This article is about how Elon Musk violated section 16(b) of the 1934 Securities Exchange Act when he sold 2,782,670 shares of Tesla Motors for $213.22 on May 25, 2016 and subsequently acquired 2,403,024 shares of Tesla Motors for $185.05 per share on November 21, 2016, when a merger was finalized between Tesla Motors and SolarCity Corp.

Musk paid for the acquisition of the 2,403,024 Tesla Motors shares on November 21, 2016  by delivering his 21,845,674 shares of SolarCity to SolarCity Corp.

SolarCity had received the Tesla Motors shares from Tesla Motors. Musk made over $67,700,000 = {($213.22- $185.05) x 2,403,024} which was recoverable from Elon Musk by Tesla Motors.  

Elon Musk reported on an SEC Form 4 that the acquisition of the 2,403,024 shares of Tesla Motors on November 21, 2016 was a purchase between himself and Tesla Motors Inc. But the purchase was a transaction between Musk and SolarCity Corp. The purchase transaction between Musk and SolarCity was not a transaction that was exempt from being matched with the sale on May 25, 2016.

We turn now to the U.S. Supreme Court's statement on constructions of the terms of Section 16 (b) of the 1934 Securities Exchange Act which is below and highlighted.

Reliance Electric Co. v. Emerson Electric Co.

404 U.S. 418, 92 S. Ct. 596, 30 L. Ed. 2d 575 (1972)

"In order to achieve its goals, Congress chose a relatively arbitrary rule capable of easy administration. The objective standard of Section 16 (b) imposes strict liability upon substantially all transactions occurring within the statutory time period, regardless of the intent of the insider or the existence of actual speculation. This approach maximized the ability of the rule to eradicate speculative abuses by reducing difficulties in proof. Such arbitrary and sweeping coverage was deemed necessary to insure the optimum prophylactic effect." Bershad v. McDonough, 428 F.2d 693, 696.

And in the same case, it said that:

"To be sure, where alternative constructions of the terms of 16 (b) are possible, those terms are to be given the construction that best serves the congressional purpose of curbing short-swing speculation by corporate insiders."-------------

Although Section 16 (b) itself has not changed, the ability to enforce Section 16 (b) has been diminished to a high degree. This is partly because of the fact that the SEC staff has made Rules which have exempted certain transactions which were comprehended within the scope of Section 16 (b). And large law firms who represent top executives have made interpretations of the SEC Rules, which further the artificial expansion of the exemptive rules.

And the Federal District and Appellate Courts have accepted the expansive interpretations of the SEC rules and the expansive interpretations of the Section 16 (b) by large law firms. 

Most of the expansive interpretations by the SEC, and large law firms, which were accepted by the District and Appellate courts are inconsistent with the sentence below in the Supreme Court in

Reliance Electric Co. v. Emerson Electric Co. 404 U.S. 418

"The objective standard of Section 16 (b) imposes strict liability upon substantially all transactions occurring within the statutory time period, regardless of the intent of the insider or the existence of actual speculation."

In future articles, I will explain in precise detail how a number of expansive exemptions of transactions have been accepted by the courts to top executives, which are clearly within the scope of Section 16 (b).

The first violation of Section 16 (b) that will be analyzed will be the transactions by Elon Musk connected with Tesla Motors acquisition of SolarCity Corp on November 21, 2016.

Below is an article by Alan Dye who along with Peter Romeo created a Treatise on Section 16 (b) of the 1934 Securities Act. Some attorneys consider the two to be experts and some courts accept the claim that they are experts, even though their being experts is far overstated. The article below is about a suit against Elon Musk and 3 of the officers and directors of Tesla Motors for violations of section 16 (b). 

 The question is whether there were violations and whether the $80,000,000 profits made in the Tesla Motors/SolarCity Merger should have been recovered by Tesla Motors Inc. The answer depended on whether the acquisition of the “right to receive” Tesla Motors shares by the 4 officers or directors of Tesla Motors were purchases  (Code A) transactions that are exempt from section 16 (b) of the 1934 Securities Act .

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Below is Alan Dye’s article on the topic:

“Rule 16b-3 Exempts Acquisition of Issuer Stock in Merger of Target with Issuer’s Subsidiary":

"A judge in the Northern District of California has dismissed a complaint filed against Elon Musk and other Tesla insiders which alleged that their acquisition of Tesla common stock in Tesla’s reverse triangular merger with SolarCity was not a transaction with “the issuer” and therefore was not eligible for exemption under Rule 16b-3(d), making the insiders acquisitions matchable with their sales of Tesla stock within less than six months.

The plaintiffs in the case are John Olagues and Ray Wollney, who are part of the group that has been challenging (unsuccessfully, so far) the availability of Rule 16b-3(e) to exempt elective tax withholding transactions under equity compensation plans.

The defendants are insiders of Tesla who were stockholders of SolarCity when SolarCity merged with a wholly owned subsidiary of Tesla, with SolarCity surviving the merger. The merger was approved by Tesla’s board of directors and by Tesla’s shareholders following a proxy solicitation. The merger closed four days after the shareholder vote, and the defendants reported their receipt of Tesla stock on Form 4, using transaction code “A” and stating in a footnote that the acquisitions were exempt under Rule 16b-3.  The plaintiffs argued that the defendants’ acquisition didn’t occur at closing, but instead occurred when shareholders approved the merger, giving the defendants a “right to receive” stock in the merger. That acquisition, the plaintiffs’ argued, was a transaction with the subsidiary, not Tesla, and therefore was not eligible for exemption under Rule 16b-3.   The plaintiffs also argued that, even if the acquisition occurred at closing, the merger was with a subsidiary and therefore still didn’t involve a transaction with the issuer. The court rejected both arguments, holding that, regardless of when the acquisitions occurred, they involved a direct issuance of stock by Tesla and therefore were with “the issuer.” The court also said that, even if the transaction were deemed to be with the non-surviving merger subsidiary, the SEC staff said in a 1999 interpretive letter to the American Bar Association that a transaction with a majority owned subsidiary is a transaction with the issuer for purposes of Rule 16b-3. While a staff interpretive letter isn’t binding on a court, the court said it found the staff’s position “persuasive.”-Alan Dye, Secption16.net August 5, 2019. ---------- End of the Alan Dye article-------------------

I am certain that this article by Alan Dye may be hard to read and understand by persons who are not familiar with the case and the relevant law and the court decision. But the article is hard to understand even by persons who claim that they are experts on Section 16 (b) and the SEC Rules that give exemptions to Section 16 (b). So let me make some statements that are certain.  Mr. Elon Musk reported on an SEC Form 4 that of November 21, 2016 he disposed of all of his 21,845,674 shares of the merger target SolarCity to SolarCity Corp, the issuer of the SolarCity shares. He entered a code "D" into column 3 of Table 1. If he did not dispose of the SolarCity shares to SolarCity Corp, the SEC Form 4 is false and the filing of the false SEC Form 4 is a violation of Title 18 Section 1001. When Musk delivered the SolarCity shares to SolarCity , SolarCity was the owner of the Tesla shares. And the Tesla shares, owned by SolarCity were delivered to Musk in a transaction between Musk and SolarCity.

 In one of the two Explanations of Responses  filed on Nov 23, 2016, Where SOLARCITY CORP was the issuer,   Elon Musk stated:

 “1 ) Outstanding shares of the common stock of the Issuer  were converted into the right to receive 0.110 shares of Tesla common stock for each share of the Issuer's common stock issued and outstanding, with cash paid in lieu of fractional shares, in accordance with the Merger Agreement.”

If any part of the SEC Form 4 filed by Elon Musk was false, that would constitute a felony pursuant to Title 18 section 1001.--------------

 The Explanation of Responses (1) states that the SolarCity shares were then converted by SolarCity Corp into the “right to receive” .110 Tesla Motors shares for every SolarCity delivered to SolarCity Corp. 

Upon examination of the merger agreement we find that Tesla Motors issued Tesla Motors shares to “D” subsidiary  and that “D” subsidiary merged with SolarCity, with SolarCity being the surviving wholly owned subsidiary of Tesla.The merger agreement stated that the Tesla shares went to SolarCity Corp and that SolarCity Corp then converted the SolarCity shares received from Elon Musk into Tesla Motors Inc shares   (i.e. .110 Tesla shares for each SolarCity share).

We then find a second SEC form 4 filed by Elon Musk on November 23, 2016 claiming that Musk purchased 2,403,024 Tesla Motors shares in a transaction between Elon Musk and Tesla Motors Inc, with Tesla Motors the issuer of the shares. Elon Musk entered a Code  “A” in column 3 of Table 1. An “A” in column 3 means: A - “Grant, award or other acquisition pursuant to Rule 16b-3(d)”.

 In this case it means an acquisition pursuant to Rule 16b-3d”, since there was no grant or award.The SEC stated in an Amicus Curiae Brief in the Dreiling v. American Express case in the Ninth Circuit in 2005 that SEC “Rule 16 b-3(d) is available only to exempt transactions between an officer or director and the issuer. It applies in a limited type of transaction in which the risk of abuse is inherently limited.” 

But there is nothing in this Merger Agreement that indicates a purchase of Tesla shares by Elon Musk “between an officer or director and the issuer”, Tesla Motors. It is certain that the transaction was between Elon Musk and SolarCity Corp, where he used his SolarCity shares as payment to SolarCity. So Rule 16 b-3(d) did not exempt the acquisition of Tesla Motors shares on 11/21/2016 as claimed in the SEC Form 4.

Was the non exempt purchase of 2,403,024 shares of Tesla Motors on 11/21/2016, when the stock was trading for $185.05 per share matchable with the non exempt sale of 2,782,670 shares of Tesla Motors on May 25, 2016, when the stock was trading for $213.22? The answer is yes and Elon’s Musk’s profit was above $67,800,000, which was recoverable by the issuer Tesla Motors.

The District Court Ruled that the acquisition of the right to receive was mandatory and automatic and therefore was exempt. Of course the acquisition was voluntary as any of the 4 insiders could have sold the SolarCity shares prior to the effective merger. And the SEC counsels and attorneys in an Amicus Curiae Brief in the Gryl v. Shire Pharma case had declared that, in a similar circumstance, the acquisition was not exempt from section 16 (b) as the acquisition was not “unorthodox”.

The court in the Olagues v. Elon Musk et al suit also claimed that : “Based on that language, each individual Defendants’ acquisition of Tesla shares appear to be a transaction with Tesla”. However none of the transactions on November 21, 2016 were with Tesla Motors and non were between the 4 insiders and Tesla Motors. It is clear that the acquisitions by the 4 executives of Tesla Motors were a transactions between the 4 insiders and SolarCity Corp.

At the bottom of all  SEC Form 4s, there is the following sentence: “ Intentional misstatements or omissions of facts constitute Federal Criminal Violations. See 18 U.S.C. 1001 and 15 U.S.C 78ff(a).”

In addition Elon Musk also made the sale of the 2,403,024 shares of Tesla Motors on May 25, 2016 for $213.22 and the purchase of the 2,403,024 shares for $185.05 within less than 6 months of the sale on November 21, 2016 causing a violation of Section 16 (b) of the 1934 Securities Act. He was not forced to pay due to phony arguments by his attorneys.

John Olagues

As an addendum to the Discussion above we find that the Supreme Court decision

Gollust v. Mendell 501 U.S. 115, 124 of June 10, 1991 stated:

 An " issuer of a security is defined under 3(a)(8) of the 1934 Act as the Corporation that actually issued the security, 15 U.S.C. 78c (a)(8) and does not include parent or subsidiary corporations." ------------------