Elon Musk’s Potential Defeat in SEC Investigation Over Twitter Usage

Elon Musk is facing another legal battle with the U.S. Securities and Exchange Commission (SEC), and this time the SEC might come out victorious.

The agency on Thursday asked a federal court to compel Musk to testify in its investigation into his $44 billion purchase of social media giant Twitter, marking the third time the SEC has subpoenaed Musk.

It sued him in 2018 and again in 2019 over a tweet Musk sent saying he had secured funding to take his electric car maker Tesla private. The 2018 lawsuit was quickly settled on the condition that lawyers review Musk’s future tweets. A 2019 SEC lawsuit trying to enforce the deal didn’t go their way.

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In this case, the SEC is on solid ground because the law governing investigative requirements, or subpoenas, is clear, said several former SEC officials.

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

“This case differs from previous investigations between the SEC and Elon Musk in that it is subpoena enforcement. These cases are really cut and dry,” said Stephen Crimmins, a partner at the law firm of Davis Wright Tremaine and a former SEC trial attorney.

“By law, the SEC has subpoena power to take an investigative statement and collect documents.”

The lawyers said that if Musk defies the court, he could be fined until he testifies. In extreme cases, defiance can lead to prison.

The SEC, which declined to comment, is investigating whether Musk violated securities laws in 2022 when he bought shares in Twitter, which Musk renamed X, and his statements and disclosures related to the deal.

The SEC said it began an investigation in April 2022, and Musk provided documents and testified via video conference in two half-day hearings in July. The SEC later received new documents and in May called Musk to testify again, this time at its office in San Francisco, where X is based.

Musk agreed to testify on September 15, but two days earlier made “misleading objections” and said he would not be there. Musk also declined SEC offers 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 released last month, the SEC said.

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

But it’s not unusual for the SEC or other federal agencies to seek additional affidavits as investigators develop, attorneys said.

“As investigations go on, sometimes you want to bring people back when you have more information,” said Howard Fischer, a partner at the law firm Moses & Singer and a former SEC attorney. He added that 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.”

Courts have previously upheld the SEC’s subpoena rights.

In 2018, a court forced Jay-Z to testify after he ignored the SEC’s subpoenas, despite the judge telling the SEC to ask for his permission if it took 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.

A LONG POINT

Just months after Musk agreed with the SEC to review his tweets, the agency decided he was in breach of the agreement and sued him to comply. But the judge questioned the settlement’s “soft” standard for judging when a tweet was material, telling both sides to “put on their reasonableness pants” and sort it out.

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

The SEC has launched other investigations into Musk, who has repeatedly disparaged the agency and claimed it harassed him. He has also contested the SEC’s finding that he did not have secured financing for the Tesla take private deal and has unsuccessfully tried to get a court to overturn the 2018 settlement.

However, the San Francisco court is unlikely to consider Musk’s bad blood with the agency, and will focus on whether the SEC has been reasonably accommodating to Musk’s schedule and other logistical considerations. Lawyers interviewed by Reuters 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 cases.

“I don’t think it’s likely he’ll win this fight.”

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