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The Securities and Exchange Commission (“S.E.C”) starts the new year in full swing with an unsurprising lawsuit against Elon Musk, CEO of Tesla Motors–– boldly adhering to their mission to “maintain fair, orderly, and efficient markets.[1]” On January 14, 2025, the S.E.C., filed an in enforcement action in federal court resulting from Musk’s $44 billion purchase of the popular social media app, X.[2] The S.E.C. contends that Musk’s 2022 purchase of X, formerly known as Twitter, violated securities laws when he acquired a large stock position in the company without filing the proper notification as required by federal law.[3] The complaint divulges that Musk waited 11 days before filing the required disclosures with the S.E.C.[4] As a result of his failure to disclose, Musk was able to purchase stock in the social media company at a comparatively low price point, underpaying by at least $150 million.[5]
According to the initial complaint, in late January 2022, Musk’s financial manager had instructed a broker to purchase large blocks of shares of X’s common stock on Musk’s behalf without exceeding five percent of X’s outstanding common stock.[6] “Outstanding stock” is the authorized stock that a company has issued and that shareholders presently hold– shareholders may include individual investors, institutional investors, or company insiders.[7]
The complaint alleges that in February 2022, the broker managing Musk’s share purchases warned Musk’s financial manager that Musk should seek legal advice about disclosing his position; although, it appears no action was taken at that time.[8] In mid-March 2022, Musk surpassed the 5 percent ownership federal threshold, which would have required him to make a public disclosure. [9] The complaint further asserts that additional shares were purchased until April 4, 2022, when Musk then conclusively made his public disclosure.[10] After Musk announced his position, X’s stock shot up more than 27 percent. [11] The S.E.C. has pursued its current investigation of Musk shortly after he announced in April 2022 that he had amassed a controlling stake in X.[12]
Section 13(d)(1) of the Exchange Act and Rule 13d-1(a) requires any person who acquires a beneficial ownership of more than five percent of any voting class of equity securities registered under the Exchange Act to file a Schedule 13D with the Commission within ten calendar days.[13] Comparatively, Section 13(d)(1) of the Exchange Act and Rule 13d-1(c) allow a person to file a Schedule 13G instead of a 13D, if the person “[h]as not acquired the securities with any purpose, or with the effect, of changing or influencing the control of the issuer…” and if the person beneficially owns less than 20% of the class of securities.[14]
In short, Schedules 13D and 13G are referred to as “beneficial ownership reports.[15]” The term “beneficial owner” includes any person who directly or indirectly shares voting power or investment power–– here, Musk, as he acquired a controlling stake in X.[16] In theory, when proper disclosures are made regarding the funding sources, the public is able to ascertain whether the acquiring company is over-leveraging itself or may signal an imminent corporate takeover.[17] This public transparency allows for other shareholders to then make properly informed decisions based on the investor’s intentions and/or potential influence on the company’s future direction.[18]
In the recent filing, the S.E.C. echoes sentiments of market-harm contending that investors who sold X common stock during this period did so at “artificially low prices” and thus suffered substantial economic harm.[19] Further, that a transparent disclosure would have materially increased X’s stock price.[20]
The S.E.C.’s civil law enforcement authority enables the Commission to hold violators of the federal securities laws accountable for any wrongdoings and assist in recovering money to harmed investors.[21] The S.E.C. may take action publicly via litigation when it finds evidence of wrongdoing, such as the case at hand.[22] When action is taken publicly, it is common for violators to agree to settlements; however, other cases go through the litigation process in federal court or through an administrative proceeding and decided by a judge or jury. [23]
S.E.C. investigations are generally conducted privately and may include informal inquiries, interviewing witnesses, examining brokerage records, reviewing trading data, and other methods.[24] When a formal order of investigation is issued, the Division’s staff may compel witnesses by subpoena to testify and produce books, records, and other relevant documents. [25] Once an investigation is concluded, SEC staff present their findings to the Commission for review which will then prompt a potential case filing in federal court.[26] In October 2023, the S.E.C. initially went to court to compel Musk to testify as part of its investigation into the purchase of X. [27] In the drawn-out investigation, Musk appeared for testimony a year later.[28] In November 2024 a federal judge in San Francisco denied the S.E.C.’s request to impose sanctions on Musk. [29]
The S.E.C. seeks for the federal court to order Musk to pay disgorgement of unjust enrichment and to also issue civil penalties.[30] Notably, S.E.C. Chair, Gary Gensler, under the Biden Administration, has now stepped down from his position since the end of January 2025.[31] Thus, it is unclear if the incoming SEC head will pursue the lawsuit.[32] Marc Fagel, a former SEC attorney who led the agency’s San Francisco regional office, comments “tossing the case outright would be an almost unprecedented action that could raise questions about the SEC’s independence.”[33] Fagel further warns, the “SEC enforcement should not be a creature of politics [and] political influence or consideration should not be a factor.”[34] Only time will tell if the lawsuit will be pursued under the Trump administration.
[1]Mathew Goldstein and Kater Conger, S.E.C. Sues Elon Musk Over Twitter-Related Securities Violations, The New York Times, https://www.nytimes.com/2025/01/14/technology/sec-elon-musk-securities-violations.html (Jan. 14, 2025); The Role of the SEC, U.S. Securities and Exchange Commission, https://www.investor.gov/introduction-investing/investing-basics/role-sec#:~:text=Maintain%20fair%2C%20orderly%2C%20and%20efficient%20markets (Last Visited: Feb. 16, 2025).
[2] Goldstein and Conger, supra note 1.
[3] Id.
[4] Id.
[5] Barbara Ortutay, SEC sues Elon Musk, saying he didn’t disclose Twitter ownership on time before buying it, AP News, https://apnews.com/article/sec-elon-musk-lawsuit-twitter-stock-5c55f71fa7e57f2f8d59ce324e277629 (Jan. 17, 2025).
[6] See generally, Securities and Exchange Commission v. Elon Musk, c/o Quinn Emanuel and Sullivan, LLP, Case 1:25 cv-00105, United States District Court for the District of Columbia,
https/www.sec.gov/files/litigation/complaints/2025/comp26219.pdf (Filed 01/14/25).
[7]Outstanding Stock, Cornell Law School, https://www.law.cornell.edu/wex/outstanding_stock#:~:text=Outstanding%20stock%20is%20the%20authorized,by%20the%20Wex%20Definitions%20Team%20%5D (Last Visited: Feb. 16, 2025); Nina Semczuk, What are outstanding shares?, Yahoo! Finance,https://finance.yahoo.com/news/outstanding-shares-152428721.html# (Nov. 9, 2023).
[8] Supra note 6.
[9] Goldstein and Conger, supra note 1.
[10] Supra note 6.
[11] Goldstein and Conger, supra note 1.
[12] Id.
[13] Supra note 6.
[14] Id.
[15] Schedules 13D and 13G, U.S. Securities and Exchange Commission, https://www.investor.gov/introduction-investing/investing-basics/glossary/schedules-13d-and-13g (Last Visited: Feb. 16, 2025).
[16]Id.
[17] Andrew Beattie, What Can a Schedule 13D Tell an Investor?, Investopedia, https://www.investopedia.com/ask/answers/09/schedule-13d.asp (Aug. 19, 2022).
[18] What is a Schedule 13D & 13G SEC Filing, DFIN, https://www.dfinsolutions.com/knowledge-hub/thought-leadership/knowledge-resources/what-schedule-13d-13g-sec-filing#:~:text=Key%20Information%20Included%20in%20a,regulatory%20actions%20or%20criminal%20records (Nov 15, 2024).
[19] Ramishah Maruf, SEC sues Elon Musk for allegedly failing to properly disclose his Twitter ownership stake, CNN Business, https://www.cnn.com/2025/01/14/business/sec-lawsuit-musk-x-ownership/index.html (Jan. 14, 2025).
[20] Id.
[21] About the SEC, U.S. Securities and Exchange Commission, https://www.sec.gov (Last Visited: Feb 16, 2025).
[22] Id.
[23] Id.
[24] Id.
[25] Id.
[26] Id.
[27] Ortutay, supra note 5.
[28] Id.
[29] Goldstein and Conger, supra note 1.
[30] Aliza Chasan, SEC sues Elon Musk, accusing him of withholding info that cost Twitter investors millions, CBS News, https://www.cbsnews.com/news/sec-sues-elon-musk-withholding-info-from-twitter-investors/ (Jan. 15, 2025).
[31] Maruf, supra note 19.
[32] Id.
[33] Declan Harty, SEC hits Elon Musk with lawsuit in final salvo, Politico, https://www.politico.com/news/2025/01/14/sec-sues-elon-musk-over-twitter-purchase-disclosures-00198295 (Jan. 14, 2025).
[34] Id.