Elon Musk/SEC: fair and efficient markets depend on timely disclosure

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Elon Musk and his lawyers have been busy reading the new biography of the multi-billionaire entrepreneur released in September. Poring over Walter Isaacson’s book is one excuse Team Musk has offered for shirking testimony repeatedly demanded by the US Securities and Exchange Commission.

Other big, buccaneering investors should take note. The regulator is tightening scrutiny of securities disclosure.

Last week, the SEC sued in federal court in an effort to force Musk to appear. It is investigating his purchase of X shares in the 2022 lead-up to his eventual $44bn full buyout of the social network. 

The SEC has strict rules on flagging purchases and disposals of shares. Investors who accumulate more than 5 per cent of a company’s stock are required to make an initial public filing within 10 days of crossing the threshold.

Musk was initially a passive investor in X. Then he engaged with the company in seeking to join the board. Then he bid outright. He made his requisite 13D filing roughly 20 days after tipping over 5 per cent in X shares. 

The SEC lawsuit comes at an interesting moment. In late September, the agency announced more than 10 separate actions against companies and individuals which had violated rules on disclosing share activity.

The SEC has also been considering shortening the 13D disclosure window to five days, instead of the 10 days that had been implemented decades ago. For all the wrangling, SEC fines for disclosure violations are typically only a few hundred thousand dollars. 

Musk may, however, have a bigger problem. A federal court last week ruled a civil lawsuit from individual shareholders could go ahead. They claim damages from Musk’s alleged disclosure violations.

The shareholders assert that if they had been properly informed about Musk’s intentions to buy X, they would not have sold their shares cheaply before his eventual 13D filing.

The lawsuit is a reminder of why these rules are not merely technical. Markets are most efficient and fair when relevant information is disseminated with timeliness.