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Cornell Prof: SEC Can Police, Jail Billionaires Like Elon Musk

Pushing legal limitations to promote a new business is typically considered as "entrepreneurial" or "disruptive" in the startup scene, but breaching securities laws, as Elon Musk is accused of doing, is something else entirely, Cornell University Prof. Charles K. Whitehead wrote for CNN Perspectives (July 6, 2022) about Musk's troubled relationship with the Securities and Exchange Commission (SEC).

Photo Insert: The US Securities and Exchange Commission

The SEC charged Musk with making "false and misleading" comments about taking Tesla private in 2018. Musk agreed to pay a $20 million fine and step down as Tesla's chairman for three years as part of a settlement with the SEC. The compensation, however, does not appear to have discouraged Musk from breaking the regulations again.

Earlier this year, Musk waited 21 days to publicly report that he had purchased 9.2 percent of Twitter shares, despite the fact that the SEC requires investors to make such statements within 10 days after owning 5% or more of a public company's stock.

Policing Musk puts the SEC in a difficult position. Any financial penalties it is able to levy are unlikely to have much of an impact on someone as wealthy as Musk. Other penalties, given Musk's prominence to Tesla, might possibly hurt shareholders, employees, and others who have little or no influence in whether or how Musk chooses to comply with securities rules.

Musk's influence stretches far beyond his businesses and goods. It has an impact on thousands of others whose portfolios rise and fall in response to his tweets. In this situation, Musk's inability to comply with fundamental rules appears to be recidivism and possibly a lack of respect for the SEC, rather than entrepreneurship.

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One possible SEC response is to increase the size of the financial penalties it imposes. But doing so may require a change in the securities laws. Based on Musk's net worth, no reasonable penalty based on his conduct to date is likely to be large enough to deter him.

Barring Musk from holding company office may be another response, which some refer to as the "nuclear" option. If a CEO steps over the line and does so continually, the SEC may reason that an enforcement action is necessary and axing the CEO should be the cost shareholders bear for the stock price increases they have benefited from. Musk may have already crossed that line.

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A third possibility is criminal prosecution. But the bar for successful prosecution is considerably higher than for civil penalties.

The SEC's examination of Musk's Twitter disclosures might be the first step in determining whether those disclosures involved purposeful misstatements, which could be grounds for criminal prosecution. Whether or not criminal prosecution is filed, the threat of jail time, along with the nuclear option, may be the only way the SEC can deter Musk from violating the rules.

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