A shareholder lawsuit that claimed Tesla made false statements about Model 3 production was dismissed on Monday. The case is not completely closed: the presiding judge granted the dismissal with “leave to amend,” meaning the plaintiffs have until September 28th to take the judge’s decision into consideration and file an adjusted complaint.
Originally filed in October 2017, the lawsuit alleged that Tesla and CEO Elon Musk repeatedly misled shareholders about the progress being made during the run-up to full-scale production of the Model 3, the company’s first mass-market vehicle. The plaintiffs (who sought but have not been granted class action status) built their case around statements made by Tesla and Musk in SEC filings and during quarterly calls with financial analysts.
Set against the eventual (and numerous) delays that Tesla faced as it ramped up production of the Model 3, as well as an October 2017 report from The Wall Street Journal that claimed Tesla was making the cars by hand, the plaintiffs alleged that the statements served as evidence that the company knowingly misled shareholders.
Tesla’s lawyers argued the company “bluntly warned of the many challenges” ahead
Earlier this year, the plaintiffs amended their original complaint to include the months that had passed since the lawsuit was filed, arguing that Tesla and Musk’s continued optimism in the face of Model 3 delays was causing shareholders to lose money.
Tesla asked the court to dismiss the lawsuit in May. The company’s lawyers argued that Tesla and Musk, in many of the same SEC filings and phone calls cited by the plaintiffs, had “bluntly warned of the many challenges of Model 3 production in stark terms.” The lawyers even pointed to Musk’s “production hell” comment from the July 2017 Model 3 delivery event as proof that the CEO and his company had been clear with the public about the challenges ahead. And, they argued, any statements that were read as too optimistic by the plaintiffs were always accompanied with the proper SEC disclosures about the risks of forward-looking statements. Lawsuits like this one were what these “safe harbor” clauses were meant for, they wrote.
Ultimately, the judge agreed with Tesla, especially on this last point. Tesla’s failure to meet its own goals would only be actionable if the company “did not accompany those projections with meaningful qualifications,” the judge wrote. Attorneys for both sides and a representative for Tesla did not respond to comment in time for publish.
The decision could be instructive for understanding how one of the SEC’s two ongoing investigations into Tesla might play out. The SEC is reportedly investigating whether Musk or Tesla misled investors with their statements about Model 3 production. If the SEC finds that any potentially misleading or false statements were properly accompanied with the necessary disclosures about forward-looking statements, as the judge did in this lawsuit, that particular investigation could arrive at the same conclusion. As the judge wrote, “Federal securities laws do not punish companies for failing to achieve their targets.” (That said, the SEC is reportedly digging deeper than just the public statements Tesla and Musk made, including subpoenaing one of the company’s parts suppliers.)
Tesla also faces a second SEC probe into Musk’s now-abandoned attempt to delist the company and take it private. Monday’s decision in the shareholder lawsuit helps illuminate the difference between the two SEC investigations, according to Stephen Diamond, who teaches securities law and corporate governance at Santa Clara University’s School of Law. Musk announced his intent to privatized Tesla in a tweet, and his tweets may not be afforded safe harbor since they weren’t accompanied by cautionary statements, Diamond says.