Did The SEC Pick The Wrong Cherries?

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I wonder whether the SEC picked the wrong cherries from Elon Musk’s deposition.

First, I am not a lawyer and I am Dutch. I am from a very different culture with a very different judicial system. It is therefore possible that my understanding of this situation is completely wrong. But being logical and factual should produce some food for thought.

I am hugely amazed by the SEC action against Elon Musk. The civil suit was concocted the same day the deal they offered Elon Musk was refused. It appears to be an action by the SEC made in anger.

According to the Merriam-Webster Dictionary, Fraud: “intentional perversion of truth in order to induce another to part with something of value or to surrender a legal right.”

But in the context of the laws governing the financial markets, as they are understood by me, Security Fraud: An act, other than stating a verifiable fact, that causes a financial loss or a loss of trust in the system on the financial markets, by a person to which these rules apply (directors and officers of publicly traded companies, professionals like brokers, bankers, and stock exchange personnel).

What others — like investors, speculators, and journalists — do is all in the game, unless it is insider trading.

There is a rather large difference in the definitions. What is missing is the part about an intentional perversion of truth in order to induce another to do something. But in everyday use, both cases are treated the same. The public and professionals assume automatically intentional deceit.

The SEC seems to think that this is a very easy open-and-shut case, because it is entirely based upon the deposition Musk made in San Francisco to the SEC. What can go wrong? He will be hanged by his own words.

U.S. Security and Exchange Commission in Washington, D.C.

But in the few hours that it took to make this deposition, more was said than is in the complaint made to the US district court.

The day after the infamous tweet — “Am considering taking Tesla private at $420. Funding secured.” — I wrote an article about the possible ways Musk could fund this going private option. One way I mentioned was using his own money. This was a real possibility because the money needed was far smaller than many pundits thought.

The whole case depends on the meaning of the words “funding secured.” The SEC and many others act like it can only mean a legal commitment made by parties. But is that true?

Think of a normal situation many of us have encountered. We want to buy a house, or perhaps a car. After an initial orientation on the market, we look at our bank account, perhaps below the cushions of the couch, ask parents or other family, and/or visit a mortgage broker or payday lender. What we do is calculate the amount of money we can spend. This can be a very informal process (with parents, for example) or more formal (with a quote from a bank and a credit rating check, for example). But the end result is that, when asked by the seller whether we can afford the house or the car, we can say with confidence that the funding is secured, or other words with the same meaning.

You want to be able to say: “You have a nice house, it needs some work, but I am considering it. I am offering 10% less than what you are asking, and yes, the funding is secured (I have or can get the money).”

What I’m trying to make clear is that “funding secured” is not a legal phrase. It is normal everyday language and it should be understood as such.

The SEC is mentioning many conditions that they think should be met, like discussion about the $420 between Musk and the Saudi fund managers. But it is not important whether the SEC thinks it should be discussed — it is important whether Musk and the Saudis think it is important or that it is within the frame of what was discussed. Was Musk justified in thinking the fund manager did have the authority to make this deal (YES for a couple of billion dollars, NO for tens of billions). If he had the authority, would it have been binding? The Saudis appear to think so.

What Musk said during the deposition was that he did have a plan B (and perhaps a plan C). Namely, that could have been using his own money.

And if he could use his own money, there can be no doubt that the funding was secured.

Indeed, it could be a very simple open-and-shut case, with a very different outcome from the one the SEC expects.

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Maarten Vinkhuyzen

Grumpy old man. The best thing I did with my life was raising two kids. Only finished primary education, but when you don’t go to school, you have lots of time to read. I switched from accounting to software development and ended my career as system integrator and architect. My 2007 boss got two electric Lotus Elise cars to show policymakers the future direction of energy and transportation. And I have been looking to replace my diesel cars with electric vehicles ever since. At the end of 2019 I succeeded, I replaced my Twingo diesel for a Zoe fully electric.

Maarten Vinkhuyzen has 280 posts and counting. See all posts by Maarten Vinkhuyzen