Musk vs. the SEC: How Tweets Impact Stocks
The stock market is already a volatile environment. Extreme rises and falls can mean trouble for investors and often the economy – and sometimes it takes less than 280 characters to cause chaos in the market.
While currently, the Securities and Exchange Commission (SEC) allows public companies to use Facebook and Twitter to make announcements as long as investors have been alerted to which to social medic channels will be used as long as the information is truthful, Elon Musk, former CEO of Tesla, could cause these rules to change.
Musk has sent the investment world into a whirlwind of confusion multiple times using only his Twitter account. In multiple tweets regarding the state of his car company, it was the “truthful” part of the SEC rules that landed Musk in hot water.
Among Musk’s tweets:
“Shareholders could either to (sic) sell at 420 or hold shares & go private.”
In response, the SEC lodged a complaint against Musk, claiming he falsely indicated that it was virtually certain he could take Tesla private at a purchase price that reflected a substantial premium over Tesla stock’s then-current share price and funding for this multibillion-dollar transaction had been secured. The truth was that Musk had not confirmed or discussed key deal terms or pricing with any funding source.
These SEC rules are in place for a reason, and when they are broken there can be consequences for both the subject of the tweets and investors. According to Sara J. Frank-Hepfer, vice president of Financial Technology Inc., “The SEC has a mandate to protect investors. They want all securities-related public communications to be truthful. Misleading information can lead investors to make decisions that may not be in their best interest.”
Musk took things a step further in April, despite past run-ins with the SEC, by lying on Twitter in order to play an April Fool’s joke. He tweeted that Tesla was bankrupt. Investors weren’t laughing when shares closed down 5.1% the following day after falling as much as 8.1%. Then, Musk tweeted that a Tesla reorganization was underway, causing shares to rise. Now, Musk and the SEC are locked in negotiations regarding keeping Musk’s tweeting under control.
Besides a fluctuating stock market, what types of implications could misleading tweets (or posts) have for public companies like Tesla?
Lansing has several publicly traded companies, including General Motors, Neogen Corp. and Emergent BioSolutions. According to Frank-Hepfer, an employee tweeting about the state of a company may have different information than an official company statement would provide.
“Publicly traded companies provide guidance in accordance with SEC rules and regulations to ensure that investors are getting good information on which to base their decisions,” said Frank-Hepfer.
This information came into play in Lansing in 2008 just before General Motors declared bankruptcy. Frank-Hepfer said that “several people were trying to buy GM stock thinking that their investment could save the company, while most people were discouraged from making a bad investment by brokers. If the official company statements mirrored what local employees were saying, losses could have been exponentially more. The company would have compounded their debt by becoming legally liable for having made false and misleading statements to the public.”
While Musk and the SEC have not reached an agreement, this behavior may be a good indication that social media is not the right platform to talk about the financial state of public companies.