Michael Lewitt
March 16, 2018
Michael Lewitt, Third Friday Management, LLC
Chief Investment Officer

Was the SEC Sending Tesla A Message?

The SEC had some harsh words for companies that grossly exagerrate their prospects in its enforcement action against Theranos this week.  Those words would seem to apply directly to Tesla and Elon Musk.

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1
of
2
Was the SEC
Sending Tesla A Message?
March 16, 2018
O
n March 14,
t
he SEC
p
rosecuted
the massive fraud at Theranos
committed by
founder Elizabeth
Holmes, a media darling who
defraud
ed
investors of more than $700 million while the financial press sung
her praises.
The company as well as its former president
Sunny Balwani were also charged.
It turns out
that Ms. Holmes pretty much lied about
everything
she told investors in the
company
, and naturally she
lied to the press and the public repeatedly
.
Ms. Holmes was fined $500,000 and stripped of her control of
the company
as well as her
18.9 million
shares in the company
and
b
arred from serving as an officer or
director of a public company for 10 years.
Criminal charges are still likel
y
.
In the press release accompanying the fraud charges, Steven Peiken, Co
-
Director o
f the SEC’s
Enforcement Division, said the following: “Investors are entitled to nothing less than complete truth and
candor from companies and their executives. The charges against Theranos, Holmes, and Balwani make
clear that there is no exemption from
the anti
-
fraud provisions of the federal securities laws simply because
a company is non
-
public, development
-
stage,
or the subject of exuberant media attention
.” (italics added)
And Jina Choi, Director of the SEC’s San Francisco Regional Office, added t
he following: “
The Theranos
story is an important lesson for Silicon Valley.
Innovators w
h
o seek to revolutionize and disrupt an industry
must tell investors the truth about what their technology can do today, not just what they hope it might do
someday
.
”
If those words bring to mind Tesla, Inc. (TSLA), it may not be an accident.
T
SLA
has repeatedly lied
about its prospects to investors, the financial press and the public.
S
hareholders
in this money
-
losing, cash
-
burning house of cards
may
excuse Tesla
’
s grotesquely inaccurate
financial and production projections as good faith estimates gone bad,
but
t
he company
’
s estimates are
consiste
ntly so far off the mark that
t
hey cannot be
based on
the kind of ground
ed analysis required of
public
c
ompanies (this may be why so many senior accounting execut
ives keep quitting the company)
. And
the boiler plate disclaimers that Tesla
e
mploys
to protect
i
tself
from lia
bility
d
o not
cover situations where
companies are merely speculating on their future results rather than providing serious
projections grounded
in
s
olid financial analysis and facts
.
Tesla
’
s financial and production projections as well as the tweeting
activity of Elon Musk
mak
e a mockery of the securities laws
.
Even if
t
hey are
not deliberately misleading
shareholders,
they
c
onstitute legally
reckless behavior.
If
t
he disclosure
laws are to mean anything,
T
esla
and Musk
should
be held accountable for
t
heir
actions. The words of
t
he SEC
apply as much to
T
esla as
they do to Theranos
–
the only difference is that
Tesla
’
s shareholders and bondholders
haven’t lost their
shirts yet because they continue to ignore the facts and suspend disbelief.
B
ut time is running out as news
slips out that Tesla is still
struggling
to solve its Mo
del 3 production problems,
larger and richer
competitors
are catching up in the electric car race,
Tesla keeps
burning
cash,
and
T
esla
’
s promises run thin.
Shareholders buying or holding Tesla shares at current prices (the stock
c
losed at $325.60/share last night)
have an unhealthy appetite for risk and are ignoring obvious danger and should exit immediate
ly.
I am short Tesla stock and also own puts on the stock.
The Credit Strategist
M
arch
1
8
, 2018
Page
2
of
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