SINGAPORE: He is a visionary, eccentric billionaire and an avid Twitter user.
Elon Musk is many things to many of us. He has undoubtedly been one of the most successful entrepreneurs in recent history.
And although he already has his hands full as the CEO of electric car company Tesla and aerospace manufacturer SpaceX, he seems to have time to pick up one more title – Twitter troll and violator of corporate disclosure laws.
Musk has gotten in trouble with the United States Securities Exchange Commission (SEC) multiple times. In 2019, Musk agreed to a deal with regulators to a US$20 million fine that also called for Tesla’s lawyers to “pre-approve written communications, including tweets with material information about the company”.
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The settlement follows the SEC investigation of Musk tweeting about taking the company private at a price of US$420 per share, a number the SEC said is allegedly inspired by the price of marijuana.
Such an announcement would be a major corporate event for a publicly-listed company, yet it was tweeted without pre-approval from his board of directors.
In spite of the SEC settlement, he has continued to let loose a stream of tweets, which have sent both Tesla and cryptocurrencies on a rollercoaster ride. He also has a well-known disdain of financial regulators, and has been quoted stating “I want to be clear, I do not respect the SEC.”
But whether Musk respects regulators is irrelevant. He should still be subject to the same set of financial regulations that everyone else is held up to. So how is it that Musk still has free reign over his social media account?
What drives this boldness? People – his followers – give him power. Both retail and institutional investors appear to react to Musk’s tweets about the market, be it due to religious zeal for him or a rational analysis of future Tesla’s corporate policy.
Take the case of Musk’s tweeting that the Tesla stock was too high on 1 May 2020. The tweet prompted a US$13 billion decline in the Tesla’s market value. The fact that the stock price later recovered to greater heights is no consolation.
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If anything, it raises the question of whether Musk purposely manipulated the stock price down in anticipation of future good news, representing a buying opportunity for himself and those he may wish to let in on the deal.
SHOULD REGULATORS STEP IN?
One question that comes up is whether investors are unwitting participants in a market manipulation scheme? And if so, what can regulators do about it?
The issue at hand is about equity (the concept, not the financial instrument).
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Regulation on corporate insiders is in place for a reason. As these insiders have access to corporate information that others do not have, their words in non-official channels could lead to large effects on the stock price and an unfair advantage for some.
It turns out that they do not need new rules for tweeting. They just need to enforce existing regulations better.
Musk said that he started SolarCity, Tesla, and SpaceX for the betterment of humanity, but his tweets that affect the financial well-being of stock market participants can hardly be said to achieve the same purpose. Billions of dollars of investments hinge on whether a tweet has a happy emoji or sad emoji. That is a lot of risk.
What makes Elon Musk special as an influencer, compared to the likes of Justin Bieber, is that he is a corporate insider. He is privy to inside information, while the other type of influencers only use public information. Unlike the latter, the economic consequences of trolling by corporate insiders is far more serious.
If we believe this has wide-ranging implications, then we should consider whether to allow markets to correct mistruths or more aggressively enforce Musk’s violations of corporate disclosure policy.
THE CASE FOR LESS REGULATION
Giving to less regulator activity means permitting arbitrary corporate disclosure while relying on financial incentives of market participants to “correct any mistruth”.
One way to do that operationally is for regulators to reduce short-sale constraints (i.e. restraining the sale of stock that the seller does not own). Currently, investors can correct underpriced stocks by buying, but face restrictions when trying to bet against stocks they think are overpriced.
READ: Commentary: GameStop insanity has painful lessons on short-selling and more for retail investors
For example, when Musk tweets that he is taking Tesla private at a high company valuation and its share price rises, market participants who are suspicious of such behavior are financially incentivised to find out whether that is true.
If they think the statement is false, they can short-sell the stock to bet against the event and profit from being correct. Restricting the ability of short-sellers to bet against the stock reduces market participants’ ability to correct overoptimistic beliefs.
Academic research has shown that short-sale constraints increase stock mispricing and the probability of a stock price crash, as unsustainable market expectations unravel in the future.
But given the public perception of short-sellers, reducing short-sale constraints doesn’t appear to be a viable option. Since the 1930s, the US SEC has taken the stance that short-sellers may manipulate markets.
Moreover, in times of financial crises and illiquidity, prices may overreact to bad news and plummet further than their fundamental value.
It doesn’t help that movies like The Big Short portray short-sellers betting against the US housing market as anti-heroes. In fact, the GameStop and AMC saga originated from retailer investors’ desires to take on short-sellers.
(If none of what happened with GameStop made sense to you, listen to financial veterans break down how different players powered the surge and which listed company could see copycat attacks in CNA’s Heart of the Matter podcast.)
CASE FOR MORE ENFORCEMENT
The other alternative is to enforce existing financial regulations more stringently. Importantly, this solution does not call for more financial regulation and should be politically easy to enact.
Given existing rules on short sales, no reasonable free-market advocate would accept allowing corporate insiders to take advantage of their position to spread misinformation or unverified numbers.
So the most practical approach would be for regulators to step in and apply the rule of law. The very essence of this is that everyone should play by the same rules. Whether it is tweets on bitcoin or Tesla, Musk should be subject to the same set of financial regulations that are imposed on all CEOs and corporate insiders.
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The SEC has admonished Musk for allegedly violating the terms of the previous settlement agreement, but has yet to file a motion to compel enforcement. It’s not clear why.
Given the lack of SEC enforcement and Musk’s recent tweets, the decentralised hacktivist group Anonymous has considered taking matters in their own vigilante hands.
In a four-minute video, the group states that Musk was “constantly trolling” and that “millions of retail investors were really counting on their crypto gains to improve their lives … Of course, they took the risk upon themselves when they invested, and everyone knows to be prepared for volatility in crypto, but your tweets this week show a clear disregard for the average working person.”
Whether Anonymous will employ more dramatic efforts to stop Elon Musk from tweeting raises another concern: Cybersecurity breaches. Concentrating public opinion, market sentiment, or information flow to a handful of sources raises the question of whether influential nodes in information or social networks may be hijacked.
Indeed, a quick Twitter search reveals numerous fake Elon Musk accounts touting various cryptocurrency scams, and the Federal Trade Commission reports that these impersonators stole more than US$ 2 million over the past six months alone.
The failure of the SEC to enforce their own agreement with Musk so far raises concern that frustrated participants and other actors may take it upon themselves to affect a change.
Ben Charoenwong is an assistant professor of finance at the National University of Singapore Business School. His research specialises in financial regulation and financial advice. He is also co-founder and head of research of Chicago Global, a quantitative investment manager. No Chicago Global funds have an investment in Tesla.