through February 2022. In late February 2022, the SEC alleged, “the broker repeatedly suggested to Musk’s wealth manager that Musk obtain legal advice as to his obligations under the federal securities laws to publicly disclose his holdings if he became the beneficial owner of at least five percent of Twitter’s outstanding common stock,” but neither obtained legal advice on this issue. In response to an inquiry from the broker, the SEC alleged, around March 8, Musk’s wealth manager, at Musk’s direction, “instructed the broker to continue buying shares of Twitter common stock for Musk past the five percent threshold,” which he proceeded to do.
According to the complaint, on March 14, the broker advised that the 5% threshold had been crossed, and the wealth manager so advised Musk within a week. The SEC alleged that Musk was “required to publicly disclose his Twitter holdings by filing a beneficial ownership report on Schedule 13D (or, if eligible, on Schedule 13G) with the SEC by March 24, 2022.” He did not do so. Instead, the SEC alleged, Musk continued to purchase shares—almost 3.5 million shares on March 25 at an average cost of approximately $38.20 per share, amassing almost 8% of Twitter’s outstanding.
On Sunday, March 27, 2022, according to the complaint, Musk privately advised a Twitter board member “that he owned at least 7% of Twitter’s outstanding common stock.“ The director then “suggested to Musk that he join Twitter’s Board of Directors. Musk expressed interest in doing so.” The SEC alleged that, in this same conversation, Musk asked the director “whether he had ever considered taking Twitter private,” and the director responded yes. On the same day, the director sent a group text message to the Board chair, another director, Twitter’s CEO and Musk regarding Musk’s potential Board nomination. Over the next two days, the SEC alleged, Musk purchased approximately 5.5 million shares.
On March 31, the SEC alleged, Musk discussed with the second board member his potentially joining Twitter’s Board; Musk also indicated that “he was considering, among other options, acquiring Twitter. On March 31, 2022, Musk purchased 2 million shares of Twitter common stock at an average cost of approximately $38.82 per share.” That evening, according to the complaint, Twitter’s CEO and the Board Chair advised Musk that they wanted him to join the Board, but first needed to follow internal Twitter processes. As alleged, Musk indicated that he was considering acquiring Twitter. On the next day, April 1, he purchased nearly 2.2 million shares of Twitter common stock at an average cost of approximately $39.34 per share, with the result that he then owned over 9% of the shares. On Sunday, April 3, the SEC alleged, Musk was formally offered and verbally accepted a seat on Twitter’s Board.
On April 1, 2022, the SEC alleged, Musk’s wealth manager consulted an attorney regarding Musk’s disclosure obligations. On Monday, April 4, 2022, before trading opened, Musk filed a Schedule 13G, publicly disclosing his ownership of over 9% of Twitter shares. As alleged, the Schedule 13G indicated that “he was filing pursuant to Rule 13d-1(c)—i.e., because he had purportedly not acquired the Twitter common stock with the purpose of changing or influencing the control of Twitter.” The filing, according to the SEC, “was eleven days late.” That day, after the filing, according to the complaint, Twitter’s stock price increased more than 27%, closing at $49.97 per share compared to a close of $39.31 per share the prior trading day. The next day, Musk filed a Schedule 13D publicly disclosing “that he had accepted a seat on Twitter’s Board of Directors and that he held more than nine percent of Twitter’s outstanding common stock.”
The SEC alleged that, as a result of his failure to publicly disclose his Twitter holdings by March 24, 2022—“in violation of Section 13(d)(1) of the Exchange Act and Rule 13d-1 thereunder—Musk paid significantly less for the shares of Twitter common stock he purchased between March 25, 2022 and April 1, 2022 than if he had timely disclosed. During that period, Musk spent more than $500 million acquiring additional shares of Twitter common stock.” “If Musk had timely filed,” the SEC alleged, “he would have had to pay at least $150 million more to acquire the same number of shares between March 25 and April 1, 2022. Musk’s violation resulted in substantial economic harm to investors selling Twitter common stock between March 25, 2022 and April 1, 2022. Those investors, unaware that Musk had accumulated more than five percent of Twitter common stock and unaware of Musk’s overall investment purpose, sold their shares at artificially low prices because the market had not yet priced in this material information.”
Here is the litigation release, notably not your typical SEC press release replete with quotes from the SEC officials involved.
Violations. The SEC charged that Musk failed to timely file his beneficial ownership reports and, as a result, violated Section 13(d) of the Exchange Act and Rule 13d-1 thereunder. The SEC requested that the Court “issue findings of fact and conclusions of law that Musk committed the alleged violation,” and issue a final judgment including a permanent injunction and an order to pay disgorgement and a civil penalty.
