Law Firm Looking Into Securities Law Violations by Tesla (TSLA) for Potential Class Action

November 18, 2013 9:06 AM EST
Wohl & Fruchter LLP is investigating potential federal securities law claims against officers and directors of Tesla Motors, Inc. (Tesla) (Nasdaq: TSLA) in connection with alleged violations by Tesla of Securities and Exchange Commission (SEC) rules governing the disclosure of financial metrics that do not comply with Generally Accepted Accounting Principles (GAAP).

On October 2, 2013, Canada’s The Globe and Mail published an article questioning the economics of Tesla’s business and the quality of its earnings under GAAP. Citing research by Gradient Analytics, the article identified several accounting issues of concern, including reporting non-GAAP revenue and profit that is substantially higher than GAAP revenue and profit due to inclusion in non-GAAP revenue of Model S car sales to buyers to whom Tesla has provided guarantees that they will be able to sell their used vehicle at a particular price. According to Gradient Analytics, this accounting maneuver unrealistically assumes that Tesla “will not lose a dime on a single Model S residual value guarantee.”

Other areas of concern at Tesla cited in the article were potentially inadequate accrual of warranty expense; excluding shares Tesla could issue due to convertible debt from share counts when calculating non-GAAP earnings per share; and questionable lengthening of depreciation schedules.

These and other accounting issues prompted an analyst at Gradient Analytics to characterize Tesla as “a firm struggling to find a way to justify its current share price with increasingly complex, apples-to-oranges non-GAAP earnings computations.”

On November 5, 2013, Tesla issued a press release reporting its 3Q 2013 results. The headline of the release highlighted non-GAAP profit of $16 million even though the release later disclosed that Tesla suffered a net loss under GAAP of $38 million. Tesla also reported non-GAAP revenue of $603 million versus GAAP revenue of $431 million (by adding back revenues deferred under GAAP for cars sold with the resale value guarantee).

On November 14, 2013, Bloomberg published an article (“Are There Cockroaches Under Tesla’s Hood?”) highlighting the reference to non-GAAP profit in the headline of the release announcing Tesla’s 3Q 2013 results. The article asserts that this headline and other sections of the release violated SEC rules requiring companies to give “equal or greater prominence” to GAAP numbers when they present their financial results. In support of this assertion, the article cites a 2008 article by Wilson Sonsini Goodrich & Rosati -- the law firm that helped take Tesla public – advising that “if an issuer announces GAAP and non-GAAP earnings per share in its press release, it should report the GAAP earnings per share prior to the non-GAAP earnings per share.”

Since the publication of The Globe and Mail article, as well as following media reports of battery fires in at least three Tesla cars, TSLA shares have declined over 25% from a close of $180.95/share on October 2, 2013, to a close of $135.45/share on November 15, 2013.

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