GUEST BLOG: Twits or Tweeters by Aegis Frumento

August 30, 2018

I don't tweet. I don't think I could drop random 140-character bon mots without eventually sounding stupid. Oh sure, guys like Nietzsche and Wittgenstein put their whole philosophies in lists of aphorisms that could have been tweets. But they put them in books, and I'm not one of them anyway. If you want to know what I have learned through all my foolish years, buy me lunch. We'll have time left for dessert.

We all talk to ourselves, all the time. But if we talk only to ourselves, how long before every Gollum believes he's an Einstein? As a mentor of mine would sometimes observe after listening to a client justify one thing or another, "Everyone likes the smell of their own shit." George Carlin aptly called our half-baked ideas "brain-droppings." Most belong in the privy.

Then along came Twitter, inviting us to plop our brain-droppings onto an unsuspecting world. Publishing does a funny thing even to the dumbest thoughts. People assume that whatever is published is worth the effort to publish it. Words in print -- even reports of bat-boy riding the subway -- are believed. That has become a problem now that any twit can publish tweets with no effort. But I'm not thinking of him. I'm thinking of Elon Musk.

Don't get me wrong.  Elon Musk is one of the true geniuses of our age. Tesla could lighten cars both of their gasoline engines and their drivers. Tesla's PowerWall batteries lets a friend of mine in Arizona sell electricity rather than buy it. Last February, two of Musk's SpaceX rockets landed back on their own launch pads simultaneously, as if the video of their blasting off was shown in reverse. This, after putting a Tesla roadster in orbit. To which all I can say is, "WOW!"

But even the most brilliant can sometimes be a twit, and Elon Musk proved it this month.

Musk tweets a lot, and on August 7 he tweeted that he was "considering" taking Tesla private. And added, "Funding secured." Tesla stock immediately jumped 11%, which temporarily made Musk $1.4 billion richer. That's when, like Lilliputians trying to string down Gulliver, the SEC started investigating. What did he mean when he said funding was "secured"? How secure was "secured" intended to mean? And I understand class action suits have already been filed.

All that got Musk blogging about a Saudi sovereign wealth fund that had been nagging him for years to take Tesla private. So, financing wasn't "secured" in the sense of an executed stock purchase or a loan agreement, nor even a letter of intent. But according to Musk, all he had to do was ask.

On August 24, Musk announced that Tesla will not be going private after all. Too complicated and investors objected. Or too expensive, as some estimated it would take as much as $24 billion. So Tesla's going-private adventure lasted all of 17 days, and ended with a whimper. Still, at last count, Tesla hired no fewer than five major law firms to deal with the fallout. 

No tweet can launch a thousand lawyers without a sacrifice, and in this it was our collective common sense that was served up well-done.

Musk was a twit for tweeting out his half-baked idea in the first place, but that the investing public would buy close to $12 billion in Tesla stock on a tweet says more about us than about him. People bet on Tesla going private because Elon Musk thought about it out loud on Twitter. But people bet on lots of things for no good reason. Since Tesla is not actually going private, and Musk never said that it was, what stance should securities law take?

Securities law is built on the primacy of "material facts." Material facts must be disclosed in SEC filings. Material facts must not be misrepresented or omitted in purchasing and selling securities. It's a two-part test. First, is it a "fact." Second, is it "material." You have to have both together for a statement to be legally relevant.

What is a "fact" seems to be the metaphysical question of the age. The trial lawyer in me thinks it's easy: If I can prove something is true with admissible evidence before a neutral judge or jury, then it's a "fact.If I can't, then it's not. But even if something is a "fact," it must still be "material." Would "reasonable investor" consider that "fact" to be important? A statement that is not both a "fact" and "material" is a nothing that securities law generally doesn't bother with.

Musk tweeted two things. First, that he was "considering" taking Tesla private. I suppose a reasonable Tesla shareholder investor would consider that important. But how can that be a "fact?" Musk never said he had decided to do anything, only that he was thinking about it. Generally, musings, ideas, opinions, hypotheses, guesses are not regulated because they are not "facts."

Second, Musk tweeted that the funding needed to take Tesla private was "secured." Well, sure, I could prove with evidence whether there was a contract to provide financing. But the availability of financing standing alone is a "so what?" A guy who can choreograph two rockets to take off and land back on their own pads in unison can surely charm some billions of dollars out of a Saudi prince. That Musk could raise the money to take Tesla private would only be material had Musk actually decided to take Tesla private, which he specifically said he had not.

So, Musk tweeted one non-factual and one non-material statement. Neither each individually nor both together amounts to a "material fact." That some investors chose to place bets on those statements says nothing at all about whether Musk violated the securities laws. They might just as well have bought Tesla because they thought a roadster in orbit was cool, or that bat-boy was on the F-train.

Of course, Musk was a twit for tweeting, but he was under stress and sleep deprived. And maybe high. We've all been there. Still, if Musk had said all that in a bar instead of on Twitter, his bartender would have known what to do with his stressed and groggy (and buzzed) customer -- he would have listened and then ignored him. That's what Tesla's bondholders did. And that's what Tesla's stockholders should have done. Tweets are brain-droppings. We become the twits when we don't watch where we step.

And the SEC? It will be easy for it to go after Musk for his errant tweet. It would be harder for the SEC to figure out how to discourage investor reliance on informal chatter like tweets altogether. Since the SEC tends to go for easy these days, I'm betting it too will be a twit about the whole thing.


Aegis J. Frumento
Stern Tannenbaum & Bell
Co-Head, Financial Markets Practice

380 Lexington Avenue
New York, NY 10168

Aegis Frumento is a partner of Stern Tannenbaum & Bell, and co-heads the firm's Financial Markets Practice. Mr. Frumento represents persons and businesses in all aspects of commercial, corporate and securities matters and dispute resolution (including trials and arbitrations); SEC and FINRA regulated firms and persons on regulatory compliance issues and in SEC and FINRA enforcement investigations and proceedings; and senior executives of public corporations personal securities law and corporate governance matters. Mr. Frumento has also represented clients in forming and registering broker-dealers and registered investment advisers, in developing compliance policies, procedures and controls, and in adopting proper disclosure documents. 

Prior to joining the firm, Mr. Frumento was a managing director of Citigroup and Morgan Stanley, a partner and the head of the financial markets group of Duane Morris LLP, and the managing partner of Singer Frumento LLP. 

He graduated from Harvard College in 1976 and New York University School of Law in 1979. Mr. Frumento is a frequent author and speaker on securities law issues, and is often quoted in the media on current securities law developments.

NOTE: The views expressed in this Guest Blog are those of the author and do not necessarily reflect those of Blog.