The U.S. securities markets remain one of the most powerful reasons for the overall continuing success of the nation as a financial center. Two great examples occurred recently, with Elon Musk and U.S. Rep. Chris Collins teaching (and learning) a lesson.
The roller coaster ride of Tesla’s operations and lack of profits fueled short sellers of the company’s stock, frustrating Musk to the point of “threatening” to take the company private at $420 per share of price, suggesting a buyout that would cost $70 billion, an unprecedented price for such a transaction. Enter the Securities and Exchange Commission, raising the question of whether Musk’s statements may be illegal stock price manipulation. Musk had claimed financing for the transaction was already secured. If so, his statements were probably legal, though his method of announcing this (Twitter) was unconventional. If not, the suggestion that financing was secured could be seen as an attempt to simply drive the stock price up without any substance. That is unacceptable (and illegal) in our system. (SEC Rule 10b-5 is one everyone should know….FRAUD!)
On the same day, Rep. Collins, who was elected to the House of Representations from western NY in 2013, was arrested for wire and securities fraud and making false statements to regulators. This was in relation to shares of a biotech company that he, his son, and several other friends and family owned. His acts are alleged to violate insider trading laws. In general, “insiders” are corporate directors, senior officers, and holders of more than 10% of voting stock. Because they are or may be privy to information that “outsiders” lack, insiders have a special duty not to trade on information only they know.
The buying and selling of shares of publicly-traded stock has long been one of the driving forces of the U.S. economy. The most critical element of the system is the reliance placed by investors on disclosure of information and a fair playing field. Musk and Collins violated that trust by engaging in activities that may mislead or deceive investors (Musk), or that are prohibited because corporate “insiders” are not permitted to use information not available to the public to pad their own wallets or pocketbooks (Collins). Along with the SEC regulating and enforcing the relevant laws to ensure a fair playing field, the annual financial statement audit and interim reviews of financial results performed by an independent CPA firm provide assurance to the average “retail” investor that they are being treated fairly and are basing their investment decisions on full disclosure of relevant information. This is the foundation of the U.S. securities markets and stock prices, and the most compelling reason why the U.S. remains a global economic powerhouse and influence. Trust and a level playing field. They go a long way.
Bill Dresnack is the Department Chair for Finance and Accounting at Saunders College of Business and Associate Professor in Accounting. In his accounting courses in the Executive MBA curriculum, students will gain exposure into current topics and trends in the world of accounting, including the rules and regulations of the Securities and Exchange Commission.