Money Stuff: Is DOGE Securities Fraud?

Today is April 1, so 10% of the news that you read will be fake. Be careful out there! I confess that I enjoyed today’s issue of Petition, a newsletter of bankruptcy and liability management, fake quoting Treasury Secretary Scott Bessent:

Starting next week we will commence a tender offer to purchase up to $20 trillion of Treasury securities maturing after 2030 for 50 cents on the dollar. Furthermore, we will transfer ownership of our national parks and other federal lands to an unrestricted subsidiary, and investors participating in the exchange will also receive their pro rata share of a $5 trillion PIK interest first lien term loan due in 2075 secured by our nation’s wondrous natural assets.

There’s also a bit about the Trump memecoin. I confess that when I started reading it I was like “oh right this is the Mar-a-Lago Accord, normal stuff.” What even is reality anyway.

On that note:

The head of New York City’s pension funds called for a shareholder lawsuit against Tesla, accusing Elon Musk, its chief executive, of causing the company’s shares to plunge because of his actions to slash spending and the federal work force as head of the Trump administration’s cost-cutting effort.

In a letter sent late Monday to the New York City Law Department and reviewed by The New York Times, Brad Lander, the comptroller who oversees the city’s five public pension funds, said the highly contested cost-cutting measures by Mr. Musk’s initiative, the Department of Government Efficiency, are hurting Tesla’s stock.

He accused Mr. Musk, the world’s richest person, of “effectively quitting his job at Tesla” and “promoting policies” that have been harmful to Tesla’s business. ...

As a result, the letter said, the value of the pension system’s Tesla holdings has dropped by 34 percent from Dec. 31 to March 28, to $831 million from $1.26 billion. 

This is my own fault — I am constantly writing that “everything is securities fraud” — but probably the most frequent reader question that I have gotten over the last couple of months is “can Tesla shareholders sue for securities fraud because Elon Musk is doing DOGE stuff and hurting the stock?” And, uhhhhhhhhhhhhhh. This is not a successful lawsuit, or a lawsuit at all; it’s just a politician musing about suing. There are lots of ways for this to come to nothing. But it is the case that Tesla, unlike the rest of Musk’s empire, is a public company, which means that:

• It has a stock price that can go down, and
• The stock is not owned solely by carefully vetted Elon Musk fans: Anyone can buy it, and lots of index-y investors, including New York City pension funds, do.

So here you go. The theory of “everything is securities fraud” is:

1. A company does a bad thing.
2. The stock goes down.
3. The company somehow misled shareholders about the bad thing, so they bought the stock when it was high and have losses now that it went down.

Tesla’s stock is down year-to-date, so you can check that box. What is the bad thing? Well, from this report, there are two possible bad things. One is that Lander thinks that Musk is not putting in enough hours at Tesla, Tesla’s stock is down because of his lack of effort, and Tesla has lied to shareholders about Musk’s involvement. Here’s the relevant risk factor in Tesla’s securities filings:

We are highly dependent on the services of Elon Musk, Technoking of Tesla and our Chief Executive Officer. Although Mr. Musk spends significant time with Tesla and is highly active in our management, he does not devote his full time and attention to Tesla. For example: Mr. Musk also currently holds management positions at Space Exploration Technologies Corp., X Corp., X.AI Corp., Neuralink Corp. and The Boring Company, and is involved in other ventures and with the Department of Government Efficiency.

This does not strike me as a good theory of securities fraud. Like (1) that’s pretty good disclosure that Musk will be distracted and (2) if this ever went to trial there would be some pretty tedious testimony from Musk about how hard he still works at Tesla, how he never sleeps or has fun but only builds cars and dismantles government agencies. I just feel like an “Elon Musk isn’t doing enough work” theory is going to be a hard sell. Elon Musk is never on firmer ground than when he is complaining about how hard he works.

The other theory is that Musk, in his government role, is “promoting policies” that are bad for business, both in the sense that the policies (tariffs, less support for electric vehicles) are bad for business and in the sense that the people who like electric cars (liberals, Europeans) tend to dislike many of Musk’s (and Trump’s) policies, so Musk’s government involvement has been bad for sales. That strikes me as more factually plausible.

But I am not sure what the fraud is here. In an everything-is-securities-fraud case, you want to have some argument that, not only did the company do a bad thing, but it misled you about the bad thing. [1] Elon Musk has not been particularly secretive about his political engagement; “I bought Tesla stock because I was deceived about Elon Musk’s politics” feels like a tough argument. Still, in everything-is-securities-fraud cases, you don’t have to have much of an argument on this front. “We continue to monitor our public narrative and brand,” says Tesla’s annual report, “and tailor our marketing efforts accordingly, including through investments in customer education and advertising as necessary”; maybe you could argue that it hasn’t done that monitoring and tailoring for DOGE.

I still think this is weak, but we talked last year about a similar lawsuit against Target Corp. In 2023, Target did a Pride Month marketing event; there was a conservative backlash and boycott, and the stock went down. Shareholders — actually conservative activists, but anyone can buy shares of a public company — sued, arguing that the marketing event was securities fraud. This struck me as extremely implausible: Target obviously was not secretive about its Pride Month marketing event (it was a marketing event), and its annual report included a risk factor very specifically saying that “Target’s responses to crises and our position or perceived lack of position on environmental, social, and governance (ESG) matters … could harm our reputation … and can result in consumer boycotts.”

Target asked a federal judge to dismiss the case, but he let it go forward, finding that “Defendants’ general warning in their risk disclosure could be materially misleading because it was not specifically tailored to the risks from their 2023 Pride Month Campaign.” By that standard, the fact that Tesla’s securities filings don’t specifically say “Elon Musk’s work with DOGE and his alignment with the Trump administration could lead to a consumer backlash against our cars” could count as securities fraud. I don’t think this is right! It’s obviously wrong! But it’s arguably what the law is, or at least what some judges think the law is, and you mostly get to choose where you sue.

There’s a reason I write about “everything is securities fraud” all the time. It is weird to filter US political and legal life through securities fraud; it is weird to try to find ways to fit political disagreements into the framework of securities fraud. I mean, it’s fine when my readers email me about it — I sort of ask for it! — but it’s weird when actual politicians survey their range of potential actions and think “ah yes securities fraud lawsuit.” I wrote last year that “the thesis of ‘everything is securities fraud’ is that US law is somehow more responsive to financial-market claims than it is to other, substantive claims.” Or I wrote way back in 2016:

I find all of this so weird because of how it elevates finance. [Various cases] imply that we are not entitled to be protected from pollution as citizens, or as humans. [Another] implies that we are not entitled to be told the truth as citizens. (Which: is true!) Rather, in each case, we are only entitled to be protected from lies as shareholders. The great harm of pollution, or of political dishonesty, is that it might lower the share prices of the companies we own.

There are a lot of people who do not like what Elon Musk is doing with DOGE, and approximately none of them don’t like it because of what it is doing to Tesla’s stock price. [2] But the stock price is what might make it securities fraud.

Plausibly there are two models of corporate governance:

1. In the good-governance model, the chief executive officer works for the board of directors, who work for the shareholders. The directors monitor the CEO to hold her to account; if she is no longer the best person for the job, they fire her and get someone else. The board is active, robustly debating corporate strategy and involving itself in the details of operations; it demands a lot of information from management to fulfill its supervisory role. Meanwhile the shareholders keep an eye on the board, and if performance suffers an activist shareholder will try to round up shareholder votes to replace the board.
2. In the good-CEO model, the chief executive officer is a visionary superstar whose special skills and surprising insights are the main source of value for the company, and she should be allowed to do whatever she wants. Everything that she does is, by definition, good for the company; her errors are volitional and are the portals of discovery. The company has a board of directors, but their job is to sit quietly, give the CEO advice if (and only if) she asks for it, and approve her pay package. There are shareholders, but they don’t ask too many questions either: They know that it’s a privilege to be along for the ride with the visionary CEO.

My view is that both models can work, in different circumstances. Sometimes the CEO really is that good, really is the guiding visionary of the company, and it’s embarrassing and counterproductive for the board or shareholders to micromanage her decisions. Often the CEO is fine, is a professional hired to do a job, and it’s perfectly right for the owners of the company to keep an eye on her and make sure she’s doing a good job.

The first model is traditionally the ideal for big public companies; the second model is traditionally the ideal for tech startups. (And mostly for big public tech companies that are still run by their founders.) Venture capital investors compete to be “founder-friendly,” startup boards are gentle and advisory, and it’s a big deal — and often requires the CEO’s cooperation — when a startup board fires its founder-CEO.

And then there is a lot of confusion when you try to apply one model where the other model is appropriate. This describes approximately everything I’ve ever written about Elon Musk. [3]  But also, the Wall Street Journal has an excerpt from Keach Hagey’s new book covering “The Secrets and Misdirection Behind Sam Altman’s Firing From OpenAI,” and it seems obvious that everyone was just confused about this. Altman, the visionary founder-CEO, was not going to worry about conflicts of interest, or even tell his board about them:

One night in the summer of 2023, an OpenAI board member overheard a person at a dinner party discussing OpenAI’s Startup Fund. The fund was launched in 2021 to invest in AI-related startups, and OpenAI had announced it would be “managed” by OpenAI. But the board member was overhearing complaints that the profits from the fund weren’t going to OpenAI investors. 

This was news to the board, so they asked Altman. Over months, directors learned that Altman owned the fund personally. OpenAI executives first said it had been for tax reasons, then eventually explained Altman had set up the fund because it was faster and only a “temporary” arrangement. OpenAI said Altman earned no fees or profits from the fund—an unusual arrangement. 

He also didn’t bother telling the board about OpenAI’s high-profile product launches, because that was none of the board’s business and they could read about it in the newspaper like everyone else:

They also hadn’t been alerted the previous fall when OpenAI released ChatGPT, at the time considered a “research preview” that used existing technology, but that ended up taking the world by storm. 

There is also a controversy about how Altman told one board member that a second board member had said that a third board member should leave the board: the sort of thing that would obviously be annoying to the board members, but that seems impossibly boring and trivial when you try to explain it to anyone else, so I won’t.

Anyway the board didn’t like all of this, so it fired the CEO and replaced him with the chief technology officer. And then everyone pretty much immediately realized “oh wait his special magic is what creates the value of this company,” and they rushed to reverse themselves and apologize. 

It is very understandable; it is just mistaken. Zvi Mowshowitz writes:

My conclusion, which I still believe, was that Sam Altman had engaged in a variety of unacceptable conduct that merited his firing. ...

If you lie to board members about other board members in an attempt to gain control over the board, I assert that the board should fire you, pretty much no matter what.

No! Wrong! Not no matter what! In a normal company with good governance, absolutely. Lying to the board is the main bad thing that the CEO can do, from a certain perspective. But there are definitely some companies — Elon Musk runs like eight of them, but also OpenAI — where, if you lie to board members about other board members in an attempt to gain control over the board, the board members you lie about should probably say “I’m sure that deep down this is our fault, we’re sorry we made you lie about us, we’ll see ourselves out.”

To be clear, I am very sympathetic to the OpenAI board’s confusion. This was not a simple dumb mistake. They did not think “we are the normal board of a normal public company, and we have to supervise our CEO to make sure that he pursues shareholder value effectively.” This was a much weirder and more reasonable mistake. They thought “we are the board of a nonprofit set up to pursue the difficult and risky mission of achieving artificial general intelligence for the benefit of humanity, and we have to supervise our CEO to make sure he does that.” Lying to the board seems quite bad as a matter of, you know, AI misalignment. 

It was very understandable that the OpenAI board thought all of this, because it was formally true: It's what OpenAI’s founding documents and public communications said. But like 48 hours of contact with their shareholders — who they probably didn’t even think were shareholders! — persuaded them otherwise. Nope, hot startup, superstar CEO, nothing you can do.

Elsewhere:

OpenAI has raised $40bn in new funding from SoftBank and other investors, valuing the ChatGPT maker at $300bn as it becomes one of the best-funded private start-ups in the world.

During the brief Altman interregnum, some OpenAI investors supposedly said they were writing their shares down to zero. If Altman is the difference between a $300 billion valuation and a zero valuation, I’m sorry, but he gets to lie to the board all he wants.

Just the other day, I wrote that “my model used to be that investment banks were socialist paradises run for the benefit of their workers, but that is increasingly untrue.” Now investment banks look more like normal public companies run for the benefit of their shareholders. My thinking on this is particularly colored by changes at Goldman Sachs Group Inc., where I used to work. Goldman has long prided itself on a “partnership” culture, but its current chief executive officer, David Solomon, has tried to remake it as a more normal public company that puts shareholders first and is run by the CEO, not by a loose consensus of partners. The partners, understandably, complain about this sometimes. There are limits to this, though:

Goldman Sachs Group Inc.’s $80 million retention bonuses for the firm’s top two leaders have drawn another prominent critic, with Institutional Shareholder Services urging investors to reject the rewards at an annual meeting.

The incentives for Chief Executive Officer David Solomon and President John Waldron “lack rigorous, pre-set performance criteria, which is particularly concerning for off-cycle awards with such large values,” the proxy adviser wrote in note to clients Monday. It accused the board of “poor practice” for adding new incentives before a prior program is finished.

In a separate recommendation late last week, Glass Lewis described the latest bonuses as “excessive.”

Goldman Sachs’s board has urged shareholders to endorse the incentives in an advisory vote at its April 23 meeting, with the firm citing “fierce” competition for talent. The package of restricted stock would reward the pair for sticking around five more years.

Obviously you cannot judge Solomon’s pay by the normal standards of public company governance. When he needs more money, you have to give it to him!

Last month I made fun of Citigroup Inc. for its habit — unattractive in a bank — of crediting customers with wildly wrong amounts of money, often due to bad computer interface design. For instance, Citi once “almost shifted about $6 billion to a customer’s account by accident after a staffer handling the transfer copied and pasted the account number into a field for the dollar figure.” That one wasn’t that bad. It had “a could-happen-to-anyone flavor,” I wrote. Any system like that is going to have a field for an account and a field for an amount, and those words rhyme and both fields are filled in with numbers; it would be weird if no one ever got confused.

Anyway here’s this:

A Prince George’s County substitute teacher was paid more than $7 million in 2022 — and two months passed before the school system recouped the funds. ...

The audit, dated March 25 and sent to the legislature’s Joint Audit and Evaluation Committee, said the 2022 overpayment for the substitute teacher occurred when a school system employee mistakenly entered the teacher’s identification number in the “hours” field. That led to the teacher being paid for approximately 73,000 work days, rather than three.

School system officials didn’t realize the overpayment had occurred until more than 50 days later. They recovered the funds within a few days, the audit said.

I would read a 5,000-word hour-by-hour account of those 50 days. Presumably nothing particularly interesting happened at the school’s administrative offices for most of that time — they didn’t know they had overpaid — though surely the discovery of the problem was exciting.

But the teacher! Imagine getting $7 million for three days of substitute teaching! Like you have the immediate question of “do I call someone or …,” but this person apparently answered that one in the negative. And then you have the second question of “do I move this into Bitcoin and flee the country,” but again no. Between those two extremes you get pretty much “well I will buy myself a nice dinner and wait to see what happens.” Presumably you have some deadline in your mind, like, “if they haven’t asked for this money back within a year I am pretty sure I get to keep it.” And then every day you check your email nervously, holding your breath, sure that today is the day they ask for the money back but still holding out a little hope that they won’t. Probably the Citi customers are more blasé about their mistaken transfers.

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