The DealBook newsletter delves into a single topic or theme every weekend, providing reporting and analysis that offers a better understanding of an important issue in business. If you don’t already receive the daily newsletter, sign up here.
Elon Musk is in another fight about free speech — this time, not on Twitter, but in the Supreme Court.
Quietly, amid all of the noise about Mr. Musk’s proposed acquisition of Twitter, he joined a little-noticed amicus brief filed last week that could have profound implications for how the Securities and Exchange Commission prosecutes cases and whether defendants who agree to settle can ever talk about them.
Mr. Musk is now part of a group of executives who are supporting a petition filed by Barry Romeril, a former chief financial officer of Xerox, asking the Supreme Court to review a 2003 deal he made with the S.E.C. that required him to stay forever silent about a fraud case against him.
Mr. Romeril’s petition argues that the requirement violates his constitutional rights, and that “no act of Congress authorizes such a sweeping restriction on freedom of speech.” The U.S. Court of Appeals for the Second Circuit said he waived that right to deny the allegations.
From Opinion: Elon Musk’s Twitter
Commentary by Times Opinion writers and columnists on the billionaire’s $44 billion deal to buy Twitter.
- Farhad Manjoo: Many worry that Twitter might get worse under Musk. But there’s also room for it to become much better.
- Amelia Tait: If meaningless speech is what Musk hopes to cultivate, then perhaps his purchase of Twitter actually makes sense.
- Anand Giridharadas: Musk has embraced a flawed understanding of the free speech issue. That makes the deal particularly dangerous.
- Ezra Klein: Twitter is built to gamify conversation, and Musk knows it. Could this push him to right-size the platform’s influence?
- Pamela Paul: The impending cloud of “Elon Muskiness” hanging over Twitter is sure to set off a wave of farewells to the platform.
The group supporting him, which also includes Mark Cuban, who has fought the S.E.C. and won, beating insider trading charges, takes a different perspective: that forcing silence deprives the markets of important information.
Mr. Musk has also claimed a deal he made with the S.E.C. in 2018 to settle fraud charges violates his First Amendment rights.
The Tesla chief executive had moved to have his own agreement with securities regulators terminated, but a federal judge in New York denied that request on Wednesday, just two days after Twitter’s board agreed to Mr. Musk’s $44 billion bid to buy the company. Mr. Musk’s deal requires him to get approval for his social media posts about Tesla — the charges were related to tweets he posted saying that he had secured financing to take Tesla private — and bans him from discussing the case.
The same argument for both sides: ‘Strong, vibrant markets’
The S.E.C.’s gag order has been around since 1972. The practice, which allows settling defendants to neither admit nor deny wrongdoings on the condition that they never speak about the case in public, is meant to help the S.E.C. police the markets more efficiently.
The rationale is that if every defendant opted out of a trial but then later reframed the charges to the public, it would undermine the validity of resolutions and the legitimacy of Wall Street’s chief regulators, experts say. “It makes everything look like a sham,” said Harvey Pitt, a former agency chairman, who has little sympathy for retractors. “It’s unseemly for somebody who doesn’t admit to then violate a gag order. They have an out — refuse to settle.”
Denials after settlement also suggest that nothing actually happened, potentially downplaying the risks surrounding an individual or entity to investors. For defendants, remaining silent about a case can be an invaluable protection. That’s a choice defendants can make, said Alma Angotti, a former enforcement lawyer at the S.E.C. and the Treasury Department: “It’s a voluntary waiver.”
But the executives in the amicus brief argue that the choice isn’t actually a choice. They say most cases end up settling because fighting the S.E.C. is too costly. Mr. Musk has said he settled because litigation would have put Tesla under too much financial pressure and jeopardized its financing.
And banning any discussions about the cases, the brief argues, actually goes against the S.E.C.’s mission to protect investors, leaving them in the dark instead about material information. The executives go on to cite the former S.E.C. chairman Arthur Levitt, who said in a 1999 speech that “quality information is the lifeblood of strong, vibrant markets.” The group argues that the S.E.C. should be “barred from discouraging full, frank, public discussion,” which ensures this vibrancy.
Next stop: A review from the high court?
Mr. Musk calls himself a “free speech absolutist” and says he believes in the unfettered flow of information within the law, as the amicus brief he joined argues to the Supreme Court.
Of course, the justices might not take up the case. But with Mr. Musk making headlines denouncing the gag order policy, the issue is getting a lot of attention and the New York court that just denied Mr. Musk’s claims did rely on the ruling in Mr. Romeril’s case.
Whether his defenders would succeed in invalidating the S.E.C. provision — even if the Supreme Court agrees to review the matter — is very much up in the air.
How Elon Musk Bought Twitter
A blockbuster deal. Elon Musk, the world’s wealthiest man, capped what seemed an improbable attempt by the famously mercurial billionaire to buy Twitter for roughly $44 billion. Here’s how the deal unfolded:
The initial offer. Mr. Musk made an unsolicited bid worth more than $40 billion for the influential social network, saying that he wanted to make Twitter a private company and that he wanted people to be able to speak more freely on the service.
The response. Twitter’s board countered Mr. Musk’s offer with a defense mechanism known as a “poison pill.” This well-worn corporate tactic makes a company less palatable to a potential acquirer by making it more expensive for them to buy shares above a certain threshold.
Securing financing. Though his original offer had scant details and was received skeptically by Wall Street, Mr. Musk moved swiftly to secure commitments worth $46.5 billion to finance his bid, putting pressure on Twitter’s board to take his advances seriously.
Striking a deal. With the financing in place, Twitter’s board met with Mr. Musk to discuss his offer. The two sides soon reached a deal, with the social media company agreeing to sell itself for $54.20 a share.
What’s next? Shareholders will vote on the offer, which will also be reviewed by regulators. The deal is expected to take three to six months to close. In the meantime, scrutiny is likely to be intense and several questions remain about Mr. Musk’s plans for the company.
Throughout the justice system, defendants commonly waive rights in exchange for the many financial and reputational benefits of a swift resolution, Ms. Angotti said. In contrast, “when you lose a trial, you bear the brunt of a finding.”
But vague resolutions can be problematic in this age, according to Gurbir Grewal, the director of the S.E.C.’s enforcement division.
“When it comes to accountability, few things rival the magnitude of wrongdoers admitting that they broke the law,” Mr. Grewal said in a speech in October. “And so, in an era of diminished trust, we will, in appropriate circumstances, be requiring admissions in cases where heightened accountability and acceptance of responsibility are in the public interest.”
This could be a “significant” change, some lawyers say, but the S.E.C. in 2013 made a similar pledge, which proved less than revolutionary. Three years after that announcement, the agency obtained admissions from less than 2 percent of the individuals and entities charged, researchers found.
Since Mr. Grewal’s speech, the agency has announced 10 settlements, one of which was reached before the policy shift. Of the remaining nine, there have been two admissions of guilt. The S.E.C. did not respond to a request for comment.
Though the S.E.C. can justify its gag orders, it doesn’t systematically enforce them, writes Noah Feldman, a Harvard Law School professor. That failure only supports critics’ arguments for more oversight of the agency, he said. And there is a danger that it can use the vow of silence to shield itself from valid critique anyway — because most people do not have the financial wherewithal that Mr. Musk has and can’t afford to risk another tussle with the government.
Mr. Musk recently aired his grievances at a TED conference interview while his request to vacate his own settlement was under consideration. And he trolled the S.E.C. on Twitter on the day of the announcement of his deal to acquire the platform.
Of course, Mr. Musk will not be easily silenced, and his potential acquisition of Twitter won’t make him more circumspect, whatever a judge says.
What do you think? Do you think “gag orders” are good or bad for the markets? Let us know: email@example.com.