Federal Judge Not Ready To Approve Musk & Tesla Settlement With SEC
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In legal battles as in sports, it ain’t over ’til is over. We all thought the flap between Elon Musk, Tesla, and the Securities & Exchange Commission was over, so we could all move on to happier things — Model 3 production increases, Tesla earning a profit, and things like that — but it appears there is one more step in the process that needs to be completed before the door on this unfortunate chapter in Tesla history is closed for good.
CNBC reports that U.S. District Judge Alison Nathan on Thursday told the parties they have one week to convince her the settlement they reached is “fair and reasonable, with the additional requirement that the public interest not be disserved.” She added that the court needs to make a “minimal determination of whether the agreement is appropriate” before it is approved by the court.
Is that unusual? Yes and no. Once the SEC filed suit against Musk at the end of September, the case was assigned to Judge Nathan. Every judge in every court has the authority and the duty to review every settlement agreement to make certain it serves the interests of justice. Usually, that is just a formality, but not always.
Jay Hulings, a former federal prosecutor, tells CNBC, “It’s odd, given the nature of this settlement. If there is a class action, it’s common. But just for an SEC enforcement action, particularly with a big fine, it’s unusual,” he said. Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware, disagrees. “The court is perfectly within its jurisdiction to throw a settlement out,” he said.
Elson notes that courts in the past have rejected settlements with the SEC when the judge in charge of a case believed the agency was too lenient on the defendant. He thinks that might be the case here. “I am a little disappointed they didn’t require him to leave the board,” he said. “I understand the argument for not replacing him as CEO, but I certainly don’t think he should be overseeing himself.”
On the other hand, some have postulated that the judge might consider the punishment harsh — depending on her reading of the underlying tweets.
What happens if Judge Nathan refuses to approve the settlement? The court can stipulate what sanctions would satisfy the court. Under the terms of the agreement as presently written, Elon Musk has agreed to step aside from his role as chairman of the Tesla board of directors for a term of three years but retain his seat on the board and his role as CEO. Judge Nathan could decide that he should leave the board altogether. If that happens, expect another round of share price turmoil.
Elon is apparently none too happy with the deal he made anyway. He took to Twitter yesterday to fire a shot across the bow of the SEC, suggesting it ought to change its name to the “Shortseller Enrichment Commission.” How that will affect Judge Nathan’s decision is anyone’s guess.
Just want to that the Shortseller Enrichment Commission is doing incredible work. And the name change is so on point!
— Elon Musk (@elonmusk) October 4, 2018
Today, he went into more detail about his problems with short selling, a practice that is illegal in several countries.
Not all. However, shorting applied to market as a whole is obv net negative — it incents negative gdp! Moreover, it stops private companies from going public, preventing access by retirement funds & small investors, thus increasing wealth divide. https://t.co/7jk2Bs56HR
— Elon Musk (@elonmusk) October 5, 2018
When something sounds too good to be true, it usually is. Way the trick works is companies like Blackrock keep up to 50% of short interest revenue, but suffer almost none of equity decline, as they’re just “passive” managers. Blackrock made $597M in short lending last year!
— Elon Musk (@elonmusk) October 5, 2018
All of which highlights precisely why Elon Musk considered taking Tesla private in the first place. Privately held corporations don’t need to be concerned about having an independent board of directors or whether the needs of investors are being properly taken into account when deciding how to operate the business. If Tesla were a private corporation, all the hoopla generated by short sellers would go away and the company would be free to concentrate on its core mission — ridding the world of the scourge of fossil fuels.
If the court decides the SEC went too easy on Musk and Tesla, don’t be surprised if the idea of taking Tesla private gets revisited.
At the moment, though, Elon seems to concede that Twitter is a dangerous place to play.
Fair point 😀
— Elon Musk (@elonmusk) October 5, 2018
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