SINGAPORE: He’s a visionary, eccentric billionaire and an avid Twitter user.
Elon Musk is a lot for many of us. He was undoubtedly one of the most successful entrepreneurs in recent history.
And while he’s already had his hands full as CEO of electric car maker Tesla and aerospace maker SpaceX, he still seems to have time to pick up another title – Twitter troll and corporate disclosure violation.
Musk has come into conflict with the US Securities and Exchange Commission on several occasions. In 2019, Musk agreed to a $ 20 million fine with regulators that also required Tesla’s attorneys to “pre-approve written communications, including tweets containing essential information about the company.”
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The settlement follows the SEC investigation into Musk, who tweeted taking the company private at a price of $ 420 per share, a number allegedly inspired by the price of marijuana, according to the SEC.
Such an announcement would be a major corporate event for a publicly traded company, but it was tweeted without prior approval from its board of directors.
Despite the SEC agreement, he continued to post a stream of tweets that sent both Tesla and cryptocurrencies on a roller coaster ride. He also has a known disdain for financial regulators and was quoted as saying, “Let me be clear, I don’t respect the SEC.”
But whether Musk respects regulators is irrelevant. It should still be subject to the same financial rules that everyone else is subject to. So how is it that Musk still has a free hand over his social media account?
What drives this boldness? People – his followers – give him power. Both private and institutional investors seem to be responding to Musk’s tweets about the market, whether out of religious zeal for him or a rational analysis of Tesla’s future corporate policy.
After Tesla announced that it would buy Bitcoin, the price skyrocketed. Tesla reported its quarterly profit through March 2021 on Bitcoin sales of over $ 100 million.
Take the case of Musk’s tweet that Tesla stock was too high on May 1, 2020. The tweet caused Tesla’s market value to drop by $ 13 billion. The fact that the share price later recovered to greater heights is no consolation.
READ: Comment: Don’t trust the hype – Bitcoin will never be a smart investment
If anything, the question arises as to whether Musk intentionally manipulated the stock price down in anticipation of future good news, which is a buying opportunity for himself and those he may wish to get into the deal.
SHOULD REGULATIONS REGISTER?
One question that arises is whether investors are unwittingly participating in a market manipulation program. If so, what can regulators do about it?
This is about equity (the concept, not the financial instrument).
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The regulation of corporate insiders is not without reason. Because these insiders have access to company information that others don’t, what they say on unofficial channels could have a huge impact on the stock price and an unfair advantage for some.
It turns out they don’t need any new rules for tweeting. You just need to better enforce existing regulations.
Musk said he founded SolarCity, Tesla, and SpaceX for the good of humanity, but his tweets, which hurt the financial well-being of traders, can hardly serve the same purpose. Billions of dollars in investments depend on whether a tweet has a happy emoji or a sad emoji. It’s a big risk.
What makes Elon Musk special as an influencer compared to Justin Bieber is that he’s a corporate insider. He is privy to inside information while the other type of influencer only uses public information. In contrast to the latter, the economic consequences of trolling by corporate insiders are far more serious.
If we believe this has far-reaching implications, we should consider allowing markets to correct misunderstandings or more aggressively enforcing Musk’s violations of company disclosure guidelines.
THE CASE FOR LESS REGULATION
Allowing less regulatory activity means allowing arbitrary corporate disclosures while relying on financial incentives from market participants to “correct any misunderstandings”.
One way to do this operationally is for regulators to restrict short selling (i.e., restrict the sale of stocks that the seller does not own). Currently, investors can correct undervalued stocks by buying them, but face limitations when trying to bet against stocks they think are overpriced.
READ: Comment: GameStop Madness Has Painful Lessons About Short Selling And More For Retail Investors
For example, if Musk tweeted that he was privatizing Tesla if the company had a high valuation and the share price rose, market participants suspected of such behavior would be financially motivated to find out if that was true.
If they believe the statement is wrong, they can short the stock to bet against the event and take advantage of it being correct. Restricting short sellers’ ability to bet against the stock diminishes the ability of market participants to correct over-optimistic beliefs.
Scientific research has shown that short selling restrictions increase the mispricing of stocks and the likelihood of a stock price crash as unsustainable market expectations dissolve in the future.
However, given the public perception of short sellers, reducing short selling restrictions does not seem like a viable option. Since the 1930s, the US SEC has held that short sellers can manipulate markets.
In addition, in times of financial crisis and illiquidity, prices can overreact to bad news and plummet further than their fundamental value.
It doesn’t help that films like The Big Short portray short sellers betting against the US housing market as anti-heroes. In fact, the GameStop and AMC sagas grew out of a desire by retailers to take over short sellers.
(If none of what happened to GameStop made sense to you, listen to financial vets about how various players drove the surge and what publicly traded company might see copycat attacks on the CNA Heart of the Matter podcast.)
CASE FOR MORE ENFORCEMENT
The other alternative is to enforce existing financial regulations more strictly. It is important that this solution does not require any further financial regulation and should be politically easily enforceable.
Given the short selling rules in place, no sane free market advocate would accept corporate insiders taking advantage of their position to spread misinformation or unconfirmed numbers.
The most practical approach would therefore be for regulators to step in and apply the rule of law. The main thing is that everyone should play by the same rules. Whether it is tweets about Bitcoin or Tesla, Musk should be subject to the same financial regulations that are imposed on all CEOs and corporate insiders.
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The SEC has cited Musk for allegedly violating the terms of the previous settlement agreement, but has yet to file an enforcement motion. It is not clear why.
Given the lack of SEC enforcement and recent Musk tweets, the decentralized hacktivist group Anonymous has considered taking matters into its own hands.
In a four-minute video, the group states that Musk is âtrolling all the timeâ and that âmillions of retail investors are really counting on their crypto profits to make their lives better … Of course, they took the risk when they invested, and everyone did knows he’s prepared for the volatility in crypto, but your tweets this week show a clear disregard for the average worker. “
Whether Anonymous will use more dramatic efforts to stop Elon Musk from tweeting raises another concern: cybersecurity breaches. The concentration of public opinion, market sentiment or the flow of information on a handful of sources raises the question of whether influential nodes in information or social networks can be hijacked.
In fact, a quick Twitter search reveals numerous fake Elon Musk accounts promoting various cryptocurrency scams, and the Federal Trade Commission reports that these copycats have stolen more than $ 2 million in the past six months alone.
The SEC’s failure to enforce its own agreement with Musk so far raises concerns that frustrated participants and other stakeholders may take it upon themselves to make a change.
Ben Charoenwong is Assistant Professor of Finance at the National University of Singapore Business School. His research specializes in financial regulation and financial advice. He is also the co-founder and head of research for Chicago Global, a quantitative investment manager. No Chicago Global fund has an investment in Tesla.