A programming note: I will be out of the country next week, hopefully snorkeling with sharks. In any event, Sean O'Kane will be emailing you next week, and we will be off the following week for Thanksgiving!
Denholm joined the Tesla board in 2014, but she had just taken a job as CFO at Telstra Corp, an Australian communications company, a month ago. (She was previously chief operating officer for the company.) She’s quitting to take the chairwoman gig. A month ago, Denholm said she didn’t want to be chairwoman in an interview with Australian media
, so this is all very hilarious. Obviously, she is not James Murdoch, whose whisper campaign for the position
I enjoyed very much.
And Denholm’s got a lot on her plate. Remember how she’s taking over because the Securities and Exchange Commission (SEC) required Elon Musk to step down as part of his settlement regarding the “funding secured” / securities fraud thing? It’s not over!
Last Friday — the same day that Kara Swisher’s Musk interview dropped
— Tesla filed its regulatory paperwork, and we all discovered that Tesla has been subpoenaed by the SEC about Model 3 production numbers. I am not a lawyer, but subpoenas seem bad, probably?
Let’s take it to some experts! “Receiving subpoenas is never a good thing,” says former SEC commissioner Harvey Pitt, the CEO of Kalorama Partners
, in an email. “Subpoenas are a fairly serious step,” says Evelyn Cruz Sroufe, a partner at Perkins Coie
who specializes in corporate governance, in an interview. Of course, a subpoena doesn’t mean the SEC has drawn any conclusions about whether wrongdoing occurred, Sroufe added.
Usually, voluntary submissions are more standard for the SEC, Pitt says. So when the SEC issues a subpoena, it means that the agency feels the need to compel the production of documents and testimony. Tesla isn’t the only one receiving the subpoenas, either: former employees have received them
, and suppliers and subcontractors may be getting them, too, Pitt says. So we should stay tuned. Any publicly traded suppliers who’ve been subpoenaed about Tesla may tell us more about the inquiry when they file their own reports.
It is not especially difficult for the SEC to get subpoena authority, however, says John Reed Stark, president of John Reed Stark Consulting
, who also spent 15 years as an SEC enforcement attorney leading cyber-related projects and 11 years as the chief of the SEC’s Office of Internet Enforcement. In order to get one, the SEC staff has to write a memo that says “here’s what we think what’s going on.” But once that’s done, “99.999 percent of the time,” the commission grants it “because the legal threshold is ‘official curiosity,’” Stark says. “So it’s a very low standard.”
The thing about the Model 3 production numbers is that we have already had
a judge wave a gavel at it. Back in August, a shareholder lawsuit over Tesla’s statements about the Model 3 was dismissed. The lawsuit, filed in October 2017, alleged that Musk and Tesla knowingly misled shareholders about the Model 3 production ramp-up. But the judge, Charles Breyer, wrote in his order
In this non-Twitter-related securities action against Tesla, Inc., a purported class of shareholders (“Plaintiffs”) alleges that the carmaker misled the public regarding the progress of production on the “Model 3,” Tesla’s attempted first foray into producing a mass-market vehicle. However, while Plaintiffs claim that Tesla and its officers (collectively “Defendants”) fell short of their production goals, a firm’s failure to meet projections is only actionable if the firm did not accompany those projections with meaningful qualifications. Because Plaintiffs fail to allege that Defendants made any projections that were not so qualified, their claims fail. Federal securities laws do not punish companies for failing to achieve their targets.
A of all: “In this non-Twitter related securities action” — hats off to this troll-ass judge. But B, Breyer seems to be saying that Tesla had adequately warned its investors that the company might not meet its own goals and that you can’t just punish companies for being fuck-ups.
According to Pitt, though, this dismissal tells us nothing about the SEC’s investigation. The dismissal indicated the plaintiffs could refile. And sure enough, the plaintiffs did
as of September 28th. In that filing, the plaintiffs say that a former Tesla employee “told Musk directly that there was zero chance that the plant would be able to produce 5,000 Model 3s per week by the end of 2017.” Tesla needs to respond by November 20th
, so, you know, stay tuned.
The SEC case may not be quite the same as the shareholder suit. Sometimes the SEC notices a shareholder suit and starts poking around. But in this case, it’s also possible that the SEC was poking around anyway, says Sroufe. Musk is notorious enough that the SEC might not need to be flagged by a shareholder suit to start wondering if the Model 3 timelines were any good.
In any event, the shareholder suit is still attempting to get to the “discovery” phase where the plaintiffs can demand that Tesla cough up documents related to the case, a hurdle the SEC doesn’t have to get over because it can just issue subpoenas.
There’s another thing about those SEC subpoenas, though. See, the Tesla filing indicated that there are two Justice Department investigations open: one on “funding secured” and the other on Model 3 production. Fun fact about the SEC: it cooperates with the Department of Justice, Pitt says. So whatever information Tesla hands over to the money cops (what I call the SEC in the privacy of my own skull) will likely also wind up in the hands of the actual cops. When the two agencies conduct parallel investigations, “there are frequent communications between SEC and DOJ personnel,” Pitt says.
And those two entities coordinate. There are actual FBI agents that just hang out at the SEC all day, says Stark. “When any big investigation comes up in any jurisdiction, there’s always going to be a headline-seeking US attorney who’s going to call the SEC and say, ‘What’s going on,’” Stark says. (Stark then apologized for being snarky. But, obviously, I like a snarky lawyer!)
Okay, but what does this mean for Tesla, Musk, and Denholm? Well, it’s costly to respond to this kind of thing. It takes a lot of time and effort to search for the documents required by the subpoena, says Sroufe. But the more law enforcement digs into your business, the more likely they are to find a violation of some kind, including through simple error. At that point, the question becomes one of oversight: was there adequate oversight? Were there consequences in place for the violation? And Denholm’s entire job now is oversight — not just of Musk, although that is obviously her biggest challenge, but of the entire way Tesla operates.
The SEC subpoenas aren’t great, obviously. But what would make me more nervous is the DOJ. The question for the DOJ is whether Tesla intentionally misled investors. (It’s necessary to prove criminal intent.) That’s an uphill battle for the DOJ, actually! Unless there’s an email somewhere where someone said, “Hey, let’s do crimes” with, like, Musk and Denholm cc’d, very probably it’s going to be hard to prove that Tesla didn’t simply screw up. And as our friend Judge Breyer has pointed out: fucking up, in many cases, isn’t illegal.
“Earlier this year, Tesla received a voluntary request for documents from the Department of Justice about its public guidance for the Model 3 ramp and we were cooperative in responding to it,” says Dave Arnold, a spokesman for Tesla, in an email. “We have not received a subpoena, a request for testimony, or any other formal process, and there have been no additional document requests about this from the Department of Justice for months.”
Additionally, Arnold says, the company was very clear about how difficult their production ramp would be. He pointed out the production ramp was the first of its kind. “While Tesla gets criticized when it is delayed in reaching a goal, it should not be forgotten that Tesla has achieved many goals that were doubted by most,” Arnold says. “We are enormously proud of the efforts of the whole company in making it through this difficult ramp and getting us to volume production.”
The SEC and DOJ matters will be an early test of Denholm’s leadership and independence, Pitt says. The conduct that’s being challenged by regulators means that she needs to decide if there should be an internal corporate review. That might mean looking at Musk’s public statements about production capacity and then checking out internal documents to see if Musk was accurate. “She will have her hands full!!” Pitt says in an email. (Both exclamation points, I should note, are his.)
Denholm’s appointment itself is a good sign, Sroufe points out. Following through on appointing an independent chair tells regulators that Tesla’s board is serious about improving governance. If Denholm acts independently and isn’t seen as deferring to Musk, that may help with both the SEC and DOJ probes. Denholm could even become a spokesperson for the board’s positions — both in general and when it comes to the investigations, Sroufe says. Sroufe did echo Pitt in one respect: Denholm “will definitely have her hands full in spearheading the board’s relationship with Musk.”
With reporting by Andrew J. Hawkins and Sean O'Kane.