“When you talk about fraud,” [Jina Choi of the SEC] answered, “you’re talking about a state of mind, you’re talking about mens rea. We call it scienter. You have to do something with intentionality. The idea of just making a misstatement doesn’t necessarily rise to the level of fraud."
Misstatements can “be the first step to fraud,” Choi had added. “But generally, when we talk about fraud the F word, I think we are talking about a state of mind that’s a little bit higher than that.”[1]
That telegraphs a pretty lenient stance on misstatements that aren't completely fabricated. And there were actual serious negotiations happening here. That's not in dispute.
Without question, Musk made a misstatement. But what was his state of mind? Was there intent to deceive, or was he merely overzealous in his interpretation of the negotiations? If he can argue the latter then it may not rise to the level of criminal fraud.
[1] https://techcrunch.com/2018/09/13/a-tesla-investor-says-he-w...
American commercial law goes out of its way to avoid criminalizing stupidity. At a certain level, the difference between a genius and a madman is the genius was correct. They are indifferentiable without the benefit of hindsight.
The nail in Elon's coffin (or lack thereof) will probably revolve around the degree to which he documented his animus towards short sellers in the days leading up to the misstatement.
That's a huge issue. If he made his misstatements with the intent of hurting short sellers, that's criminal fraud. If he just made a material misstatement, with no intent to harm anyone, it's a civil case.
Every CEO dislikes short sellers, and nearly every CEO makes "material misstatements" now and then. What separates that from fraud is what the SEC focused on in their comment: scienter.
Scienter just means intent. It's literally just the fancy legal term for intent.
Thus, it matters very much that Musk has a history of trashing short sellers and wishing harm to them, because they can use that history to establish that his tweet was made with the intent to defraud market participants and materially affect the price of Tesla's stock.
Especially the "funding secured" bit. You don't say "secured" if it's not really secured. There is no legal interpretation where "secured" is a harmless mistake.
Again, every CEO dislikes short sellers and literally everything they do to talk up the company hurts shorts, by definition. You don't need any tweets to establish that. It's a given. And every CEO misstates things and makes errors and in big companies every statement moves the stock price. The issue is intent.
What you are doing is focusing on the misstatement, adding in fancy sounding terms like "legal interpretation", and whipping that up into intent to defraud. But as the SEC explicitly addressed in the cited comment, they set the "state of mind" bar higher than mere misstatements. You are going to need more than that to establish scienter.
Your fancy term aside, there actually are other interpretations of his comment. He may have been overzealous. He may have overestimated his investors intent.
Let's look at it another way. Musk is a reasonably smart guy. How far was he going to get with this alleged scheme to intentionally defraud the market? How long until everyone realized the funds were not actually secured and the fraud was revealed? Like, 2 hours? That would be the stupidest fraud in the history of frauds. The conclusion is that, perhaps he actually believed the deal would come together. Erroneously, but erroneous statements are not enough for fraud; the key factor is state of mind.
That and if he's able to show he really thought funding could have been secured but fell through. IIRC we still don't know the full story on that.
"Funding secured" and "funding to be secured" are materially different terms. The point of "secured" is it's been bindingly, definitively agreed upon in a way that makes falling through very, very difficult.
His best defense is, absurdly, arguing a seasoned CEO doesn't understand what "funding secured" means. He might be about to inject enough doubt into a jury to avoid criminal charges, but I don't think that will outweigh the preponderance of evidence which is required for a civil judgement.
But that's the SEC's investigation. The deal with the article today, is that the DoJ... aka the FBI is beginning to get involved. This suggests that the FBI is concerned with CRIMINAL issues with regards to that tweet. Criminal penalties looks unlikely IMO, but who knows what the FBI manages to dig up?
In either case, the FBI looking into it doesn't look good at all. If anything, it helps solidifies the SEC (non-criminal) case of negligence.
Optimism might justify a statement like "final stages of signing funding" or "almost closed the deal" or even "funding as good as secured" -- there might be ambiguity there. Not for "funding secured".
This is as close to textbook as you can get.
No this is not textbook at all. See previous citation from the SEC re: intentionality as a key element in criminal fraud.
"Clearly and knowingly false" is just a serious-sounding way to say a misstatement. Did Musk not actually believe in his heart that the deal was basically done? It wasn't, of course, but it takes more than being incorrect to constitute fraud. It takes intent to do something you know is wrong. Wishful thinking may be fraud but it is not necessarily textbook fraud.
So you're saying that, the way securities law works, personal optimism is all it takes to justify any representation of any upcoming financing terms? There's no requirement beyond what's in his heart?
Oops, I mean I didn't say that. The head of the San Francisco SEC office did.
In English, the sentence "Secured funding" is ambiguous in meaning: as a shorthand sentence, it could mean "we would only use secured funding for a transaction like this".
"Secured debt" is a thing, and therefore secured funding is a thing. Unless he clarified it someplace else in a way that was not in his favor, there is plenty of wiggle room in that sentence.
[0] https://twitter.com/elonmusk/status/1026872652290379776?ref_...
This is not true.
If you just make "outrageous" comments on twitter, why is it weird that "USA culture" wouldn't generally prescribe jail time? I'm from the USA, granted, but that sure seems like a reasonable protection of freedom of expression.
Racist comments are of course a trickier example, but I think it's perfectly reasonable for there to be a legal distinction between (protected) tasteless/offensive/insensitive statements about race/ethnicity and (not protected) statements that defame or incite violence.
Hate crimes are treated far more seriously than monetary crimes, if that's what you're trying to get out. It's simply that merely making racist statements is not a crime in the US.
it's as simple as that
so i agree that US law makes a bigger deal out of messing with money than messing with feelings
You can call a person a million names to their face, but if you publish an article or book saying you think that person's a thief, and that person's life was ruined because nobody would hire them anymore, then yes you're potentially opening yourself up to legal action.
Ah ok it actually makes a lot of sense presented that way. So it really is about "culture" then.
This reminds me of "perp watches" posed by police departments on Facebook and twitter. No charges, but arrested - and you get to live in the newspaper and social media regardless if you are exonerated. Cause, public shaming?
edit: s/peep/perp/
There is simply no other way, the only reason this is a big announcement is because Elon is very active on social media.
"We conduct investigations on a regular basis on a multitude of people over possible perceived wrongdoings."
-vs-
"We are conducting a thorough investigation on Musk, Tesla, SpaceX because we believe he did something wrong."
The first is a non-answer, and puts no blame anywhere. Its their reason to be, so its unsurprising. The second statement itself changes the market the very same way he was claimed to do, and paints him and the companies in a bad light, prior to any finding of fact.
I'm arguing for the defense and protection of the accused. By the very definition, they are not guilty/liable UNTIL the court says they are. But this style of bandying around "We're INVESTIGATING ____" Only puts strong implicit blame and guilt on the accused.
Do you have evidence of this, or is it speculation?
The "cause financial harm to people shorting Tesla stock" is a bit of speculation but it seems basically obvious to all observers.
It doesn't seem obvious to me. It seems like one of a few interpretations, not limited to:
- Elon was overly stressed (as has been documented recently) and didn't think before posting such an impactful statement
- He considers twitter to be an official outlet for Tesla and just continued with his tendency to publicise his decisions and thought process constantly.
- His idea of "secured" is simply different from the SEC definition and if the funding had been SEC-secured, the tweet would be a compliant form of public disclosure.
[edit]
To be clear, I'm not arguing that the tweet shouldn't be investigated. I'm saying that "he intentionally lied to screw over short sellers" is presumptive and that may not have been his intent.
> His idea of "secured" is simply different from the SEC definition ...
He is the CEO. He's not allowed to have a different definition. Words mean things. That's how we communicate.
Are you putting words in my mouth on purpose? I'm not arguing that he shouldn't be investigated. I'm arguing that "trying to screw over short sellers" is not the only and "obvious" reason why he could have made the tweet.
Also I don't believe his intent matter for criminal liability in market manipulation.
Source? I legitimately haven't seen this.
> Also I don't believe his intent matter for criminal liability in market manipulation.
I'm not saying it does. Where did I say it does? I don't understand why I keep getting this response.
https://markets.businessinsider.com/news/stocks/elon-musk-ma...
Yes, but words are often nuanced and ambiguous. It's why we have an entire legal system to interpret exactly what "words" mean.
Certainly, it was a reckless thing to say and a bad idea given that it wasn't 100% closed. "Secured" was the wrong word to use, no doubt.
Elon: "I left the July 31st meeting with no question that a deal with the Saudi sovereign fund could be closed, and that it was just a matter of getting the process moving. This is why I referred to “funding secured” in the August 7th announcement."
Elon is a smart man. He knows this does not mean that funding has been secured. "Could be" is not a "secure" state.
Even if we can't say definitively what was going on inside his head when he posted that tweet we can say that any reasonable person in that role with that level of experience can be expected to understand what "funding secured" means.
It's kind of like if I walk into a store and take something off a shelf without paying for it. I can't claim "it's not stealing because I didn't know this stuff wasn't just free for the taking" because any reasonable person in my situation should understand what a store is and how it works.
420...was is really $420? And then smoking weed on Joe Rogan? LOL, now that's funny ;-)
He also tweeted this:
https://twitter.com/elonmusk/status/980566101124722688?lang=...
Was this some elaborate stock exploitation?
I don't mind the investigation but this whole thing, especially all the hate, like he ruined short sellers lives ( the stock is way down since the tweet ), is insane to me.
CEOs have a legal duty to their shareholders and the public to communicate about their companies in a clear an honest manner.
At what point did obvious jokes become illegal?
It wouldn't be illegal if there was a tender offer for the shares at $420.
I'm sick of people giving high-profile people in the tech sector a pass on their shitty behaviour because of the pervasive hero-worship culture. Jobs, Zuck, Torvalds, etc.
Irrespective of Musk "caring too much" or whatever other justification his fans have concocted, this is exactly the sort of behaviour (lying to manipulate the market) we have laws to prohibit.
We see articles every so often about how Tech as an industry needs to play catch up on the Ethics side of things. Now's the chance.
https://www.tesla.com/blog/update-taking-tesla-private
In the post, he also admits that the Saudi Arabian investment would only provide a small fraction of the necessary amount needed to go private.
https://twitter.com/elonmusk/status/1026872652290379776?lang...
Follow the original twitter feed yourself. Its not like its been deleted. Musk is very clear that "funding is secured", and in follow up tweets.
> Am considering taking Tesla private at $420. Funding secured.
> Shareholders could either to sell at 420 or hold shares & go private
> My hope is all current investors remain with Tesla even if we’re private. Would create special purpose fund enabling anyone to stay with Tesla. Already do this with Fidelity’s SpaceX investment.
----------
Days later, Musk posts a blogpost that directly contradicts his original tweets. IE: He was lying originally. We now know that there's no buyer who was willing to spend $70 Billion to buyout Tesla and take it private.
The question then, is was this lie "negligence" (SEC fine), or was it intended to manipulate the price? (FBI jailtime).
The DoJ case implies the FBI is looking into the jailtime question. While the SEC is looking into the negligence question. Both cases will move forward as appropriate.
My bet is that SEC gets him on negligence, but I don't really know enough about history / other cases to know what kind of punishment Musk will get. I'm guessing a fine of some kind, but the SEC does have the power to remove Musk from his CEO position entirely.
This is all drama for drama's sake.
But he lied on twitter in a direct effort to cause financial harm to people shorting Tesla stock. You can't do that. He should go to jail.