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Explained | Why the SEC might win its latest battle with Elon Musk

The US Securities and Exchange Commission (SEC) has taken Elon Musk to court again, and this time it may win.

The agency on Thursday asked a federal court to force Musk to testify for its investigation into his $44 billion takeover of social media giant Twitter, the third time the SEC has taken Musk to court.

It sued him in 2018 and again in 2019 in relation to a tweet Musk sent saying that he had funding secured to take his electric carmaker Tesla private. The 2018 lawsuit was quickly settled on the condition that lawyers vet Musk’s future tweets. The 2019 lawsuit by the SEC trying to enforce that deal did not go their way.

In this case, the SEC is on solid ground as the law enforcing the requirements of investigative demands, or subpoenas, is clear cut, said several former SEC officials.

While the stakes are lower this time, the new case again shines a spotlight on the extraordinary feud between the world’s richest man and most powerful securities regulator, which has for years struggled to bring Musk to heel.

“This case is different from past forays between the SEC and Elon Musk because it’s a subpoena enforcement case. These cases are really cut and dry,” said Stephen Crimmins, a partner with Davis Wright Tremaine law firm and a former SEC trial lawyer.

“The law provides the SEC has subpoena power to take investigative testimony and gather documents.”

If Musk defies the court, he is likely to be fined until he testifies, lawyers said. Further defiance could, in an extreme scenario, lead to jail.

The SEC, which declined to comment, is probing whether Musk broke securities laws in 2022 when he bought stock in Twitter, which Musk renamed X, as well as statements and filings he made in relation to the deal.

According to the SEC, it opened the probe in April 2022 and Musk provided documents and testified via videoconference for two half-day sessions that July. The SEC later received new documents and subpoenaed Musk in May to testify again, this time at its office in San Francisco, where X is based.

Musk agreed to testify on Sept. 15, but two days beforehand raised “spurious objections” and said he would not appear. Musk also refused SEC proposals to testify in Texas, where he lives, in October or November, the SEC said.

Among his objections, Musk said the SEC was trying to “harass” him and that his counsel needed time to review potentially relevant material contained in a biography of Musk published last month, the SEC said.

On Thursday, Musk wrote on X that such agencies need “a comprehensive overhaul.” Musk’s attorney Alex Spiro said that the investigation was “misguided” and that “enough is enough.”

But it’s not unusual for the SEC or other federal agencies to seek additional testimony as probes evolve, lawyers said.

“As investigations go on, you sometimes want to bring people back as you have more information,” said Howard Fischer, a partner at law firm Moses Singer and former SEC attorney. He added the court will likely order Musk to sit for additional testimony.

“All you have to show is…the subpoena is part of a legitimate effort to obtain information.”

The courts have previously upheld SEC’s subpoena rights.

In 2018, a court compelled Jay-Z to testify after he ignored SEC subpoenas, although the judge told the SEC to seek his permission if it needed more than a day. The musician was also represented by Spiro. In 2022, a judge ordered Terraform Labs’ founder to comply with an SEC subpoena for documents.

Long-running feud

Just months after Musk agreed with the SEC to vet his tweets, the agency determined that he breached that deal and sued him to comply. But the judge challenged the settlement’s “soft” standard for assessing when a tweet was material and told both parties to “put your reasonableness pants on” and work it out.

After that, the SEC was reluctant to return to the court even though staff believed he breached the deal on subsequent occasions, Reuters reported last year.

The SEC has opened other probes into Musk, who has on several occasions denigrated the agency and alleged it is harassing him. He has also disputed the SEC’s finding that he did not have funding secured for the Tesla take private, and has tried unsuccessfully to have a court rescind the 2018 settlement.

The San Francisco court, though, is unlikely to consider Musk’s bad blood with the agency and will focus on whether the SEC has been reasonably accommodating of Musk’s schedule and other logistical considerations. Lawyers Reuters interviewed said the SEC appeared to have met that bar.

“Musk is trying to make a point and he doesn’t want to be pushed around,” said Robert Frenchman, a partner at Mukasey Frenchman who has defended clients in SEC matters.

“I don’t think it’s likely he wins this battle.”

(Published 09 October 2023, 12:10 IST)

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