Tesla is walking a fine line.
The short version is that Edward Niedermeyer, an auto industry reporter at the Daily Kanban, surfaced a potential issue around the company’s agreement with customers.
Tesla said the implication of this report — that the company makes customers sign agreements preventing them from taking issues to the National Highway Traffic Safety Administration or other agencies — is “preposterous.”
The company added that when customers have issues with their car, even if not caused by the car itself (say you drove down a muddy road and got stuck, for example), Tesla will cover the repairs to see if they can learn anything about their vehicles.
In these instances, they will ask customers to sign a “goodwill agreement” that prevents these gratis repairs from being used against them in court.
In its blog, though, Tesla went a step further and all but implied that Niedermeyer and others discussing potential issues surrounding the company are really just motivated by potential financial gains from a decline in Tesla’s stock price.
Tesla is blaming short sellers
Short selling is a bet that a stock’s price will fall, and Tesla’s tactic of blaming those who stand to gain from your financial distress for the fact that you are experiencing that distress in the first place has a long and storied tradition in financial markets. And, it is a tactic that’s often employed by those who end up on the wrong side of history.
Summarizing the issue nicely, T
he Financial Times back in 2008 wrote that “short sellers were accused of bringing about the crash of the Dutch tulip market in the 17th century, the Wall Street crash of 1929 and, this year, for helping to bring down Bear Stearns, the New York investment bank.”
Ken Lay, the founder of Enron, also blamed short sellers for the company’s eventual collapse, and later in 2008 Dick Fuld, then the CEO of the now bankrupt investment bank Lehman Brothers, did the same.
Earlier this year, Valeant Pharmaceuticals asked the Securities and Exchange Commission to investigate short seller Andrew Left, who had raised issues about some of the company’s accounting practices, only to have the SEC turn its gaze to Valeant.
Just as blaming your partner for a failed relationship and not owning your (even “minor”) mistakes amplifies your wrongdoing, accusing those critical of your business or accounting practices of merely being in it for the money is to miss the point of their exercise and invite further scrutiny.
Scrutiny that could potentially unearth issues much larger than those against which you lashed out.
Tesla wrote Thursday that because of what it called billions of dollars in short sale bets against the company, “there is a strong financial incentive to greatly amplify minor issues and to create false issues from whole cloth.” Niedermeyer’s colleague Bertel Schmitt, however, told Business Insider’s Matt DeBord in an email: “The only shorts I have are the ones between me and my chair. Same with Ed.”
The risk Tesla runs here, again, is to merely heighten existing questions the company faces in the marketplace.
For example, Tesla’s use of GAAP and non-GAAP accounting has long been the subject of scrutiny, particularly as it relates to deferred revenue recognition for its leasing program included in its non-GAAP financials.
There’s also the question of how Tesla fits into the Elon Musk-iverse — which comprises Tesla, solar energy company SolarCity, and rocket company SpaceX — and how all the players in this world fit together.
In April, The Wall Street Journal detailed how Musk has used his personal wealth, and his stakes in Tesla and SolarCity (both of which are public), to inject capital into his businesses at various times.
Musk told The Journal that the odds he personally gets margin-called — which could require a large sale of his stake in either public company — are “almost zero” given how much his personal lines of credit are in relation to his overall net worth.
Questions about tangled webs of corporate and personal financial interests, however, are the kind of thing that makes those inclined to be sceptical about business (read: short sellers) want to look even closer.
Musk told The Journal it is “valid” to question his financial machinations. But just as Tesla accuses those raising questions about its accounting and relationships with customers for seeking financial gain, so too does Musk stand to benefit from continued market confidence that his three-legged stool will remain standing.
In markets, everyone is always talking their book and accusing someone else of doing as much is bald-facedly hypocritical. To do so merely prompts others to ask what you’re hiding. And while the answer to that might very well be “nothing,” financial markets quickly create glass houses for those who want to throw stones.
In an interview with The Financial Times in April, noted short seller Jim Chanos recalled that, in his 1990 Nobel acceptance speech, market legend Bill Sharpe said short sellers are required for the capital asset pricing model (for which Sharpe won the Nobel) to work.
Short selling, in other words, is not a bug, but a feature of well-functioning markets.
In his interview with the FT, Chanos said that from a portfolio-construction standpoint, a short seller allows those betting stocks will go up to be more long, as a good short fund can hedge out potential losses in a downturn. So if you want to be more confident in your bets stocks go up, you should find someone who thinks they won’t.
Tesla wrote Thursday that it makes mistakes, never claimed to be perfect, and hopes to always do the right thing when falling short.
A start would be not blaming others who, like Tesla, are just doing their job.