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Elon Musk fights to end corporate monitoring of his Tesla tweets

The Second Circuit will decide if Tesla lawyers must continue to review the CEO's social media posts as part of an SEC settlement.

MANHATTAN (CN) — More than halfway through his first year as the owner of Twitter, Elon Musk pushed a panel of appeals judges Thursday to throw out a monitoring requirement born out of injudicious tweets that could affect the stock price of one of his other companies, Tesla.

The SEC imposed a rule for Tesla lawyers to review Musk’s tweets about the company as part of an October 2018 settlement. Two months earlier, the Tesla CEO had drawn regulators' ire by posting that he had the financing to take electric vehicle company private for $420 a share. They noted in an ensuing civil fraud suit that Musk had nothing of the kind.

Musk tried to renege on his deal with the SEC about a year ago, asking the court to throw certain portions of the agency's subpoena and to terminate the preapproval provision for his tweets.

U.S. District Judge Lewis Liman ruled against the business mogul on days after he publicly offered to buy Twitter.

Musk appealed, arguing in a brief to the Second Circuit that the provision “imposes an impermissible chilling effect” by threatening Musk speech with contempt sanctions.

“The SEC has used the pre-approval provision as a basis to investigate Mr. Musk’s lawful and constitutionally protected speech and sought to hold Mr. Musk in contempt based on such speech. It has done so despite the fact that Tesla has implemented SEC-approved procedures governing the oversight of executive communications, which apply to Mr. Musk,” the filing states. “Such a process serves any purported goal of minimizing the risk of future securities law violations.”

At Thursday oral arguments before the panel of appeals judges in Manhattan, Musk was represented by Ellyde Thompson, from Quinn Emanuel. She argued there is “no close nexus” between the settled conduct and daily chilling effect that the preapproval provision causes Musk.

The three-judge panel questioned Thompson on why Musk's defense failed to raise these First Amendment challenges on direct appeal when the consent degree was imposed.

Thompson told the panel Musk believed that agreeing to the settlement would “buy peace” from the regulators.

Attorneys for the SEC meanwhile contend that Musk voluntarily signed off to the terms of the consent degree twice, the initial settlement in 2018 and an amended judgment the following year.

“Those are the terms to which he agreed,” Jeffrey Berger argued Thursday morning for the SEC, urging the appeals court to affirm the dismissal of Musk’s motion.

Berger defended the constitutionality of the provision and said it does not bar Musk’s free speech on any topic. He noted that it requires “preapproval only for certain topics related to Tesla,” and does not preclude him from speaking about politics, for example, or his other companies like SpaceX and NeuraLink.

The SEC lawyer also noted that the consent decree has resulted in just three sets of inquiries over three years and a single subpoena to Musk in November 2021 after he tweeted a poll that asked: “Much is made lately of unrealized gains being a means of tax avoidance, so I propose selling 10% of my Tesla stock. Do you support this?”

The tweet triggered separate SEC subpoenas of Tesla and Musk, demanding he produce “all documents and communications concerning” the tweets.

“A single subpoena is a not a constant investigation,” Berger said. “Certainly doesn’t show an abuse of discretion.”

U.S. Circuit Judges Debra Livingston and Reena Raggi, both appointees of former President George W. Bush, were joined on the panel by U.S. Circuit Judge Maria Araujo Kahn, who was appointed this year by President Joseph Biden.

The half-hour oral arguments concluded with no immediate ruling on Musk’s appeal.

According to the SEC’s 2018 complaint, Musk calculated Tesla’s $420 price per share of the tweet based on a 20% premium over that day’s closing share price because he thought 20% was a “standard premium” in going-private transactions. This resulted in a price of $419, and Musk stated that he rounded the price up to $420 in a nod to number’s significance in marijuana culture and thought his girlfriend “would find it funny, which admittedly is not a great reason to pick a price.”

Musk's $44 billion takeover of Twitter seven months ago has been stained with dysfunction and layoffs as he attempts to transform the platform.

Last month, the Musk-owned Twitter began stripping blue verification checkmarks from accounts that don't pay a monthly fee, leaving public agencies and other organizations around the world clambering to figure out a way to show they're trustworthy and avoid impersonators.

After polling Twitter users, Musk reinstated former President Donald Trump’s account, which had been banned since a pro-Trump mob attacked the U.S. Capitol on Jan. 6, 2021, as Congress was poised to certify President Biden's 2020 election victory.

“I invested in Twitter as I believe in its potential to be the platform for free speech around the globe, and I believe free speech is a societal imperative for a functioning democracy,” Musk said in a filing with the SEC in April 2022, signaling the likelihood of unbanning suspended accounts under the banner of free speech.

Eli Lilly, General Mills, General Motors and Audi are just a few major companies that have stopped advertising on Twitter since Musk’s tumultuous acquisition.

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Categories / Business, Civil Rights, Media, Securities

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