Judge doesn't like Elon Musk settlement with SEC, but says court can't block it

“Elon Musk, the richest person in the world with a net worth close to $1 trillion, allegedly ignored his obligation to file SEC disclosures at the expense of other investors to the tune of $150 million,” Sooknanan wrote yesterday. “That is why the SEC previously sought disgorgement from Mr. Musk in the ballpark of $150 million. So the $1.5 million penalty in the consent judgment, though touted as the largest in the SEC’s history, is around 1 percent of the total amount of money that was potentially at stake in this case.” Musk was accused of violating Section 13(d), which is enforced under a “strict liability” standard. That means it doesn’t matter whether a rule violation was intentional or inadvertent. The Trump SEC and Musk agreed to a settlement in which a trust in Musk’s name would pay a $1.5 million civil penalty to the government. A settlement term prohibiting future violations of the disclosure law would be imposed on the trust instead of Musk himself, and the trust and Musk did not admit to any wrongdoing. It appears that the injunction against future violations “binds Mr. Musk in his capacity as trustee of the Trust,” Sooknanan wrote. However, the consent decree naming the trust instead of Musk “allow[s] Mr. Musk to proclaim publicly that he has been cleared of wrongdoing,” she said. The SEC dropped its request for disgorgement of Musk’s unjust enrichment resulting from the violation. That means investors allegedly harmed will not be compensated under this settlement, although Twitter investors who sued Musk over a different violation are seeking an estimated $2.6 billion in damages after a jury ruled that Musk made false statements. “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,” Sooknanan wrote yesterday. The SEC told the court that it originally asked for disgorgement because it “has the statutory authority” to do so but dropped the request because it has not historically obtained disgorgement in this type of case, she wrote. The SEC told the court that Musk requested having the trust replace him in the settlement, and that the agency agreed as part of a compromise. “The Court is left to wonder whether the SEC will afford other alleged securities-law violators such solicitude,” Sooknanan wrote. “Or is this a one-time deal designed for Mr. Musk negotiated without the involvement of the SEC lawyers litigating this case?” However, Sooknanan said this does not “render the proposed consent judgment unfair or unreasonable under the governing law.” She said the parties were “represented by experienced counsel” and “clearly considered the ‘balance of advantages and disadvantages’ embodied in the proposed judgment.” Although Sooknanan made it clear she doesn’t like the settlement, she said she is bound by precedent that, while a district court must consider whether the deal is consistent with the public interest, it may not “determine whether the resulting array of rights and liabilities is the one that will best serve society.” In this case, the Musk/SEC deal “advances the purpose of Section 13(d) by obtaining a penalty for the provision’s alleged violation” and “includes an injunction protecting against future violations,” she wrote. “In approving the Parties’ proposed consent judgment, the Court stresses that its role is limited,” Sooknanan concluded. She said the court may not substitute its judgment for that of the settling parties, which “means that the Court may not step in the shoes of the SEC, notwithstanding that the SEC’s decision-making in this case raises red flags. So mindful of that principle and, as always, its proper role, the Court is constrained to accept the Parties’ agreement despite its significant misgivings.”