United States Securities and Exchange Commission v. Musk

Background

The SEC previously sued Elon Musk over statements he made on Twitter about taking Tesla private at $420 per share. The case ended in an October 2018 judgment entered with Musk’s consent. The judgment permanently barred violations of specified federal securities laws, imposed a $20 million civil penalty, and required Musk to follow Tesla’s procedures for reviewing and pre-approving written communications that contained or reasonably could contain information material to Tesla or its shareholders. Musk also agreed not to publicly deny the allegations in the SEC’s complaint without making a required qualification.

After Musk tweeted in November 2021 about proposing to sell 10% of his Tesla stock and promising to follow the results of a Twitter poll, the SEC served subpoenas on Musk and Tesla. The subpoenas sought documents and communications about the tweets, including whether Musk submitted them to Tesla’s general counsel or securities counsel for review before publication. The SEC issued the subpoenas under a formal investigation order stating that it had information tending to show possible violations of federal securities laws.

Musk moved to quash portions of the subpoena served on him and to terminate the 2018 consent decree. He argued that the SEC lacked authority to issue the demands, acted in bad faith, and was limited to seeking evidence under the enforcement provisions of the consent decree. He also argued that the decree should end because it restricted his speech, had been used to pursue repeated investigations, and was obtained through economic pressure.

Motion to Quash

The court held that the motion was not the proper procedure for challenging the SEC’s administrative subpoena. Section 21(b) of the Securities Exchange Act gives the SEC broad investigative authority, including the power to demand records relevant or material to an investigation. Section 21(c), codified at 15 U.S.C. § 78u(c), provides a process for the SEC to seek judicial enforcement when a subpoena recipient refuses to comply.

Relying on Second Circuit precedent, the court held that a subpoena-enforcement proceeding under Section 78u(c) is the exclusive method for testing the validity of an SEC investigation or subpoena in federal court. Because the SEC had not brought an enforcement proceeding against Musk, the court could not decide through Musk’s motion whether the subpoena was properly issued or whether the investigation was motivated by bad faith. The court also stated that sovereign immunity barred Musk from bringing his own action against the SEC to challenge the investigation.

The court rejected Musk’s argument that the earlier SEC lawsuit and the consent decree gave him a different method of challenging the subpoena. The 2018 judgment resolved only the claims asserted in that civil proceeding. It did not give Musk broader immunity from later SEC investigations or prevent the SEC from investigating possible securities violations in 2021. The decree’s provisions allowing reasonable requests for evidence about Musk’s compliance were enforcement mechanisms for that decree; they did not replace the SEC’s independent authority to investigate possible violations of the securities laws.

The court added that, even if it could review the subpoena’s relevance, it would find the requested information relevant. Evidence about whether Musk followed Tesla’s review procedures and received legal advice could bear on his responsibility for potential violations. Evidence about whether Tesla followed its own policies could also bear on whether Tesla’s disclosures about those policies were accurate.

Motion to Terminate the Consent Decree

Musk sought relief under Federal Rule of Civil Procedure 60(b)(5), which allows relief from a final judgment when applying it prospectively is no longer equitable. The court explained that a party seeking to modify a consent decree must show a significant change in factual conditions or law. Examples include compliance becoming substantially more burdensome, unforeseen obstacles making the decree unworkable, or enforcement without modification harming the public interest.

The court rejected Musk’s First Amendment argument. It stated that Musk’s tweets were at least presumptively protected speech, but Musk also conceded that the First Amendment did not protect speech that was fraudulent or violated securities laws. The court further relied on precedent holding that parties may waive First Amendment rights in settlements and consent decrees. Because Musk agreed to the decree’s communication-review requirement, the court held that he could not later challenge that provision on the ground that it violated his First Amendment rights. The court did not decide whether the pre-approval requirement, considered independently, would satisfy the First Amendment.

The court also rejected Musk’s claim that the SEC had misused the consent decree to harass him through investigations. It reasoned that non-public SEC investigations were foreseeable when Musk entered the decree and that the SEC’s limited inquiries about his 2021 tweets were consistent with its investor-protection mission. Finally, the court rejected economic duress. Musk’s assertion that the SEC had taken advantage of Tesla’s position was conclusory, and the court found that Musk voluntarily entered the agreement with counsel to obtain the benefits of settlement, including finality.

Disposition

The court denied Musk’s motion to quash the subpoena and to terminate the consent decree. It directed the Clerk of Court to close the docket entry for the motion.