Published on October 1st, 2018 | by Zachary Shahan0
Is The SEC Screwing You?
October 1st, 2018 by Zachary Shahan
This article isn’t just about Tesla. In fact, it’s just approximately half about Tesla.
The Tesla story seems rather absurd, but also rather straightforward. Elon Musk tweeted that he was considering taking Tesla private and then explored the possibility. That was more transparent than CEOs of public companies tend to be, and many shareholders appreciated that. In the end, after various discussions and learning that it would be much harder to let retail investors keep shares in TSLA if it went private, Elon decided Tesla wouldn’t go private.
The SEC decided to pursue massive penalties against Elon Musk and Tesla in the name of “protecting” shareholders. Their “protection” of shareholders tanked the stock. A penalty for making a major announcement without notice in the middle of a trading day warrants some penalty, but not what the SEC was seeking (and partly got), and the idea that Elon should be penalized for being as transparent with shareholders as he was is ridiculous, in my humble opinion.
Former SEC senior counsel Thomas Gorman said what many have acknowledged — the tweets had some downsides from a business perspective, but they were certainly not fraudulent. “There’s a significant difference between bringing a law enforcement action, charging someone with fraud, and saying, ‘This is not really a great way to do your business,’” he noted. The Business Insider coverage of his statements on this matter added that there is no legal problem with the tweets Elon sent out on the topics, counter to what many in the financial press have claimed and what the SEC was suing about. “Gorman said the Saudi fund’s reported interest in a take-private deal was enough to make Musk’s statements legal, if ill-advised. And the SEC’s current allegations that Musk hadn’t ironed out the details don’t change that, Gorman said.”
That has all seemed clear and logical for weeks. The hyperventilation about the legality of the tweets was always much ado about nothing, as far as I could tell. (And more recent coverage of Tesla doesn’t make me any more confident the financial press knows what it’s talking about.) I’d say the only big question regarding the SEC lawsuit is what its aims were. Were they to grandstand and use this as an opportunity to scare other CEOs/boards? Were they honest concerns about the tweets? Or is the SEC in the pocket of Big Oil and Big Auto (or have direct interest in such industries) and thus trying to hurt Tesla? Gorman said, “I’m not questioning their motive. I just disagree with their judgment here,” but let’s move on to some other SEC topics and see if there’s any kind of odd pattern.
A number of commenters dropped notes into our first article about the SEC suing Tesla. Steve Hanley cleverly highlighted one of them in his article today about two emails from Elon Musk to staff:
“For you conspiracy theorists out there, it may be interesting to know the same SEC that leapt into action over an Elon tweet also concluded a 2 year investigation into ExxonMobil, during which it reviewed more than 4 million documents. The probe centered on whether the company was truthful with its shareholders with regard to the risks to its business posed by climate change. In the end, the SEC decide to close the investigation without taking any action according to a report by the Associated Press.
“That announcement came on the same day the Trump maladministration announced it was rolling back the fuel economy standards for cars and light trucks put in place under president Obama. Coincidence? We leave that to you to decide.”
Wait, what? The SEC, with Trump-appointed SEC chairman Jay Clayton in charge, concluded a two-year investigation into ExxonMobil’s obviously misleading history with no action? At around the same time it slammed Elon Musk with an inane lawsuit? The SEC didn’t find that ExxonMobil has been deceiving shareholders about the risks of climate change to its business even though there’s proof of that in the public record and it’s as obvious as it is that water is wet?
In a 2016 article, Harry Broadman wrote, “It appears the SEC’s right hand does not know what its left is doing.
“In its implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the U.S. corporate watchdog recently proposed a new rule to explicitly allow resource extractive businesses to exclude public disclosure of payments made in connection with Corporate Social Responsibility ( CSR ) initiatives they undertake in emerging markets. The SEC’s attempt to put the kibosh on transparency and improved governance—indeed paradoxically to undermine its own compliance authority—is most odd: the agency has been stepping up its prosecution of cases under the Foreign Corrupt Practices Act (FCPA) of CSR programs, where, all good intentions aside, are sometimes employed by companies to curry favor with overseas governments to gain competitive advantage over rivals and become backchannels for corruption.
“The supreme irony, of course, is that in so doing, CSR initiatives sometimes actually reward in-country elites and worsen the status quo ante local balance of social and political power. At the same time, they inflict huge financial costs and damaged reputations on the source companies and sometimes even earn corporate executives jail sentences. In light of such perverse outcomes, one would think it would be wise for the SEC to bolster rather than relax its rules for transparency of CSR payments.
“The extractive industries seem to be a haven for CSR investments gone awry.”
That’s right — extraction industries (think: oil drilling, coal mining, resource mining) are allowed to conceal information about where their CSR payments are going. How does that help society and shareholders? It doesn’t.
And here’s a matter from August of this year: “Senator Elizabeth Warren (D-Mass.) said Tuesday that the Securities and Exchange Commission’s (SEC) rule proposal governing broker-dealer conduct has been tainted by ‘soft corruption’ and regulatory capture, as regulators shuffle between the private and public sectors.
“‘Who do you think has been in there, saying “No, no, no, no no?” It’s been some of the biggest players in the industry who don’t like the idea that there is a regulatory body that would say something as shocking as when somebody gives investment advice, the advice should be geared towards making sure the customer is going to prosper rather the investment advisor is going to prosper,’ Warren said during a press conference after a speech at the National Press Club.
“The SEC’s proposed new regulation best interest standard would require brokers to mitigate or eliminate their conflicts of interest, but has been criticized by Warren and RIAs as being too soft on the brokerage industry. Warren most notably pressed Republican SEC commissioner nominee Elad Roisman over his views on the rule at a confirmation hearing in July.”
The swampiest swamp in D.C. history is employing the SEC to do the opposite of its job in other ways as well. From early 2017, just after Donald Trump took office: “President Trump recently repealed a U.S. Securities and Exchange Commission (the ‘SEC’) rule that promoted transparency and improved anti-corruption efforts in the oil, gas and mining sectors. The repealed rule would have required U.S. extractive sector entities to disclose payments made to foreign governments. The joint resolution to repeal this rule was passed on February 14, 2017 with the support of the House and Senate Republicans.
“The repealed SEC rule was mandated by the Dodd-Frank Act established in response to the global financial crisis, and part of the Act called for greater disclosure and transparency. The SEC rule sought to require oil, gas and mining companies to disclose payments made to foreign governments. …
“The extractive sector poses unique and rampant opportunities for corruption, which the SEC rule attempted to address by imposing greater transparency in payments to foreign governments. Requiring U.S. entities to disclose payments made to foreign governments makes bribery and fraud easier to detect, and further holds those foreign governments publicly accountable to their own citizens for the funds received from U.S. entities. This transparency helps to prevent embezzlement or misappropriation of funds, which are major issues in many states with abundant oil, gas and mineral resources. …
“Trump’s administration has been adamant about its dedication to remove environmental and financial regulations.”
In other words, in yet another instance, we see that the SEC — particularly under Trump — is more interested in allowing corruption than blocking it, especially in environmentally harmful industries. At the same time, it just went after the critical head of possibly the most influential pro-environment company in the world. Furthermore, it did so in the name of “protecting” shareholders, but shareholders actually see it as an attack on the company they hold stock in, indicating very clearly by the sharp drop in the stock price following the release of the lawsuit and the sharp rise once Elon Musk settled without having to step down from the CEO role.
Regarding the severity of the lawsuit and settlement against Elon Musk, here’s some perspective from the NYTimes: “When S.E.C. lawyers accused the billionaire Mark Cuban of insider trading in 2008, for example, they did not seek such a ban. Mr. Cuban won the case at trial. When they settled a case against the hedge fund manager Steven A. Cohen for failing to supervise his $13 billion hedge fund, SAC Capital, where several portfolio managers were charged with insider trading, the S.E.C.’s lawyers required Mr. Cohen to stop managing investors’ money only for a period of two years.”
I’ll end with a great comment from Dr. Dean Dauger:
“I’m interested in participating in a class-action suit against the SEC for taking action, whether the SEC knew or was reckless in not knowing, that harms my investment. (I’m long TSLA.)
“It is well documented for years that Elon Musk takes risks for what he believes is the greater good. The shorts hate him for it. Many of the longs like him for it. Arguments about it have raged for years. Knowing that context, the meaning of Elon’s tweet is perfectly clear and is therefore not fraud.”
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