On March 14,the SEC prosecuted the massive fraud at Theranos committed by founder Elizabeth Holmes, a media darling who defrauded 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 barred from serving as an officer or director of a public company for 10 years.Criminal charges are still likely.
In the press release accompanying the fraud charges, Steven Peiken, Co-Director of 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 fromthe 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 the following:
“The Theranos story is an important lesson for Silicon Valley. Innovators who 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.
TSLA has repeatedly lied about its prospects to investors, the financial press and the public.
Shareholders 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 the company’s estimates are consistently so far off the mark that they cannot be based on the kind of grounded analysis required of public companies (this may be why so many senior accounting executives keep quitting the company).
And the boiler plate disclaimers that Tesla employs to protect itself from liability do not cover situations where companies are merely speculating on their future results rather than providing serious projections grounded in solid financial analysis and facts. Tesla’s financial and production projections as well as the tweeting activity of Elon Musk make a mockery of the securities laws.
Even if they are not deliberately misleading shareholders, they constitute legally-reckless behavior. If the disclosure laws are to mean anything, Tesla and Musk should be held accountable for their actions.
The words of the SEC apply as much to Tesla 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.
But time is running out as news slips out that Tesla is still struggling to solve its Model 3 production problems, larger and richer competitors are catching up in the electric car race, Tesla keeps burning cash, and Tesla’s promises run thin. Shareholders buying or holding Tesla shares at current prices (the stock closed at $325.60/share last night) have an unhealthy appetite for risk and are ignoring obvious danger and should exit immediately.
I am short Tesla stock and also own puts on the stock.