The SEC (US Securities and Exchange Commission), the financial market regulator, took Elon Musk to court again and, this time, he could win.
On Thursday (5), the agency asked a federal court to force Musk to testify in its investigation into the $44 billion acquisition of social media giant X, formerly Twitter. It is the third time that the regulator has taken Musk to court.
The regulator sued him in 2018 and again in 2019 over a tweet by Musk in which he said he had secured financing to take his electric car maker Tesla private. The 2018 lawsuit was quickly resolved on the condition that lawyers examine Musk’s future tweets. The SEC’s 2019 lawsuit attempting to enforce this agreement was unsuccessful.
In this case, the SEC has solid grounds because the law imposing the requirements for investigative demands, or subpoenas, is clear, several former officials at the regulatory agency said.
While the stakes are lower this time, the new case again highlights the extraordinary dispute between the world’s richest man and the securities regulator, which has struggled for years to bring Musk under control.
“This case is different from previous raids between the SEC and Elon Musk because it is a subpoena enforcement case. These cases are really simple,” said Stephen Crimmins, partner at law firm Davis Wright Tremaine and former trial attorney of the SEC.
“The law provides that the SEC has subpoena power to take investigative statements and gather documents.”
If Musk defies the court and fails to respond to the summons, he is likely to be fined until he testifies, lawyers said. A new challenge could, in an extreme scenario, land you in prison.
The SEC, which declined to comment, is investigating whether Musk violated securities laws in 2022 when he purchased shares of Twitter, which Musk renamed X, and the investigation also includes statements and filings he made regarding the deal.
The SEC opened the investigation in April 2022 and Musk provided documents and testified via video conference twice in July. The regulator later received new documents and subpoenaed Musk in May to testify again, this time at his office in San Francisco, where X is headquartered.
Musk agreed to testify on September 15, but two days earlier he raised “spurious objections” and said he will not appear. Musk also declined SEC overtures to testify in Texas, where he lives, in October or November, the SEC said.
“As investigations progress, sometimes you want to bring people back as you have more information,” said Howard Fischer, a partner at the law firm Moses & Singer and a former SEC lawyer. He added that the court will likely order Musk to give additional testimony.
“All you need to show is that…the subpoena is part of a legitimate effort to obtain information.”
A few months after Musk agreed to have the SEC examine his tweets, the agency determined he violated the agreement and sued him to enforce it. But the judge questioned the settlement’s “soft” standard for assessing when a tweet was relevant and told both parties to “put on their reasonableness pants” and resolve the issue.
After that, the SEC was reluctant to go back to court, even though the team believed he had violated the agreement on subsequent occasions, Reuters reported last year.
However, the San Francisco court is unlikely to consider Musk’s poor relationship with the agency and is instead expected to focus on whether the SEC was reasonably compliant with Musk’s schedule and other logistical considerations. Lawyers interviewed by Reuters said the SEC appears to have met that requirement.
“Musk is trying to make it clear that he doesn’t take kindly to being pressured,” said Robert Frenchman, a partner at Mukasey Frenchman who has defended clients in SEC matters.
“I don’t think he’s likely to win this battle.”