Court chides distribution agent for $40M Tesla fair fund

More than six months have passed since the Court appointed Rust Consulting to serve as Distribution Agent for the Fair Fund comprising $40 million in penalties paid by Elon Musk and Tesla Inc as a part of a settlement with the Securities and Exchange Commission (SEC).

It turns out, however, that the distribution procedure has been marred by the lack of reports by Rust.

On December 21, 2021, Judge Alison J. Nathan of the New York Southern District Court issued an order noting that, under an order from May 12, 2021, Rust has to file status reports and quarterly accounting statements within 30 days of the end of each quarter. The Court has received no such reports.

On Tuesday, December 21, 2021, the Judge ordered the distribution agent to file a status report and the most recent quarterly accounting statement by January 7, 2022.

Let’s recall that, back in September 2018, the SEC announced that Elon Musk has agreed to settle the securities fraud charge brought by the SEC against him. The SEC also charged Tesla with failing to have required disclosure controls and procedures relating to Musk’s tweets, a charge that Tesla has agreed to settle.

According to the SEC’s complaint against him, Musk tweeted on August 7, 2018 that he could take Tesla private at $420 per share — a substantial premium to its trading price at the time — that funding for the transaction had been secured, and that the only remaining uncertainty was a shareholder vote.

The SEC’s complaint alleged that, in truth, Musk knew that the potential transaction was uncertain and subject to numerous contingencies. Musk had not discussed specific deal terms, including price, with any potential financing partners, and his statements about the possible transaction lacked an adequate basis in fact. According to the SEC’s complaint, Musk’s misleading tweets caused Tesla’s stock price to jump by over six percent on August 7, and led to significant market disruption.

According to the SEC’s complaint against Tesla, despite notifying the market in 2013 that it intended to use Musk’s Twitter account as a means of announcing material information about Tesla and encouraging investors to review Musk’s tweets, Tesla had no disclosure controls or procedures in place to determine whether Musk’s tweets contained information required to be disclosed in Tesla’s SEC filings. Nor did it have sufficient processes in place to that Musk’s tweets were accurate or complete.

Musk and Tesla have agreed to settle the charges against them without admitting or denying the SEC’s allegations. Among other relief, the settlements require that Musk and Tesla will each pay a separate $20 million penalty.

In February 2021, a Fair Fund was established for the $40 million paid by Musk and Tesla.

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