$20 million: the cost of Musk’s misleading tweet

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Elon Musk, CEO of Tesla, has been in trouble with the US financial regulator over a tweet which was said to be “false and misleading”. Back in August, Musk tweeted that he had secured funding to take Tesla private.

The company is listed on the US stock market and Musk said that de-listing the £50billion company would be Tesla’s ‘best path forward’.

Making the announcement on Twitter rather than through conventional disclosure channels, and before informing Tesla’s investors, was described as an ‘unusual move’ by financial experts in the US. But the US market regulator does allow firms to use social media to make announcements provided investors have been informed in advance which platform is to be used.

The regulator said that Musk’s tweet caused ‘significant confusion’ in the stock market and harmed investors. The tweet also saw Tesla’s share price jump and Musk was sued for alleged securities fraud owing to its misleading nature. Musk had not discussed any deal terms, including price, with any potential funder.

Musk has now reached a settlement with the US regulator which will see him pay a $20 million fine. He will remain as CEO but must step down as chairman for three years.

Could it happen here?

Directors of UK listed companies also have a number of obligations relating to the disclosure of information and the making of misleading statements which could lead to fluctuations in share price. A breach of these obligations can lead to serious criminal sanctions.

In particular, a director who makes a materially misleading or false statement, or who dishonestly conceals material facts in a statement will be guilty of an offence if he/she made the statement with the intention of inducing someone to, for example, sell or refrain from selling shares.

Making a misleading statement is an offence punishable by up to seven years in prison and/or an unlimited fine. The director may also be required to compensate any investor who has suffered a loss as a result of the statement.

Disclosure obligations

Certain information must be notified to a Regulatory Information Service (RIS) for distribution to the public before the information is published anywhere else, including on social media platforms.

Inside information relating to a company must be notified as soon as possible. This is information which relates to the company or the company’s shares which has not been made public but which, if it were made public, would be likely to have a significant effect on the price of the company’s shares.

Care must be taken when making a notification to ensure that the information is not misleading, false or deceptive and that it includes all the relevant information.

The disclosure of inside information can only be delayed in very limited circumstances, namely where:

  • immediate disclosure would likely prejudice the legitimate interests of the company;
  • a delay is not likely to mislead the public; and
  • the company is able to ensure the confidentiality of the information.

Social media policy

If an announcement is made before making the market aware, and this leads to abnormalities in the company’s share price, as happened following Elon Musk’s tweet, trading in the company’s shares may be suspended until a formal announcement is made by the company. If information is deliberately made public with the intention of altering the company’s share price, this is more serious and is likely to be market abuse. The company would face action by the FCA which has strong powers to penalise the company involved.

Ensuring statements are made through the proper channels before informing stakeholders on social media prevents any fluctuations in the company’s share price and the potential adverse consequences and penalties that could be imposed on the company as a result.

Elon Musk has highlighted the importance of enforcing an effective social media policy. Failing to do so can carry a hefty penalty.

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