Tesla Hoping To Dismiss Model 3-Related Securities Fraud Lawsuit



By any definition, the Tesla Model 3 production ramp up, from dozens of cars a week to thousands, has not been smooth.

CEO Elon Musk famously spoke of the coming “production hell” at a splashy event that saw the first examples go to paying customers. But even that turn of phrase understated the problems and set backs that were to follow. Cue the lawyers.

On October 10, 2017, the Rosen Law Firm launched a lawsuit, making the claim that Tesla –

“…made false and/or misleading statements and/or failed to disclose that: (1) contrary to defendants’ representations that Tesla was prepared for the launch of its Model 3 sedan, in reality, Tesla had severely inadequate inventory and was woefully unprepared to launch Model 3 sedan as anticipated; and (2) as a result, Tesla’s public statements were materially false and misleading at all relevant times. When the true details entered the market, the lawsuit claims that investors suffered damages.

hundreds of Tesla cars in factory parking lotNow, the California automaker is seeking to have the legal action dismissed. According to Reuters, Tesla has filed a motion in a Federal court that claims its “…statements about the challenges the company faced with Model 3 were “frank and in plain language,” including repeated disclosures by Chief Executive Elon Musk of “production hell.”” Further, it says that the company believed production of the Model 3 to be proceeding according to plan until August of 2017.

The motion also makes mention of the problems which, contrary to claims in the lawsuit, its production setbacks arose from bottlenecks at both its Nevada Gigafactory and its Fremont auto assembly plant.

The suit contends that the price of Tesla shares were inflated during the period from May 4, 2016 to October 6, 2017,  and that investors were “misled” by statements made by the company and its executives. A hearing in the case is scheduled for August.

Source: Reuters

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35 Comments on "Tesla Hoping To Dismiss Model 3-Related Securities Fraud Lawsuit"

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Not all class-action lawsuits are frivolous but this one sounds like one to me.

Absolutely no one in the investment community expected the Model 3 launch to be without challenges and setbacks.

Anyone relying on a perfect Model 3 launch was ignoring Tesla’s launch history, ignoring Tesla’s TSLA writtten Investment Memorandum risk disclosures, and ignoring general common sense.

Sounds like an extort lawfirm that specializes in targeting public cos for a class-action payoff settlements. Same kind of guys that specialize in shorting public cos stocks for profit. It’s possible TSLA shorters behind initiation of this lawsuit to generate negative press towards Tesla… bird of a feather.

Exactly, even the most ravenous Tesla fanboi knows what “Tesla Time” is and that you have to pad release dates if you want to know when things are coming out.

It’s true that these sorts of lawsuits almost never succeed.
Material harm is difficult to prove especially when the stock is out performing the index.

But Teslas stock wasn’t outperforming the index in the alleged time span.

eject — The suit was filed in Oct 2017, and the term in question is May 4th 2016 through Oct 23rd 2017. During that time period, TSLA shares went from $220/share to $320/share. Please tell me what index outperformed TSLA during that time span?

I think their point is that the stock was over valued at that tie, so investors overpaid. The price then lost significant ground, which is the reason for the suit.

At all times every stock for every company is either over or under valued, and is in a state of constant correction between those who say it is overvalued, and those who say undervalued. That is the very nature of free markets. If stocks were traded at a single fair market value, the price would be fixed, and not determined by buyer’s bids. This is the very basis of free market capitalism. The company can’t control that.

TSLA stock actually has a long history of high volatility. Any investor should be aware of that, and mitigate their own risks by dollar cost averaging in and out of historically volatile stocks like TSLA.

If the investor’s complaint is that they failed to dollar cost average and therefore poorly timed the market, they don’t even qualify for compensation under SEC rules. SEC rules simply don’t protect investors from short term price swings. Which is why SEC filings are only required once a quarter for updates, and once a year for full numbers.

Here is why they still would have no damages over that time period. If they dollar-cost averaged their purchases over even just a quarterly basis over that time, here is what they would have paid per share on the first of day of each 3rd month from May 2016 until the end of the period in Oct 2017:
$220, $227, $190, $251, $322, $325, $320.

With even this simple dollar-cost averaging, for each share purchased, investors would have paid an average of $219 per share, and at the point the lawsuit was filed they would have over $100 dollars of profit with each share worth $320 when the lawsuit was filed. The only other way they could have lost $$ in that term were if they failed to practice basic investing rules, and they poorly timed the market.

oops, math error. it is $265 not 219. Still a 50 dollar a share profit, no loss.

“Absolutely no one in the investment community expected the Model 3 launch to be without challenges and setbacks.”

Yeah everybody knew, and only Tesla didn’t? So they also knew and thus were misleading

@James said: “…Yeah everybody knew, and only Tesla didn’t? So they also knew and thus were misleading.”

Production Goal…

Goal: the object of a person’s ambition or effort; an aim or desired result.

Nothing wrong with setting very ambitious goals… it’s commom knowledge that Tesla is know for managing through this method.

Personally I like Tesla’s method of setting very high goals and hope they continue to do so which I’m sure they will. It’s in large part what has made Tesla more market cap valuable than Ford.

I don’t think the issue is them being ambitious. But you have to be honest with the reality of how you’re doing at achieving those goals. When the Tesla model 3 had it’s premiere with deliveries. Tesla didn’t say they were basically hand built using production machinery. Battery packs were being hand assembled. If Musk would have said that I can guarantee the investors would have acted differently. Remember not everyone is reading EV blogs with hundreds of comments daily.

Should investors have known better – yes. But imagine any other manufacturing doing the same thing Tesla does. Musk didn’t answer investors questions saying they were “boring”.

Investors didn’t even need to read a single EV blog. Tesla outright spelled out that they certainly could experience production delays right in their SEC filings for the whole investment world to see long ahead of time.

Each and every issue you list was already covered as disclosed Risk Factors right in Tesla’s SEC filings. Tesla warned it could happen, and then some of the Risk Factors they disclosed actually happened.

Every company lists their Risk Factors in their SEC filings, and every company has some risks actually happen. That is the risk of investing, and why you get less return if you choose a low risk investment, like a nice Treasury Note.

theflew said: “…But imagine any other manufacturing doing the same thing Tesla does…”

Not hard to imagine.

Several traditional car makers have published production goals/targets for new EV models and later the actual start of production date & volume was delayed for various reasons and in some cases the cars never made it to production.

Also, it’s normal for initial early production cars to be less factory automated than later higher volume production.

While on the topic of production delays…

“FRANKFURT, March 22 (Reuters) – BMW has held back the mass rollout of electric cars until 2020 because current fourth generation electric car technology is not profitable enough for volume production, Chief Executive Harald Krueger said…” source:

Not only did Tesla know the risks, they listed EVERY SINGLE RISK IN DETAIL in their SEC filings for everybody in the world to read. What you have inadvertently done James, is to admit publicly that you failed to read and/or comprehend Tesla’s SEC filings. So any analysis you attempt at this point reflects only your inability to conduct basic due diligence, and nothing about Tesla.

Let’s keep it real. They knew exactly they couldn’t produce and deliver the promised numbers

James — So your claim is that on May 4th 2016 (the start of the term of this lawsuit) that Tesla ALREADY knew that they would have a battery assembly “flufferbot” (that they hadn’t even designed yet) fail to insert fluff into a battery pack? That they would end up having to hand build battery packs nearly a year and a half later?

Do you realize how crazy that sounds? That is straight up conspiracy nuttery.

Tesla knew there were unknown risks, and they disclosed those risks right in the SEC filings.

You’re deliberately trying to belittle the scope of the problem, Nix. Belittle it by some orders of magnitude, I’d say!

Tesla didn’t have to tear out and rebuild (as I recall) three out of four “modules” in their automated TM3 battery pack assembly line merely because a single robot at one place on the line failed to operate as planned, or because it turned out that one operation was better performed by a person than by a robot (or, as it turned out, better not performed at all).

My flufferbot comment wasn’t meant to cover ALL the production problems Tesla saw. It was an example of one of the things Tesla did bit expect would delay th TM3.

The items you listed were also not predictable and are also good examples of things out of their control. They are also examples of Risk Factors Tesla put in their SEC reports so investors were ALREADY on notice.

@James said: “Let’s keep it real…”

Let’s indeed keep it real… any TSLA investor that had conducted a reasonable minimum effort of due-diligence absolutely knew the Model 3 published production goal was subject to delay. It would take a special kind of investor ignorance to expect the Model 3 public production goals to be taken as a “promise’.

They knew and they fully disclosed right in their SEC filings Risk Factors section in detail. Here is just one section: “We have experienced in the past, and may experience in the future, significant delays or other complications in the design, manufacture, launch and production ramp of new vehicles and other products such as our energy storage products and the solar roof, which could harm our brand, business, prospects, financial condition and operating results. We have experienced in the past launch, manufacturing and production ramp delays or other complications in connection with new vehicle models such as Model S and Model X, and new vehicle features such as the all-wheel drive dual motor drivetrain on Model S and the second version of autopilot hardware. For example, at times since the launch of Model X, we encountered unanticipated challenges, such as certain supply chain constraints, that forced us to decrease the production of these vehicles from our initial expectations. If unexpected issues arise or recur with respect to any of our production vehicles, we may experience further delays. In addition, because our vehicle models share certain production facilities with other models, the volume or efficiency of production with respect to one… Read more »

The Shorts whinning in court. Borrrrrring.

Everything I see here was already disclosed as potential risks in Tesla’s SEC filings for everybody in the world to read. Once Tesla had disclosed those risks, Tesla had met their legal burden.

For example, the suit complains that Tesla didn’t have sufficient inventory of parts, but Tesla’s SEC filings warned of exactly that potential risk factor:

“We are dependent on our suppliers, the majority of which are single source suppliers, and the inability of these suppliers to deliver necessary components of our products in a timely manner at prices, quality levels, and volumes acceptable to us, or our inability to efficiently manage these components, could have a material adverse effect on our financial condition and operating results. “

I’m not sure what “damages” they think they are owed for the time period from May 4 2016 through Oct. 27th 2017 when they filed the lawsuit. TSLA shares went up from $220 to $320 in price, producing a massive $100 dollar profit on a $220 dollar investment. Investor’s remedy was to sell and pocket their nearly 50% profits. Are they seriously claiming that their profits weren’t sufficient, so Tesla owes them more?

This lawsuit could have some teeth, I read through the documents and the plaintiffs make some good arguments about being mislead. Corporate officers in a publicly traded company have to be very careful about their public statements. My buddy who is chief counsel for a very large publicly traded company said this could be a real problem, and is very unlikely to get dismissed before getting into discovery, in his opinion.

Every public statement made by every single company representative are ALWAYS in the context of the Risk Factors listed in the SEC filings. That’s why the Risk Factors section exists, so that every every conference call, public statement, and CEO tweet does not have to include the FIFTEEN (15) PAGES of Risk Factors that Tesla disclosed in their SEC filings in the time period in question. The existence of those Risk Factors is already known by any investor who did their due diligence, and do not need to be repeated ad-nauseam.

Are you seriously implying that investors can simply ignore the SEC filings and Risk Factors and not include them as part of their investment due diligence because the Risk Factors aren’t included at the end of every Elon Musk tweet?

I am not implying anything other then my own opinion, and that of my buddy that has a wealth of experience in this field. Its hard to judge any situation without all of the evidence, in this case it will very likely proceed to discovery and we will get to see who knew what/ when, and who said what/ when… Highly unlikely this one will get dismissed.

Please ask your “buddy” how many cases he has been party to where the only and singular proffer of evidence in the suit was an anonymously sourced story in the Wall Street Journal? Here is a description of the sole source that the lawsuit provides as proof of wrongdoing:

“according to people familiar with the matter”.

The case should be killed the instant Tesla asks for sworn statements from the unnamed sources, which are the only sources plaintiffs provided in their filing, and plaintiffs fail to provide a single witness. Anonymous news stories cannot testify in court. They need actual humans to back their accusations, and they don’t get to go on a fishing expedition to find their first witness. If they have no actual witness by the time the hearing happens, their case will be dismissed.

But your “buddy” already knows this if he is involved in the law.

Dave, your “buddy” was wrong. It ended up getting dismissed without going to discovery.

“…the plaintiffs make some good arguments about being mislead.”

Yes, I think they have a very clear case for being mislead, despite all the disclaimers Nix keeps talking about.

However, it seems they have no case at all for damages, so I can’t see how the court can view this as anything other than a frivolous lawsuit.

But then, I’m not a lawyer, and what seems obvious to me in legal matters is often seen differently by the courts.

Its a crazy world when the lawyers get involved. I am not sure if any Settlements will have to be paid, but if this case gets to the process of discovery, we will learn a lot more about the inner workings of Tesla.

I’m gonna buck the trend of Tesla fanboys supporting Tesla no matter what, here. The truth is that Tesla wasn’t even remotely ready for mass production of the Model 3 when they did their “Delivery” event, and announced production had started. It wasn’t until after that, that they even started to work on tearing out and rebuilding the non-functional automated Model 3 battery pack production line at Gigafactory One. Tesla gave many indications it was “ready to go” on their deadline of July 1, 2017, up to and including that date, when the reality was that they were still months away from true mass production. Whether or not this lawsuit has merit isn’t for me to say. That’s up to the judge and/or the jury. Tesla can always point to the financial disclaimers they included in any investor prospectus and SEC filing. And as has already been pointed out, just what “damages” did investors suffer when the stock price was rising far faster than the average stock? On that basis, it does seem that the suit should be dismissed. But I don’t think any reasonable person can honestly say that Tesla is not guilty of misleading the public about its… Read more »
@Pushmi-Pullyu said: “The truth is that Tesla wasn’t even remotely ready for mass production of the Model 3 when they did their “Delivery” event, and announced production had started….But I don’t think any reasonable person can honestly say that Tesla is not guilty of misleading the public about its readiness, or lack of readiness, to start mass production on July 1, 2017.” ———— I consider myself a reasonable person and I can honestly say Tesla I don’t think Tesla mislead the public about readiness, or lack or readiness to start production in July 2017. In fact if one takes the time to view the Model 3 initial delivery event video (which was public live-streamed and published on YouTube by Tesla) Elon Musk was very straight forward about the prospects of possible production delay impediments for Tesla meeting their production goals: YouTube First Model 3 Handovers Event: https://m.youtube.com/watch?v=vzT0uNT0ds8 Partial video text: “In terms of production the thing that is going to be the major challenge for us for the next 6 to 9 months is so how do we build a huge number of cars and frankly we are going to be in production Hell… “Welcome to Production Hell… that’s going… Read more »

CDAVIS — Those are very powerful quotes. It clearly shows that Tesla was very clearly warning of risks not only in their SEC papers (the one legally binding document that the SEC specifically created for the exact purpose of keeping investors informed) — but also in their public statements.

Anyone who cherry picks one sentence or another and then try to turn it into some sort of contractual promise clearly shouldn’t be investing in the first place. Much less crying over poor market timing over trying to turn a quick buck.


Thank you for your very well-reasoned response. You argue your side of the question very well, so I concede the point: Yes, you can — and did — reasonably argue that Tesla did not mislead the public. I don’t agree, but it’s a reasonable argument.