Elon Musk to pay SEC $1.5 million settlement, judge signs off despite 'serious misgivings'

A U.S. federal judge has approved a settlement that will see Elon Musk pay $1.5 million to the U.S. Securities and Exchange Commission (SEC) for failing to disclose his 2022 Twitter stock purchases within the legally required period. Even so, she was not happy about it. The penalty is a mere fraction of the amount Musk gained from the alleged violation, which he is apparently free to keep.

In her order filed in a Columbia District Court on Wednesday, Judge Sparkle Sooknanan expressed "significant misgivings" about the deal between Musk and the SEC. Under the agreement, Musk will pay $1.5 million to the SEC — literally one percent of the $150 million he allegedly saved due to his late disclosure. 

Further, the penalty will technically be paid by a trust in Musk's name rather than directly by the billionaire himself, a manoeuvre that the court noted appeared "for the sole purpose of Mr. Musk being able to say that no relief was entered against him in his personal capacity."

However, as the court's role is only to assess whether the agreement meets "minimum standards of fairness and reasonableness," Sooknanan stated that it is therefore obligated to accept the deal.

"[T]he Court may not step in the shoes of the SEC, notwithstanding that the SEC's decision-making in this case raises red flags," Sooknanan wrote in her order on Wednesday. "So mindful of that principle and, as always, its proper role, the Court is constrained to accept the Parties’ agreement despite its significant misgivings."

Sooknanan also questioned whether Musk was receiving special treatment.

"The Court is left to wonder whether the SEC will afford other alleged securities-law violators such solicitude," she wrote. "Or is this a one-time deal designed for Mr. Musk negotiated without the involvement of the SEC lawyers litigating this case?"

The SEC filed the case in January last year, suing Musk for late disclosure of his Twitter stock purchases in 2022. Under the Securities Exchange Act of 1934, Musk was legally required to notify the SEC within 10 days of acquiring enough shares to own more than five percent of the company. 

Instead, Musk allegedly waited 21 days, finally notifying the SEC of his purchase 11 days past the deadline. Musk also reportedly bought even more Twitter stock within those 21 days, spending an additional $500 million to increase his stake to 9.2 percent. 

According to the SEC's lawsuit, this delay had a significant financial impact not only on Musk, but on other shareholders as well. Twitter's stock price shot up after Musk finally reported his purchase, the value of his shares jumping to $2.89 billion as news of his investment became public. The billionaire allegedly saved at least $150 million on his additional share purchases as well, as he was able to buy them at a lower price than if he fulfilled his reporting obligations.

In addition to this, the SEC alleged that Musk's failure to report his Twitter stock purchase within the legally mandated period caused other investors "substantial economic harm," as those that sold their shares during his delay were denied the benefit of the increased price.

The SEC initially sought to fine Musk, as well as have him give up the profit he gained from his alleged violation. Now it's singing a much different tune, agreeing to the comparatively small $1.5 million penalty and apparently allowing Musk to keep the millions he gained through his alleged violation. Further, none of the money will go to investors who allegedly lost out due to Musk's delay.

"The SEC has decided not to press for relief that could compensate Mr. Musk’s alleged victims, instead settling on a form of relief that would go into the government’s pocket," said Sooknanan.

"Whether the Executive Branch (through the SEC) has done enough to hold Mr. Musk to account for his alleged violation is, like many other issues, for our citizenry to decide at the ballot box."

Though the SEC filed the case during the Biden administration, it looks as though it doesn't want to come down on Musk quite as hard under Trump. Musk has had a tumultuous relationship with the president, appearing to swing wildly between a close ally or a bitter enemy. Considering this slap on the wrist, it seems reasonable to wonder whether their on-and-off again flirtation may have helped swing the situation in the billionaire's favour.