SEC Finally Gets around to Filing Very Easy Case against Elon Musk
Though it already feels like a lifetime ago, just last week the SEC sued Elon Musk for failing to make some disclosures connected to his acquisition of Twitter in 2022. For now, let’s skip (1) the case’s problematic timing, and (2) whether the case will proceed after Paul Atkins becomes the SEC chair.
Section 13(d) and Rule 13d-1
But to begin, let’s say you had a lot of money and wanted to do a hostile takeover of a public company. You could start by buying shares on the open market. If you get enough shares, eventually you’ll control the company and do what you want with it. But there are rules. If you acquire more than 5% of the company’s shares, you have to make some public disclosures.
As the SEC says in its complaint, the idea behind the rules is to “help investors make informed investment decisions by providing information about accumulations of . . . equity securities of a company by persons who have the potential to change or influence control of that company.” Put another way, if:
you were a shareholder of a company whose shares traded at $50, and
a corporate raider started accumulating shares with a view toward taking over the company,
it would be helpful to know about that because you might not sell during the raider’s buildup and instead hold out for a premium on that $50, maybe something like $60.
So this is a bit oversimplified, but in 2022 Exchange Act Section 13(d)(1) and Rule 13d-1(a) required anyone who acquired more than 5% of a company’s outstanding shares to file a form called Schedule 13D within ten calendar days after crossing the 5% threshold. (In 2023 the Commission shortened the deadline to five business days.)
Rule 13d-1(c) lets someone file a different form, Schedule 13G, in lieu of the Schedule 13D if the person “[h]as not acquired the securities with any purpose, or with the effect, of changing or influencing the control of the issuer, or in connection with or as a participant in any transaction having that purpose or effect” and if the person beneficially owns less than 20% of the class of securities. You file Schedule 13D if you have plans on trying to control the company, and Schedule 13G if you don’t.
2022 Timeline
Here’s an abbreviated timeline according to the SEC’s complaint:[1]
Jan. 31 – Elon’s personal wealth manager tells a broker to start buying large blocks of Twitter stock on Musk’s behalf, but not to exceed 5% of Twitter’s outstanding common stock. The broker starts buying and keeps buying.
March 14 – The broker tells the wealth manager that Elon beneficially owns more than 5% of Twitter’s outstanding shares. Elon keeps buying shares.
March 24 – This is Elon’s deadline to file a beneficial ownership report on Schedule 13D or Schedule 13G. He doesn’t file either one, and by the end of the day he owns over 7%.
March 25 – He crosses 8%.
March 27 – Elon has conversations with members of Twitter’s Board of Directors about joining the Board.
March 28 to early April – Elon keeps buying millions of shares.
March 31–Twitter’s CEO and Board chair tentatively invite Elon to join the Board. Elon tells them he’s considering acquiring Twitter.
April 3 – A Board member formally offers a Board seat to Elon, who verbally accepts.
April 4 – Elon files a Schedule 13G, publicly disclosing for the first time that he owned more than 5% of Twitter’s outstanding shares. The cover page says he’s filing under Rule 13d-1(c) – i.e., because he had not acquired the shares with the purpose of changing or influencing the control of Twitter. Twitter’s stock price jumps from $39.31 to $49.97, a 27% bounce.
April 5 – Elon publicly discloses that he’s accepted a seat on the Board and that he holds more than 9% of Twitter’s outstanding common stock, by filing a Schedule 13D.
What Should Have Happened Here?
I remember thinking when all of this happened that the SEC should bring a case quickly. That obviously didn’t happen, but why not? Look at the facts in that timeline. The staff could have known most of them almost as they emerged. It might not have had immediate access to conversations between Musk and members of Twitter’s board – and good luck getting them out of Elon himself – but I bet Twitter’s board members and CEO would have talked about them! He said a lot of rude things about them in public!
But to bring this case within a matter of weeks, it almost doesn’t matter who said what about Musk joining the Board, planning to acquire Twitter, whatever. Section 13(d) is a strict liability statute, as the complaint helpfully points out in Paragraph 13. Elon crosses the 5% threshold and he either files the report publicly disclosing that ten days later or he doesn’t. And if he doesn’t, he’s liable under Section 13(d) and Rule 13d-1.
Schedule 13G or Schedule 13D?
I said just above that the conversations almost don’t matter because Elon’s purpose in acquiring the shares does play into whether he should have filed a Schedule 13G or a Schedule 13D on March 24th. The statute and rule really don’t provide for strict liability as to the difference between those two forms. You have to inquire into what the buyer’s purpose was. If Musk had no designs on controlling Twitter he was allowed to file a Schedule 13G. The Board discussions are at least some evidence that he wanted to “chang[e] or influenc[e] the control” of Twitter. But remember, he didn’t file anything on March 24th.
He waited until April 4th to file a Schedule 13G, suggesting he had no such purpose. The market, though, seems to have figured out what was going on because Twitter’s share price jumped over $10 that day. He filed a Schedule 13D (conceding a purpose in “changing or influencing the control” of Twitter) on April 5th and the share price moved a little bit higher, about a dollar. The difference between the two forms is at issue for at most only that one day, and the price movement was quite modest. The difference between the 13D and the 13G doesn’t amount to much here in terms of any effect on the market.
But for 21 days after crossing the 5% threshold on March 14, he didn’t tell the market anything about his 5% ownership of Twitter’s shares, as he was required to do. And Twitter’s share price bumped along in the 30s, rising slowly, throughout that 21-day stretch. The SEC calculates the discount Elon got for his Twitter shares in the runup to his disclosures as “at least $150 million.” You could probably fight about the numbers, but that’s a case! One the SEC could have filed in a matter of weeks.
Why Now?
It didn’t. Instead, it waited for 2½ years. In that time, Elon (1) grew into maybe the single largest individual influencer of a presidential election in American history; (2) started up the “Department of Governmental Efficiency”; and (3) became so powerful within the current Trump Administration that many are calling him “President Musk”. A Section 13(d) case against him looks a bit more politically motivated now than it would have in 2022.
Honestly, what were they doing that whole time? Did they consider not filing at all? Did they want to bundle it into a larger case involving other potential violations that never crystallized? How did they decide to publish with the case with a litigation release and not a press release? I would pay $10 to know the answers.
What Happens Next?
I bet the case goes forward and settles in some form that is much more favorable to Elon than it would have? I don’t know. If Elon pitched enough of a fit I bet he could get the case derailed entirely. But as crazy as it is to write, $150 million doesn’t mean that much to him. Also, I suspect incoming chair Paul Atkins won’t want to be seen as throwing up his hands and saying, “It’s a new day and nothing matters.” Maybe I’m wrong.
SEC v. Elon Musk, Complaint, Civ. No. 1:25-cv-105 (filed Jan. 15, 2025)
James Clayton, “Messages Reveal How Musk and Twitter Boss Fell Out”, BBC, Sept. 30, 2022
TradingView (historical Twitter share price data)
[1] These “facts” in this chronology are really just allegations. They might not be true.