Musk stated on Monday that he had acquired a 9.2 percent interest in Twitter, making him the microblogging site's top stakeholder and sparking a more than 27 percent increase in the company's stock. According to the petition, the occurrence that necessitated the disclosure occurred on March 14, 2022.
Securities legislation in the United States mandates notification within ten days after purchasing 5% of a corporation, and Musk missed the 10-day deadline on March 24. According to Urska Velikonja, a legal professor at Georgetown University Law Center, a late report might result in a civil penalty of up to $207,183 per infringement.
That is a financial slap on the wrist for Musk, who Forbes estimates has a net worth of $302 billion, but analysts believe the SEC might investigate market manipulation claims around the Twitter stock purchase and pursue heavier punishment in an ongoing inquiry into his Tesla stock transactions.
"This is not a gray area at all. He obtained it but failed to file within ten days. This is an infraction. Thus, from the SEC's standpoint, this is a slam-dunk case," Adam C. Pritchard, a law professor at the University of Michigan Law School, said.
Additionally, Musk filed a "13G" disclosure form for investors who want to hold their shares passively, despite the fact that Musk will assume a seat on the Twitter board in order to press for reform at the firm on Tuesday.
This implies he should have submitted the "13D" form, which is used by activist investors, executives, and directors with the potential to influence an issuer's management and policies, according to multiple attorneys.
Eleazer Klein, co-chair of Schulte Roth & Zabel worldwide Shareholder Activism Group, said Musk's use of the 13G form was improper and that authorities may have grounds to investigate.
Musk revised his prior filing on Tuesday, submitting the 13D form to declare a change in his position from a passive investor to an active investor.
The SEC is already looking into Musk's Nov. 6, 2021, tweet in which he asked his followers whether he should sell 10% of his Tesla share.
Musk is also constrained by a 2018 SEC settlement, which compels him to acquire pre approval for certain statements after his tweet claiming to have "financing secured" to take Tesla private. According to the SEC, he cheated investors.
Musk claims that the SEC is pestering him in bad faith in an attempt to penalize him for criticizing the government, and he is trying to get the transaction canceled.
Pritchard said that the SEC might "advise a judge that he is a recidivist violation of the securities laws who requires severe punishment."
Tesla and the Securities and Exchange Commission did not reply to requests for comment.
Tesla's stock fell 4.7 percent on Tuesday.
"ACTUAL DANGERS"
Musk also made remarks regarding Twitter after his acquisition but before declaring his interest.
Musk tweeted a poll on March 25: "Free expression is critical to a functioning society." Do you feel Twitter sticks to this policy to the letter?"
A day later, Musk said that he was considering "seriously" developing a new social networking site.
"Musk is taking significant risks here," Velikonja of Georgetown Law stated. Musk was playing a game with SEC officials, she claimed, saying, "'Stop me if you can, but you can't." She added, "I do believe the SEC will look long and hard at whether they can bring manipulation charges in addition to the failure to file."
Musk has recently been critical of Twitter's regulations, accusing the business of violating free speech ideals.
"One may argue that his social media statements regarding prospective Twitter replacements are a type of market manipulation intended to impact the share price, but proving that is tough," said Howard Fischer, a former SEC counsel and partner at law firm Moses & Singer.
"The fact that the disclosure of Musk's ownership resulted in a price increase that increased the value of Musk's stock is something the SEC may investigate."
Twitter's stock has soared since Musk acquired a stake in the company in mid-March. The stake, which was valued at around $2.4 billion at the March 14 closing price, increased to $3.7 billion as of Monday's closing price.
Additionally, certain well-timed deals in Twitter options days before Musk disclosed his acquisition had options experts scratching their heads.
The SEC would almost certainly investigate if anybody who was aware of the purchase of the shares traded in advance of the filing, according to Jacob Frenkel, a former SEC enforcement attorney and head of Dickinson Wright's government investigations and securities enforcement practice.
"I believe that would be the emphasis instead than the delay," Frenkel said.
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