Appeals Court Tells Elon Musk –A Deal Is A Deal: SEC Consent Decree Sticks

By: Michelle Cohen

When faced with federal agency enforcement actions, companies frequently enter into consent decrees with the government to avoid the time, expense, and uncertainties of litigation. Consent decrees often involve the payment of settlement monies. They can also include lengthy commitments in furtherance of compliance, such as annual reporting and officer certifications. Consent decrees may also restrict certain practices, even over decades. Once a “deal” is reached, there is a very limited basis for a revision or update, as parties often waive appeals. The standard for modifying a consent decree requires a significant change in the facts or the law.  Failure to adhere to consent decree requirements can result in additional penalties and oversight. The federal Court of Appeals for the Second Circuit recently gave Tesla CEO Elon Musk a lesson in “a deal is a deal” regarding his 2018 consent decree with the Securities and Exchange Commission (“SEC”) concerning his Tesla-related tweets and the pre-approval “muzzle” to which he agreed. 

Background

Musk Enters into Consent Decree, then Challenges Consent Decree in Federal Court

In 2018, the SEC charged Musk with violating Section 10(b)(5) of the Securities Exchange Act of 1934 and SEC regulations. The case stemmed from Musk’s tweets on the Twitter social media platform (which he since purchased). In those now famous tweets, Musk stated to his over 20 million followers that he could take Tesla private at $420 per share (a huge premium to its then trading price) and that funding for the transaction had been secured and only needed a shareholder vote. The SEC asserted that Musk’s tweet was false in several ways, and caused Tesla’s stock to jump over six percent, with resulting market chaos.  

Instead of litigating the claims in court, Musk and Tesla settled with the FTC. The court entered a final judgment based upon the SEC consent decree. Musk was ordered to pay a $20 million penalty and comply with several undertakings. These requirements included the pre-approval of any written communications that contain, or reasonably could contain, information about Tesla or its shareholders. Tesla agreed to implement mandatory procedures to oversee and pre-approve Musk’s’ Tesla-related written communications, including Twitter posts. The consent decree also permitted the SEC to make “reasonable requests” of Musk to investigate his compliance.  

Musk’s compliance with the consent decree did not go smoothly. In November 2021, he tweeted about a potential sale of a large portion of his Tesla holdings, allegedly without obtaining the required pre-approval. The SEC promptly subpoenaed Musk and Tesla officials about the pre-approval process (or lack thereof). Musk filed a motion to quash certain parts of the SEC subpoena and to terminate the consent decree.  

The federal district court denied Musk’s motion to quash. The court held that as the SEC had not commenced a proceeding to compel Musk’s compliance with the subpoena, the doctrine of sovereign immunity barred Musk from bringing his own action against the SEC. The court also noted that the SEC  was entitled by the consent decree to probe the issue of whether Musk bypassed the required pre-approval procedures.  

Regarding Musk’s request to modify the consent order to remove the approval requirement (asserting his First Amendment rights), the court observed that “’a party seeking modification of a consent decree bears the burden of establishing that a significant change in circumstances warrants revision of the decree.’”1 This means either a significant change in factual conditions or in law. The court highlighted Second Circuit precedent that parties can waive their First Amendment rights in consent decrees and other settlements. Since Musk entered into the consent decree agreeing to the pre-approval requirement, he could not now complain about his First Amendment rights being violated. The district court also noted that the SEC had only made limited requests following up on the consent decree. 

Musk Appeals to the Second Circuit

Musk argued that the consent decree warranted modification due to changed circumstances and because the decree contained a prior restraint violating the First Amendment (which he claimed he did not validly waive). The Second Circuit rejected Musk’s claims, as he did not show either a significant change in factual conditions or in law.2 Further, contrary to Musk’s claims, the SEC did not use the consent decree in a harassing manner; in fact, the agency had only opened three inquiries to Musk’s tweets since the 2018 consent decree. The Second Circuit also recognized a line of cases establishing the strong federal policy favoring the enforcement of consent decrees. 

As to the waiver of Musk’s First Amendment rights, the court held that parties entering into consent decrees may waive their First Amendment and other rights. For instance, every consent decree involves waiving the right to trial. Thus, Musk remains subject to the 2018 consent decree, including the pre-approval requirements for his tweets and other social media postings or other written communications relating to Tesla or its shareholders.  

What We Can Learn from Mr. Musk

Musk’s losses in the trial and appellate courts reinforce the principal that a deal with the federal government is a deal. The standard for modifying or cancelling a consent decree requires a significant change in facts or the law. Therefore, individuals and organizations contemplating entering into settlements with federal agencies (through consent decrees or otherwise) should carefully negotiate the terms of the agreements. It is important to recognize, whether it is the SEC, the FTC, the FCC, the CFTC, or another agency, the terms of the consent decree will likely require commitments in furtherance of compliance, and in many cases, bar certain activities.  Agency personnel will scrutinize a company and/or individual’s adherence to the myriad requirements of the consent decree, which can last decades. Remember, a deal is a deal, even if you are Elon Musk. 

1 U.S. Sec. and Exchange Comm’n v. Musk, 18-cv-8865 (LJL), 2022 WL 123952, at *7 (S.D.N.Y. Apr. 27, 2022) (internal quotation marks omitted) (quoting Rufo v. Inmates of Suffolk County Jail, 502 U.S. 367, 383 (1992)).  

2 Sec. and Exchange Comm’n v. Musk, No.22-1291, 2023 WL3451402, at *3 (2d Cir. May 15, 2023).