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Not all misleading corporate statements are created equal

Only one living American bears comparison to Thomas Edison as innovator and self-promoter. Will the future look back on Elon Musk with anything approaching the awe with which he’s regarded by our contemporary business press?

On Aug. 7, he tweeted: “Am considering taking Tesla private at $420. Funding secured.” The share price he picked (in part as a cannabis joke) represented a substantial premium over Tesla’s trading price. As pointed out in the subsequent complaint filed by the federal Securities and Exchange Commission, “Musk published this tweet in the middle of the day’s official market trading. Immediately after this tweet, the trading volume and price of Tesla shares spiked.” Subsequently Musk tweeted: “Only reason why this is not certain is that it’s contingent on a shareholder vote.”

Back in 2013, Tesla had filed a Form 8-K with the SEC declaring that Musk’s Twitter account was a source of official company news. Unfortunately, Musk did not discuss his Aug. 7 tweets with his board of directors. Funding was not, in fact, secured. Taking the company private was never realistically in the cards. Six days later, in the words of the SEC complaint, Musk “attempted to walk back his August 7 statements” in a blog post. But by then it was too late.

Federal law, embodied in SEC regulations, prohibits officers of public companies from making false and misleading statements about a publicly traded stock or to omit context that would make a statement “not misleading,” to use the regulation’s precisely calibrated construction. Absolute transparency isn’t the standard here. Lawyers in every field mark a sharp distinction between the false and the not-false, while worrying a good deal less about the true.

Starting false rumors to influence share prices is a practice as old as Wall Street itself. In the early days of the stock market, trading was done outdoors, much like today’s three-card monte games and with roughly the same level of honesty. That’s why the SEC places such strict controls over the release of market-moving information by public companies.

Musk’s tweets produced a sensation, causing Tesla’s share price to hit a high of $379. (In January, it dipped below $290.) Suspicion that Musk was manipulating the price to hurt short sellers (investors who bet a stock’s price will fall) was fed by Musk himself when he joked on Twitter that Tesla merchandise now included “short shorts.” Responding to these antics, the SEC filed civil complaints against Tesla and Musk personally, who both settled almost immediately. They agreed to pay a total of $40 million in penalties (to be distributed to harmed investors). Musk stepped down as Tesla’s chairman, and the company added independent directors.

But not all false and misleading statements made on behalf of a public corporation are created equal. An investor in Walmart de Mexico (known as Wal-Mex), filed suit after an explosive New York Times report documented the company’s involvement in a widespread bribery scheme. Reportedly, Wal-Mex illegally paid $24 million to “mayors, city council members, urban planners, and low-level bureaucrats to issue land use permits and related licenses.” The news raised the specter of liability under the Foreign Corrupt Practices Act, causing the market for Wal-Mex shares (technically, ADRs) to plunge, producing big losses for investors.

But during the time bribes were being paid, the suit alleged, Wal-Mex and its parent were publicly saying such things as: “We do not tolerate, permit, or engage in bribery, corruption or unethical practices of any kind.” The suit claimed that statement and others like it were false and misleading under the same standard the SEC applied to Elon Musk’s tweets.

But the federal District Court dismissed the suit and the 2nd Circuit Court of Appeals recently affirmed. The federal courts concluded that Wal-Mex’s statements were mere “puffery,” not assertions of fact. According to the 2nd Circuit, puffery includes all “general statements about reputation, integrity, and compliance with ethical norms.” You know, meaningless stuff like that.

In an earlier case, the court had gone so far as to say “no investor” would take a bank’s claim of integrity seriously “for the simple fact that almost every investment bank makes these statements.” If casual deceit is the industry standard, that seems an additional reason for condemning it, not the reverse. But our courts see the matter differently, and their cynicism about business promotion is baked into the law.

Still, it’s hard to miss the difference in specificity between Musk’s tweets and Wal-Mex’s bland assurances. Anyone speaking on behalf of a public company needs to know where the line is drawn between puffery and false statements of fact – and stay well on the puffing side.

Joel Jacobsen is an author and has recently retired from a 29-year legal career. If there are topics you would like to see covered in future columns, please write him at