Oh Elon. Sometimes it seems that mischievous Tesla, Inc. CEO, Elon Musk, can’t take anything seriously. When Tesla boosted the acceleration on its Model S, he called the option “Ludicrous Speed.” When he dreamed up a company that would dig out subterranean tunnels for LA drivers, he made its name a pun: The Boring Company. And then, just last week, exercising an apparent whim, he sold 20,000 novelty flamethrowers in the span of a few days.
Musk was forced to adjust his plans, however, after customs agents declared they would not allow shipment of a product called a “flamethrower.” In a winking response, Musk said he would simply call the device “Not a Flamethrower.” But then he waffled on even that name, leading Ars Technica to surmise that “Musk is apparently making things up as he goes along here.”
For Musk’s many fans, the shenanigans are fun. For long-term investors, they are a sidelight on the way to astounding returns. But for regulators, there’s such a thing as being too cavalier. All of which leads to the question: have Musk and Tesla been playing just as fast and loose with federal securities laws?
For nearly a year – from June 2016 to May 2017 – the SEC investigated Tesla’s rollout of its all-important Model 3 sedan. The Model 3, Tesla’s electric car for the masses, is widely perceived as being hugely important to the company’s future. By mid-2017, it accepted $1,000 deposits from half a million customers to reserve one of the hotly anticipated, sub-$40,000 vehicles. Despite so much riding on the Model 3, however, Tesla never informed investors that it was the subject of an SEC investigation.
The market knows about the probe only through an investment research firm, Probes Reporter, which uncovered the fact that the SEC sent a subpoena to Tesla in 2016, asking for information on:
- The numbers of reservations for the Model 3
- Production times and rates
- Cancellations
- Refunds requested
- Refunds processed
- Its accounting treatment of the $1,000 deposits
The SEC also asked about a providentially-timed Goldman Sachs analyst report upgrading Tesla just hours before it announced a $2 billion stock offering . . . which Goldman Sachs was underwriting.
There’s an argument that this can all be laughed off. The SEC, after all, ended at least part of its investigation without taking any enforcement action. But it refused to release certain additional records to Probes Reporter on “law enforcement grounds,” which could be an indication that at least one line of investigation remains open. Further, even if the inquiry has been shut down, it seems likely that investors would call the 11-month investigation material to their interests.
For Tesla’s lawyers, it can’t be anything to laugh at. In fact, it might be making them sweat, even without a flamethrower around.