The SEC sued Elon Musk, accusing him of failing to file a beneficial owner report within ten days of acquiring 5% of outstanding Twitter common stock on March 14, 2022, as required by Section 13(d) of the Exchange Act.  

Musk instead filed the report 11 days late on April 4, at which point Twitter’s stock price shot up 27%. Between the time when the report was due and his filing of it, he purchased an additional $500m worth of Twitter common stock at a virtual $150m discount.

The SEC noted in its complaint that, as a matter of law, Musk would be strictly liable for failing to timely file the report.

Lack of information leads to investors missing out

The SEC stated that by failing to timely file the report, Musk deprived the public of knowledge that he was gaining substantial ownership over Twitter, possibly in an attempt to acquire it. Its complaint against Musk stated that Twitter shareholders who sold their stock during that period suffered “substantial economic harm” because the shares were undervalued.

Musk would go on to complete his buyout of Twitter later that year, by offering to buy it outright for $44 billion. He initially tried to get out of the purchase, but Twitter sued to force him to commit. He eventually agreed to buy the company in October 2022, renaming it X.

In a statement, Musk’s lawyer Alex Spiro said the lawsuit was “an admission by the SEC that they cannot bring an actual case” and that “Mr Musk has done nothing wrong.”

It is possible that the SEC will terminate the lawsuit when it receives new leadership under the incoming Trump administration, including Paul Atkins, who will replace Gary Gensler as chair.

Musk has been highly critical of the SEC. On an X post he reacted to the lawsuit by stating that the agency is “a totally broken organization” that focuses on “on shit like this when there are so many actual crimes that go unpunished.”

In 2018, Musk agreed to a $20m settlement with the SEC over a Tweet that stated he was planning to take Tesla private at $420 a share, and had secured funding to do so. He also agreed to step down as CEO of Tesla for three years.