Elon Musk was 11 days late in publicly declaring he had amassed a large stake in Twitter. That omission may have earned him $156 million, according to a half-dozen legal and securities experts.
In between, he continued to buy stock at the price of around $39 per share, bringing his total stake to 9.2 percent. After his disclosure, Twitter’s share price rose roughly 30 percent and is now above $50 per share.
The late filing netted Musk $156 million, said David Kass, a finance professor at University of Maryland’s business school. “I really don’t know what’s going through his mind. Was he ignorant or knowledgeable that he was violating securities law?” he said. Whoever was handling the trades for Musk should have known, Kass said.
The disregard for securities laws — whether intentional or accidental — highlights the way billionaires and powerful individuals can skirt federal rules and even tax code to continue to build their wealth.
Musk’s windfall may come with a slap on the wrist in the form of a fine from the SEC but will probably be limited to hundreds of thousands of dollars, according to the legal and security experts.
The SEC could also argue in court that Musk needs to part with the theoretical profit, but that would be a long shot, said Adam Pritchard, a professor of securities law at University of Michigan’s law school.
The SEC “would have to be really angry with him to try that because they would have a good chance of a court rejecting that argument,” he said.
Individual shareholders, Pritchard said, have no right to sue Musk because the public disclosure is a regulatory requirement and not something he legally owes to Twitter’s shareholders.
Musk did not respond to requests for comment, nor did securities lawyers working for him. The SEC declined to comment.
SEC Chair Gary Gensler has proposed new rules that would halve the amount of time investors have to disclose after crossing the 5 percent threshold, from 10 days to five.
“It is important that shareholders get that information sooner,” he said in a statement.
Musk has drawn scrutiny from the SEC in the past. In 2018, he entered into a consent decree with the SEC for allegedly misleading investors when he tweeted that he had gathered enough funding to take Tesla, where he’s CEO, private. Musk paid a $20 million fine and agreed to step down as chairman and vet his tweets with lawyers. Last month, he asked the SEC to scrap that agreement.
Musk has continued to push the rules, polling his Twitter followers in November on whether he should sell a 10 percent stake in Tesla, potentially influencing the market.
The Wall Street Journal also reported in February that the SEC was investigating a stock sale by Musk’s brother a day before that tweet.
It isn’t clear why Musk, who is the world’s richest man valued at $276 billion according to the Bloomberg Billionaires Index, missed the deadline. The gains of $156 million represent a drop in the bucket for the PayPal co-founder, who also owns and runs rocket company SpaceX.
In addition to missing the deadline to disclose his position, Musk may have also filed a misleading report to the SEC, claiming he is a “passive investor” with no aims to change or influence ownership of the company.
Musk polled his Twitter followers March 25 about whether they thought Twitter was protecting free speech. “The results of this poll will be important. Please vote carefully.” By that time, he had already purchased 63.5 million shares of the company’s stock.
Securities lawyers and finance experts say that if Musk had been planning to join the board or to influence the company’s decision-making by leveraging the voting power of his stock, he probably should have filed a different disclosure indicating he was an “active investor.”
When Musk was appointed to Twitter’s board of directors Tuesday, he filed a different form, changing his status from a passive investor to an “active” one.
The potential abuse of passive investor status has been a subject of debate in securities law for two decades, and Musk’s choice has drawn more scrutiny to an area of finance the SEC has rarely policed.
The disclosure requirements were first implemented in 1968 to help warn investors of a potential hostile takeover bid, an increasingly common occurrence at the time.
Activist investors often buy up as much stock as possible in secret, using several brokerage firms to cover their tracks. The secrecy typically serves two purposes: To keep the stock price from going up, which would make the effort prohibitively expensive, and to keep the company’s board in the dark as long as possible.
For now, Musk has agreed to limit his stake in the company to 14.9 percent, so long as he sits on the board.