Money Stuff: Elon Did Some Securities Fraud

In April 2022, Elon Musk signed an agreement to buy Twitter Inc. for $54.20 per share in cash, about $44 billion total, but he quickly changed his mind. In May, he tweeted that the deal was “temporarily on hold,” and in July he formally terminated the deal. The reason that he gave for terminating the deal was that there were too many bots on Twitter and that Twitter’s management had deceived him about the scale of the bot problem. 

This was all, as we discussed extensively at the time, absolute nonsense. “Temporarily on hold,” I wrote, “is not a thing”; signed public-company mergers cannot be put “on hold.” Musk knew all about the bots before signing the deal, Twitter did not lie about them, and the deal was not conditioned on anything at all about bots. Presumably Musk knew all this, though who knows really, and he went ahead and said all the stuff about the bots anyway. What was he up to? I don’t know, but the stock of Tesla Inc. (Musk’s main source of money) went down after the deal was announced, the stocks of social media companies like Twitter also went down, Musk mused publicly that he was overpaying, and he was apparently using the bot nonsense as a lever to renegotiate the price.

It didn’t work: Twitter sued to make him close, he had no real chance of winning that lawsuit, so he gave up and closed the deal in October 2022, paying the original $54.20-per-share deal price. This was a great result for Twitter’s shareholders, and also for Musk: He has done some stuff with Twitter, and its successor company is now worth, by some estimates, $1.25 trillion, a 2,700% return on the $44 billion he paid for it. That’s a joke, but only barely.

But for a while — between say May and October 2022 — nobody knew all that. I mean. I knew the bot stuff was nonsense, but Musk has gotten away with a lot of nonsense, and to the casual observer it looked like Musk might find some way out of the deal. Some casual observers owned Twitter’s stock. That stock was trading in the high $40s — near the deal price — the week before he tweeted that it was “temporarily on hold”; it fell to $40.72 after that tweet, and to $32.65 after he officially canceled the deal. Eventually it worked out fine and Twitter’s shareholders got their $54.20, but they were nervous for a while. And of course not all of them got their $54.20: If you panicked in July and sold for $32.65, you missed out. Arguably that was your fault, but arguably it was Musk’s fault, too.

And so of course the question is: Was this securities fraud? Everything is securities fraud, and this does have a lot of the hallmarks:

1. Musk publicly said stuff, about the bots and the deal, that wasn’t true.
2. It is hard to see into his mind, but he probably knew it wasn’t true, or at least didn’t care to find out.
3. His intention, in saying stuff that wasn’t true, was probably to save himself a few billion dollars on a securities transaction by cutting the price he would have to pay for Twitter.
4. His false statements caused people to transact in securities (selling Twitter stock) and lose money: Had they not been deceived by Musk, presumably Twitter’s shareholders would have waited for the $54.20 they were due rather than selling early for $32.65. [1]

It is an odd form of securities fraud. Elon Musk is not the first person to sign a merger agreement, get cold feet when market conditions change, and try to renegotiate the price. When this happens, the buyer will make any half-plausible argument available to it — the target misrepresented its business, it violated its obligations under the merger agreement, there has been a “material adverse effect” on its business, etc. — and see what sticks, much as Musk did. Sometimes this works, sometimes it doesn’t. It is not especially sportsmanlike; if you do this sort of thing you will not get a reputation as a good partner to deal with.

But is it securities fraud? If a private equity buyer signs a merger agreement and then tries to get out of it, the target’s stock will probably drop; can the target’s shareholders sue? Even if the buyer is not being entirely honest in its excuses for getting out of the deal, the target’s shareholders are in an important sense not the audience for those excuses. The buyer is pitching those excuses to the target’s board of directors (to try to get them to renegotiate), or to a court (to try to get out of the deal legally), or both. If the target’s shareholders read the buyer’s excuses and sell their stock, that’s their problem; the buyer wasn’t trying to deceive them. The buyer doesn’t care, at this point, whether the target’s stock goes up or down.

Anyway Twitter’s shareholders did sue Musk for securities fraud, and on Friday they won:

Elon Musk defrauded Twitter Inc. investors when he disparaged the company in 2022 in an effort to buy the social media platform for a lower price than his original $44 billion bid, a jury concluded.

Jurors in federal court in San Francisco found Friday that Musk intentionally misled Twitter shareholders when he tweeted that the social network — now called X — had too many fake accounts and tried to back out of the deal. The jury rejected two of the four fraud claims. Musk’s lawyers vowed an appeal.

The eight-member panel calculated how much Musk’s statements drove down the company’s stock price for each trading day over a period of about five months. The amount of damages he must pay to individual investors — which could total hundreds of millions or even billions of dollars — will be determined at a later date when shareholders submit claims. …

Mark Molumphy, a lawyer for the investors, said after the verdict he thinks the damages will amount to $2.6 billion. But even an award that high wouldn’t dent Musk’s net worth, which was $661.1 billion on Friday, according to the Bloomberg Billionaires Index.

We talked about this case in 2023, when a judge let it go forward. The judge threw out some shareholder claims that Musk was lying in his letters to Twitter, and I wrote:

It would be odd to find that it’s fraud to fight Twitter in court. Musk fought Twitter in court, and the stakes were that if he won he wouldn’t have to buy Twitter and if he lost he would. He lost. Along the way, Twitter stockholders made bets on whether he’d win or lose: They sold stock thinking he’d win, or bought it thinking he’d lose. If they were wrong — if they overestimated his chances of winning, because of the arguments that he made, which sounded good but were not — then they lost money. But it seems odd for them to sue him for making those arguments. He was doing the best he could to win in court; it’s not his problem if people believed him.

But doing his best to win in court, and tweeting nonsense, are two different projects with different audiences. Musk’s lawyered-up letters to Twitter were not fraud, but his tweets, apparently, were. Also:

But Musk acknowledged under questioning from a lawyer for investors that the “temporarily on hold” post was a mistake. “It may not be my wisest tweet,” he said. “I don’t know if I would call it my stupidest. But if it led to this trial it probably qualifies as such.”

Yeah “temporarily on hold” really is not a thing. 

The very high-level story is this:

1. Currently, companies employ people to produce goods and services. People pay the companies for the goods and services. The companies, collectively, use some of the money to pay their employees. There is some money left over, profit, which goes to the owners of the companies.
2. In the future, companies will employ artificial intelligence instead of people. The companies will still produce goods and services, and people will still pay for them, but the companies will not use any of that money to pay employees. Therefore, all of the money will accrue as profit to the owners of the companies. I don’t know which companies. Maybe the companies that produce the AI models will make huge profits. Or maybe the companies that employ AI — accounting firms and film studios and restaurant chains and consumer packaged goods companies — will capture the profits. Or maybe the suppliers — computer chip manufacturers and electric power generators — will get the profits. Or the profits will be split in some way. But, collectively, the companies will collect money from people (customers) and not pay any of it out to people (employees).
3. How will the people get money to pay for the goods and services as customers, if they are not getting paid to produce the goods and services as employees?
4. An answer you sometimes hear is “universal basic income”: The government will tax the companies’ profits and use the money to pay people, not for producing goods and services, but just for existing. (For consuming goods and services?) This is a rather neat theoretical solution but would require a certain amount of political organizing to get done.
5. A simpler, more ready-made answer is “index funds.” The profits will accrue to some companies, though I don’t know which ones. Traditionally most of the biggest and best companies are publicly listed US companies, so you could reasonably assume that the profits will accrue to some set of US public companies. You can buy index funds that include all of the big US public companies; probably some of them will capture the profits from AI. And then those profits will flow to the owners of the companies, meaning you: If you buy index funds, you will own the companies. If, in the future, 100% of the economy flows to corporate profits, you’ll get your share of them.

There are, I think, some obvious flaws in this story. You might be an AI skeptic, and think it’s silly to claim that AI will replace all human labor. Or you might be an AI worrier, and think it’s silly to claim that companies will own the AIs: What if the superintelligent robots take over the world instead of cheerfully producing profits for S&P 500 companies? (“It may be difficult to know what role money will play in a post-[artificial general intelligence] world,” threatens OpenAI.) Or you might notice that a lot of the AI companies with 12-digit valuations are private, and that so far the benefits of AI do not especially seem to accrue to index funds. Or you might say, “hey look I get a paycheck for producing goods and services, and I spend like 95% of it on purchasing goods and services, so I don’t have a ton of money left over to buy index funds to replace my paycheck in this future world of AI dominance.”

Still, as a thought experiment, it’s a good story. Especially if you’re in the business of selling index funds:

BlackRock Inc. Chief Executive Officer Larry Fink warned that the artificial intelligence boom threatens to make wealthy companies and investors even richer while exacerbating inequality, unless more individuals can share in the market gains.

“The massive wealth created over the past several generations flowed mostly to people who already owned financial assets,” Fink said Monday in his annual letter to investors. “Now AI threatens to repeat that pattern at an even larger scale.”

The head of the world’s largest money manager wrote that while AI will disrupt the labor market — creating new jobs while displacing many other workers — the technology “will create significant economic value.” Encouraging individuals to invest for the long-term alongside that probable growth “is both the challenge and the opportunity,” he said.

Here is the letter, which spends some time on that last problem I mentioned, that “just buy tons of index funds” is not actionable advice for everyone:

Many people don’t have the money to invest in the first place—households living paycheck-to-paycheck. You can’t invest if you’re not sure you can afford next month’s rent, next week’s groceries, or an unexpected bill. So the starting point has to be helping people build basic financial security.

And that’s starting to happen. Emergency savings accounts where employers can match contributions and workers can withdraw penalty-free are gaining traction. And a growing number of countries are experimenting with investment accounts seeded at birth, giving kids a stake in their country’s growth from the time they leave the hospital.

Even where savings exist, participation remains limited. The U.S. likely has the highest rate of market participation in the world. Still, roughly 40% of the population has no exposure to the capital markets. Around the world, participation is far lower. Billions watch their economies grow from the outside, as renters rather than owners—putting their savings in bank accounts that earn little, rather than investing to share in the growth around them.

In a sense “universal basic income” and “universal basic index fund ownership” are isomorphic. In UBI, there are companies, they produce profits, and the government takes a set percentage of the profits (as taxes) and redistributes them to people. In, uh, UBIFO, there are companies, they produce profits, and the government makes sure that people own some set percentage of the claims on the companies’ profits (as “participation in the capital markets”). Presumably BlackRock would prefer that people own their claims through BlackRock.

Oh, by the way, I mentioned that one objection to my neat story is that a lot of the big AI companies are private and so not available to index fund investors. Obviously there is a fix to that too:

Over time, … technological advances could also help bring greater transparency and potentially broader access to parts of the private markets—areas like infrastructure and private credit that have traditionally been out of reach for most individual investors.

See we need private credit funds in retirement accounts to fix inequality.

Not really, not yet, but we’re getting there:

Elon Musk said his Terafab project — a grand plan to eventually manufacture his own chips for robotics, artificial intelligence and space data centers — will be built in Austin and jointly run by Tesla and SpaceX.

Musk, the chief executive officer of both companies, said he will start off with an “advanced technology fab” in Austin that will have all of the equipment necessary to make chips of any kind, and test them. Musk, who has no background in semiconductor production and a history of over-promising on goals and timelines, had said before that the company will start with a smaller scale fab before moving to a bigger one.

The nice thing about combining SpaceX, xAI and X/Twitter into one company is that its chief executive officer, Elon Musk, can make informed decisions about what to prioritize. In a world of limited resources, SpaceXXxAI needs to allocate capital and chips and employees to whatever projects are in the best long-term interests of the company, whether that is space rockets or chatbot training or something else. If Musk decides to prioritize training AI models, some shareholders and employees who prefer space exploration might be sad, but that’s life as an employee or shareholder of a big company: You have to rely on the managers and board of directors of the company to make strategic decisions, and hope that they take seriously their fiduciary duty to make those decisions in the best interests of shareholders.

But of course Tesla and SpaceX are not combined, yet; they just share a CEO and, now, a hypothetical chip fab. Who will decide whose chips to prioritize? Obviously Musk. How will he make those prioritization decisions? I mean, presumably the answer is “he will do whatever projects have the highest long-term expected value.” But some of those projects will benefit Tesla shareholders and some of them will benefit SpaceX shareholders and all of them will benefit Musk, and if you are a shareholder of the disfavored company — if Tesla’s chips get backed up so that SpaceX can get more chips, or vice versa — then you will have a legitimate complaint. But that’s life as a shareholder of an Elon Musk company I guess.

Investment banks have a culture of making junior bankers work extremely long hours, and most of them also have official policies discouraging that culture. We have talked a few times about banks monitoring their employees’ computer use to make sure that they are working enough hours, and about employees who thwart that monitoring using “mouse jigglers.” What is the equilibrium here?

JPMorgan Chase has started to scrutinise whether the hours junior investment bankers claim to work match up against activity electronically logged by the bank’s IT systems, as it seeks to guard against overwork.

The bank will now issue reports to junior bankers that compare computer-generated estimates of junior bankers’ work week against their self-reported time sheets as part of a pilot scheme, according to people familiar with the matter.

JPMorgan plans to roll out the programme more widely across its investment bank, the people added. The estimate is based on employees’ weekly digital footprint, including video calls, desktop keystrokes and scheduled meetings.

“Much like the weekly screen time summaries on a smartphone, this tool is about awareness — not enforcement,” JPMorgan said in a statement. “It’s designed to support transparency, wellbeing, and encourage open conversations about workload.”

If you are capped at, say, 80 hours a week, enforced by electronic monitoring, then you’d better not be working 75 hours a week. The cap is also a floor.

I just feel like, if you have the right pedigree — a good Ph.D. in artificial intelligence, good experience at a top AI lab — you could have some very fun conversations with investors right now:

You: I would like $1 billion to start a new AI lab with a few of my friends. We are all super-good at AI and have worked at fancy places.

Investor: Here is a bag with $1 billion in it.

You: Thank you. See you around.

Investor: Before you go, if you don’t mind, could I ask you a few questions about your new AI lab? No pressure, only if it’s convenient for you, you’ve got my money either way.

You: Fine I’ve got five minutes keep it snappy.

Investor: Thank you so much. Okay, so, what sort of AI products are you looking to build?

You: Dunno, we’re gonna figure that out.

Investor: Ah. So what is your process for figuring that out?

You: We’re gonna get some sweet offices and hang out with each other, talk about stuff, see what comes up, try to have fun.

Investor: Sounds perfect.

You: I’m not gonna lie, we might have some love affairs with each other. Can’t talk about AI all the time!

Investor: Of course.

You: Also there will be some really good parties.

Investor: Sounds fun! Am I invited?

You: Oh absolutely not but you can follow on Insta if you want.

Investor: I will ha ha ha! 

You: Gonna buy out hot new restaurants and just fill kiddie pools with caviar. A billion dollars buys a lot of caviar.

Investor: I mean presumably you’ll also be spending some of it on inference?

You: What is inference?

Just, like, the expected value of a happy AI researcher is so high that, if you are a top AI researcher, and you want an unlimited amount of money to just hang out with your boys and do caviar bumps, people will compete to give it to you. They are betting that a world-changing trillion-dollar AI model will come out of this process. You are taking the other side of that bet! The Information reports:

Flush with venture capital and eager to woo clients and investors amid the AI rush, tech startups have been binging on private dining and entertainment lately, filling the Bay Area’s finest restaurants, bars and cocktail lounges most weeknights—and sometimes weekends, too. In some cases, they buy out the entire venue; other times, a room within the bar or restaurant. The boom has come to underscore the you-have-to-be-here atmosphere in San Francisco right now and how the region’s fortunes are so deeply intertwined with tech and its most recent obsession: AI. …

The scene is driven by small and midsize AI startups hoping to grow their profile in an era of uncommonly fierce competition. They use the dinners to court clients and boost sales, woo investors and lure new talent in a frenzied recruiting environment, according to conversations with 20 people I spoke with for this story, a group of tech and restaurant insiders who’ve hosted, attended and planned events.

“I could eat at a Michelin-starred restaurant just about every night of the week,” said Brian Kotlyar, head of marketing at AI data company Hightouch, which recently bought out Saison, which has two Michelin stars, near Oracle Park. The evening offered a tasting menu, a Napa cabernet that typically goes for $68 a glass and door-to-door transportation.

I feel like the stereotype of the AI industry is that it mostly draws true believers, people who are driven by genuine fervor for AI and commitment to building it the right way, and that they work hard with monastic intensity to build the future, undistracted by their $50 million pay packages and $68 glasses of cab. But that stereotype exists on a lag. Three years ago, they were all in grad school eating ramen, and there were not daily headlines about AI researchers getting $50 million; people were drawn to the mission, not to the Michelin-starred restaurants. 

I once wrote about Jane Street Capital:

These niches are fragile. If solving the puzzles produces too much money, other people will notice, people who are not intrinsically interested in the puzzles but who really like money. Those people might be a bit less creative, a bit less whimsical, than the original puzzle-solvers, but they might be more practical and intense and careerist. … Over time the business will shift from “whimsical puzzle-solvers who make hundreds of millions of dollars and stuff it in shoeboxes so they have more time for puzzles” to “ruthless businesspeople with firm handshakes and yachts.”

How can you be sure everyone cares about the mission when the wine is so good?

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