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Federal Judge Dismisses Lawsuit Filed by Tesla Shareholders Over Model 3 Production Problems

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【Summary】​A federal judge in San Francisco dismissed for the second time a securities fraud lawsuit brought by Tesla shareholders alleging that the company’s CEO Elon Musk and other executives made misleading comments about the production status of its Model 3

FutureCar Staff    Mar 25, 2019 4:37 PM PT
Federal Judge Dismisses Lawsuit Filed by Tesla Shareholders Over Model 3 Production Problems
A Tesla Model 3 being assembled at the company's Fremont, California factory.

A federal judge in San Francisco dismissed for the second time a securities fraud lawsuit brought by Tesla shareholders alleging that the company's CEO Elon Musk and other executives made misleading comments about the production status of its Model 3, the automakers first mass-market vehicle.

U.S. District Judge Charles Breyer sided with electric automaker Tesla, granting the company dismissal of the lawsuit brought in October 2017. Breyer dismissed the original lawsuit in August but allowed plaintiffs to file an amended one.

Breyer wrote that the allegations of fraud ignored Tesla's "repeated warnings about Model 3 production risks."

The lawsuit sought class action status for shareholders who bought Tesla stock between May 3, 2016 through Nov. 1, 2017. Tesla shares were trading around $237 in early May 2016 and hit an intraday all-time high of $389.61 on Sept. 18, 2017.

The claim was that shareholders bought "artificially inflated" shares because Tesla CEO Elon Musk and other executives misled them with bullish statements about the production ramp up of the Model 3, failing to disclose that the company was "woefully unprepared" for the vehicle's production.

Tesla began taking deposits for the Model 3 on March 31, 2016 and production of the electric car began in July 2017. Musk initially promised to produce 5,000 Model 3's per week by December 2017. However, when Tesla failed to meet that goal Musk pushed it ahead to June 2018, saying Tesla would finally reach its goal of building 5,000 Model 3's per week by the last week of June.

Tesla argued in its defense that it had been forthcoming about challenges with Model 3 production, including repeated statements by Musk that Tesla was undergoing "production hell."

Tesla even constructed a large outdoor tent structure at its Fremont factory to expand its Model 3 assembly line to support the production ramp up. The building permits were approved on June 13, 2018. In a tweet on June 16, 2018, Musk announced the company successfully put together an "entire new general assembly line" in three weeks with spare parts.

This is not the first time Tesla was under scrutiny over inflated claims made by CEO Musk.

In 2018, Tesla and Musk were fined $20 million each by the Securities and Exchange Commission (SEC) as a result of him tweeting about taking Tesla private at $420 share, posting on Twitter "funding secured." The amount was much higher than Tesla's share price at the time. In addition to the $40 million fine, Musk was forced out as chairman of Tesla's board and the electric automaker was required to appoint two new independent directors to its board.

The SEC alleged that Musk knew that the potential transaction was uncertain and subject to numerous contingencies, adding that his statements about the possible transaction lacked an adequate basis in fact.

Musk's misleading tweets caused Tesla's stock price to jump by over six percent on August 7, 2018 and led to significant market disruption and the SEC's move to suspend trading of Tesla stock.

Tesla is currently building around 6,024 Model 3's per week, according to Bloomberg's Tesla Tracker, which calculates production rates using data collected from official government resources, social media and direct communications with Tesla owners.

Tesla share fell 1.5 percent today to close at $260.42. The company's shares slipped 18 percent this month after Tesla announced in late February that it doesn't expect to post a first-quarter profit.


resource from: Reuters

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