SEC Opening Inquiry

[msnow]

Absolutely not a bastardization of the law. Musk and his attys advising him are rock solid correct. Plainly obvious to anyone who takes time to read the facts instead of sensational media.

What precisely do you think the disclosure should have been in either the prospectus filed on May 18, based on what Tesla knew at that time, or at some later date as additional facts were developed? Including the facts as stated in the police report? What exactly should the disclosure have said?

Rider to insert same day at the printers in the prospectus: "One of our cars was in an accident last week because a truck driver turned in front of an oncoming Tesla. Our technicians arrived at the crash location today and will get more data."

How about this: "One of our vehicles was involved in a fatal accident on (insert date). We do (or don't depending on what they knew at the time) know they were using autopilot at the time. Because this is the first fatality we expect media coverage of this event to be significant."

 

[Cosmacelf]

I agree with eclectic. It wasn't so much whether or not the disclosure was material or not, the SEC is investigating, everything, more because Elon is acting like an arrogant SOB and basically told the SEC to sod off. IMHO, characterizing one of their investor risk factors as "boilerplate" was a particularly egregious and stupid thing to do. The SEC has a job to do, and it's going to do it whether Elon agrees with it or not.

 

[Eclectic]

Absolutely not a bastardization of the law. Musk and his attys advising him are rock solid correct. Plainly obvious to anyone who takes time to read the facts instead of sensational media.

What precisely do you think the disclosure should have been in either the prospectus filed on May 18, based on what Tesla knew at that time, or at some later date as additional facts were developed? Including the facts as stated in the police report? What exactly should the disclosure have said?

Rider to insert same day at the printers in the prospectus: "One of our cars was in an accident last week because a truck driver turned in front of an oncoming Tesla. Our technicians arrived at the crash location today and will get more data."

What Musk wrote was to the effect that the lack of a stock price drop showed that the information wasn't material. That's an utter bastardization of the law. The test is a much more complicated test based on many factors. Also, the prospectus that was filed on May 18 was a preliminary prospectus. They then supplemented the prospectus on May 19. The offering didn't close until a week later. I suspect the SEC is looking at that gap, and the lack of disclosure during that period, as well.

As for what would have been disclosed, I don't know what Tesla knew at the time, but if I were Tesla's counsel I'd have advised them that there's a risk of enhanced government regulation of their products as a result of a fatal accident involving a car operating under autopilot and that type of additional regulation could have a material adverse effect on the desirability of the company's products.

 

[Drivin]

I agree with eclectic. It wasn't so much whether or not the disclosure was material or not, the SEC is investigating, everything, more because Elon is acting like an arrogant SOB and basically told the SEC to sod off. IMHO, characterizing one of their investor risk factors as "boilerplate" was a particularly egregious and stupid thing to do. The SEC has a job to do, and it's going to do it whether Elon agrees with it or not.

Agree.
It often isn't just one thing (unless that one thing is really egregious), but add up the questions about the SCTY bid, the closeness of the two boards, the "sod off" attitude, the "boilerplate", the sort of NDA related to the reporting of safety issues, the use of those overseas workers who may or may not have been underpaid and the Mr. Hubris who they blamed the Model X issues on. The SEC individuals are humans and despite hundreds of pages of rules and regulations (and entirely different departments on the issues mentioned above), they will respond as humans do.

 

[msnow]

Agree.
It often isn't just one thing (unless that one thing is really egregious), but add up the questions about the SCTY bid, the closeness of the two boards, the "sod off" attitude, the "boilerplate", the sort of NDA related to the reporting of safety issues, the use of those overseas workers who may or may not have been underpaid and the Mr. Hubris who they blamed the Model X issues on. The SEC individuals are humans and despite hundreds of pages of rules and regulations (and entirely different departments on the issues mentioned above), they will respond as humans do.

They will but within the limits of the law.

 

[Drivin]

They will but within the limits of the law.

oh absolutely agree.
I did not mean to imply otherwise, apologize if I do.

An investigation or inquiry seems to be within those limits.

 

[TheTalkingMule]

The SEC has a job to do? Since when? We've had rampant fraud on every echange since forever. How is one car crash remotely relevant to their mandate?

There was a crash around 11am today outside my window on N 2nd St in Philadelphia. I saw no signs of SEC investigation.

 

[RubberToe]

... those statements were basically a taunt to the SEC. The SEC doesn't like to be taunted... Knowing what I know about the SEC, I suspect that someone at the SEC decided to push back at Musk..."...But if you poke your finger in the government's chest, you'll often get a painful lesson in return....The problem is that the government is in the business of producing regulations ... It may be that the SEC leaked news of an investigation as a way of sending a shot across Musk's bow, warning him that hubris begets nemesis... The SEC may fine Tesla and mandate additional disclosures ... It's the other government agencies that regulate vehicles/roads, etc. that have the real power here... Hopefully, Musk gets the message and becomes less confrontational (arrogant) with government regulators and agencies.

So, Elon Musk versus the U.S. Government eh?

My money is on Elon, literally and figuratively

RT

 

[msnow]

It's

The SEC has a job to do? Since when? We've had rampant fraud on every echange since forever. How is one car crash remotely relevant to their mandate?

There was a crash around 11am today outside my window on N 2nd St in Philadelphia. I saw no signs of SEC investigation.

The SEC isn't interested in the crash or the hypothetical one outside your building. They are interested to learn why the crash wasn't disclosed in their filing when the company put a lot of shares on the market for sale. One of their mandates is to monitor and enforce the law so if that is a material fact that should have been disclosed they will react accordingly.

 

[Nikxice]

What Musk wrote was to the effect that the lack of a stock price drop showed that the information wasn't material. That's an utter bastardization of the law. The test is a much more complicated test based on many factors. Also, the prospectus that was filed on May 18 was a preliminary prospectus. They then supplemented the prospectus on May 19. The offering didn't close until a week later. I suspect the SEC is looking at that gap, and the lack of disclosure during that period, as well.

As for what would have been disclosed, I don't know what Tesla knew at the time, but if I were Tesla's counsel I'd have advised them that there's a risk of enhanced government regulation of their products as a result of a fatal accident involving a car operating under autopilot and that type of additional regulation could have a material adverse effect on the desirability of the company's products.

I don't expect you to agree, but the former SEC attorney quoted within the WSJ article basically says that this alleged case has no merit.

Securities experts say there is no clearly defined standard for whether the May 7 accident was "material" enough to require disclosure by the company.

Adam Pritchard, a law professor at the University of Michigan and former SEC attorney, said he would be "very skeptical" that a court would find the fatal crash material and Tesla's failure to disclose it as a breach of securities laws.

"The behavior of the stock price -- the fact that it bounced back very promptly -- most courts would say was fairly persuasive evidence that it was not material." Also in Tesla's favor, he says: "This is development-stage technology. There are going to be wrinkles along the way."

 

[msnow]

I don't expect you to agree, but the former SEC attorney quoted within the WSJ article basically says that this alleged case has no merit.

Securities experts say there is no clearly defined standard for whether the May 7 accident was "material" enough to require disclosure by the company.

Adam Pritchard, a law professor at the University of Michigan and former SEC attorney, said he would be "very skeptical" that a court would find the fatal crash material and Tesla's failure to disclose it as a breach of securities laws.

"The behavior of the stock price -- the fact that it bounced back very promptly -- most courts would say was fairly persuasive evidence that it was not material." Also in Tesla's favor, he says: "This is development-stage technology. There are going to be wrinkles along the way."

I hope he's right.

 

[Eclectic]

I don't expect you to agree, but the former SEC attorney quoted within the WSJ article basically says that this alleged case has no merit.

Securities experts say there is no clearly defined standard for whether the May 7 accident was "material" enough to require disclosure by the company.

Adam Pritchard, a law professor at the University of Michigan and former SEC attorney, said he would be "very skeptical" that a court would find the fatal crash material and Tesla's failure to disclose it as a breach of securities laws.

"The behavior of the stock price -- the fact that it bounced back very promptly -- most courts would say was fairly persuasive evidence that it was not material." Also in Tesla's favor, he says: "This is development-stage technology. There are going to be wrinkles along the way."

I disagree with his statement about the stock price and materiality. The stock price is not evidence of materiality. It's evidence of damages in a private 10b-5 action. This misstatement of the elements of a 10b-5 action may help to explain why he's a former SEC attorney.

All snark aside, 10b-5 claims are, as I said several times before, fact and circumstance specific. There are no bright-line tests. I would have advised my client to provide disclosure of this type of thing, but that doesn't mean Tesla is going to lose a 10b-5 case brought by the SEC. The fact is, though, that as a public company, you don't want the SEC making these type of allegations, even if you aren't ultimately convicted/found liable.

 

[omarsultan]

...if I were Tesla's counsel I'd have advised them that there's a risk of enhanced government regulation of their products as a result of a fatal accident involving a car operating under autopilot and that type of additional regulation could have a material adverse effect on the desirability of the company's products.

But isn't that only the case if Autopilot was causal factor to the accident? If AP is working properly and within the parameters described in the docs, and it turns out the accident was simply a result of distracted driving, then why would AP be subject to greater government regulation.

 

[Garlan Garner]

I say... investigate away. Although I truly feel for those who were hurt or lost their life...I hope the investigation unveils the fact that AP was improperly used.
Folks are out there thinking that AP is there to replace their brain. Its not. Its an assist.

 

[Eclectic]

But isn't that only the case if Autopilot was causal factor to the accident? If AP is working properly and within the parameters described in the docs, and it turns out the accident was simply a result of distracted driving, then why would AP be subject to greater government regulation.

Several reasons. First, the government likes to expand its scope of regulation, even if what is being regulated doesn't need regulation. So if they have a pretext to regulate, they often will regulate.

Second, the question of materiality isn't one of what is certain to happen, it's what may happen. You disclose potential risks and the ramifications thereof. Leading up to 2000, the SEC mandated that all companies include risk factors about potential risks to the company of the much feared Y2K event. If that doesn't show how broad a net the SEC casts....

 

[TheTalkingMule]

The SEC isn't interested in the crash or the hypothetical one outside your building. They are interested to learn why the crash wasn't disclosed in their filing when the company put a lot of shares on the market for sale. One of their mandates is to monitor and enforce the law so if that is a material fact that should have been disclosed they will react accordingly.

Why should Tesla disclose individual crash reports as part of a filing? Would any other carmaker do this?

At no point was there any indication of malfunction. What's there to report?

Edit: Elon made a snippy comment to this effect, does anyone have that quote? It was an instant classic. Something about the absurdity of reporting the normal occurrences of the day.

 

[msnow]

It's

The SEC isn't interested in the crash or the hypothetical one outside your building. They are interested to learn why the crash wasn't disclosed in their filing when the company put a lot of shares on the market for sale. One of their mandates is to monitor and enforce the law so if that is a material fact that should have been disclosed they will react accordingly.

@callmesam - I see you "disliked" my post again, what's up?

 

[bhzmark]

Adam Pritchard is right, obviously, that there is no materiality issue here. This is such an absurd case that my money is that the Wall Street journal's source is not anybody at the SEC, but rather a short seller who tried to make a referral to the SEC and told the Wall Street Journal what they did and exaggerated what they think the SEC is going to do with that tip which in fact is going to be nothing.

There was nothing material to disclose. A fatal car accident is terrible for all involved, but does not require disclosure. Speculation about future media coverage is not material. Issuers cannot pollute their disclosures with a long list of speculation and other immaterial nonsense which will crowd out the required material disclosures. Electic is unable to answer the question about what the disclosure would say and precisely when it would be disclosed, because he probably tried to do it and realized it's a futile exercise.

 

[RubberToe]

A lawyers job is not in any way associated with ascertaining the truth. It is to advance the agenda for the client who is paying them, within the framework of the legal system. And sometimes outside it.

RT

 

[msnow]

Why should Tesla disclose individual crash reports as part of a filing? Would any other carmaker do this?

At no point was there any indication of malfunction. What's there to report?

Edit: Elon made a snippy comment to this effect, does anyone have that quote? It was an instant classic. Something about the absurdity of reporting the normal occurrences of the day.

1. It wasn't just a crash report, it was a fatality, their first ever so not insignificant.
2. Elon's tweet said the sensors didn't alert or react to the truck/trailer because they were set not to so as to avoid false positives from overhead street signs. Maybe that's what you are referring to but I don't think it helps so say "we had false positives so we ignored it because it was an edge case".
3. They would be reporting a risk to investors that could be deemed material as mentioned many times upthread. See the posts from @Eclectic and others on this topic.

It's okay if you don't agree in time we will all find out.