How did Elon Musk accumulate a 9.2% stake in Twitter without the world noticing? The most likely answer — and a running theme in his career — is that he broke the rules.
SEC rules require most individuals who accumulate a stake of 5% or more in a company to disclose it in a Schedule 13G filing within 10 days of the event, meaning the purchase, transfer or other means by which they got their hands on the shares. Given the way trades settle, there’s been some uncertainty over which date to use, but in 2016, the SEC said the clock starts the day after the trade date.
Musk’s filing gives the date of the event as March 14, which would mean he should have filed on March 24. Instead, he filed on April 4, disclosing a stake of more than 73 million shares, well above the 5% filing threshold. What happened in between?
Traders who examined activity in Twitter shares offered the following insights.
Before Monday’s filing, Twitter’s typical trading volume in recent weeks was 17 million shares a day. They estimated that traders working on Musk’s behalf could buy at most 3 million shares a day without noticeably moving the stock. Let’s assume, as our trader sources did, that Musk bought a stake just below 5%, or roughly 40 million shares, before March 24, and crossed the 5% threshold on that date, which his filing suggests. (Notably, there was a big jump in volume on March 18.)
It’s possible that Musk’s traders hadn’t gotten to his target stake by March 24. At that point, Musk may have faced a choice: File on time and see Twitter shares rise dramatically in price, as it did on Monday, or delay the filing and buy more shares at a cheaper price.
If that transpired, Musk’s savings would be substantial, in the hundreds of millions of dollars. And investors who sold shares to him in the last week of March, not knowing he was accumulating a large stake in the company, have corresponding losses.
The fines the SEC has handed out for similar violations are a parking ticket for a man of Musk’s wealth. (The SEC is considering new rules which would require much faster disclosures, by the way.) Securities lawyers might have more luck extracting a payout from selling shareholders.
All of this does raise a question for Twitter, which just announced it would name Musk to its board: You now have a director who has been charged with securities fraud and repeatedly both expressed in words and demonstrated in action his contempt for the Securities and Exchange Commission and its rules. Any qualms about him overseeing your corporate governance?
Max A. Cherney contributed to this report.