Awkward cluster of insider transactions before company disclosed autopilot fatality probably isn’t the biggest question around what management knew and why shareholders didn’t find out immediately.
It took Tesla Motors nine days to notify automotive regulators that one of its cars had crashed while operating on autopilot, killing the driver. Shareholders had to wait another six weeks for the news, which is why the SEC is now looking into the delay.
Right now it looks like they’re going to need to do a whole lot of digging to conclude that the company breached its obligations.
But that doesn’t mean Elon Musk and team can’t do better next time to finesse the appearances that soothe Wall Street as well as deliver the substance.
After all, when the silence lasts long enough for key insiders to lighten their stakes, it doesn’t really send a great message down the food chain.
Tragic timing for all concerned
The man who died wasn’t a Tesla employee testing the company’s self-driving systems. He was simply on the road when his car failed to notice a truck careening into his lane.
People die in highway accidents all the time, so Elon Musk and his circle evidently thought this particular death wasn’t worth alerting the SEC, much less issuing an instant press release.
They didn’t notify the regulators when the first of their cars was implicated in a fatality late last year. Nobody said anything about it at the time.
What makes the current situation different revolves around context. Back in December, Tesla wasn’t lining up a $2 billion secondary stock offering, so the silence gets a little complicated.
And since insider selling spiked between the crash and the announcement nearly two months later, the “complication” starts to look suspicious.
Tesla filed its $2 billion prospectus right after they reported the crash to the auto safety board, but didn’t mention it to prospective shareholders.
Out of the blue, Musk decided to add a few million of his shares to the offering at the same time, cashing out at roughly a $560 million profit. He knew there’d been a crash. He didn’t mention it.
His brother also picked this period to unload a few hundred shares and liberating about $100,000 from the company.
And within a matter of weeks, the vice president of software and a member of the board of directors executed some options and sold the shares, netting around $3 million on the round trip.
For a company where insiders rarely sell, all the activity seemed odd. Then the headlines hit.
A casual observer might wonder whether Tesla actively decided to keep the market in the dark until the secondary offering was done and insiders got their chance to lock in a little profit ahead of everyone else.
That’s probably why the matter came to the SEC’s attention in the first place, but as Musk watchers have learned over the years, it’s simply how Tesla does business.
Literally going the extra mile
This is a company that apologizes for its “hubris” when its supply chain breaks down, but management won’t apologize when they don’t recognize anything going wrong.
Ford and Toyota don’t alert the media every time one of their cars crash. Unless there’s a problem that affects millions of vehicles, day-to-day accidents are simply part of the cost of doing business on their scale.
When Elon Musk makes similar arguments, the logic gets a little circular. Because Tesla’s safety track record is relatively short, each failure has an exaggerated impact on the statistics and sentiment around the stock.
Management knows this, so if they thought this news could move the needle even incrementally toward the bears, they had a duty to warn the market.
The fact that they elected to keep quiet instead would ordinarily raise suspicions that they didn’t want to screw up the secondary offering.
Granted, the stock price has actually gone up since news of the crash got out, so the market probably would have just shrugged.
But to be on the safe side, Tesla could have delayed the offering a few weeks or moved up the crash announcement to make sure prospective buyers had all the facts.
Since the papers weren’t actually filed until after the accident, it would have been trivial to simply hold off. Maybe next time they’ll be more sensitive to appearances.
In the meantime, everyone from Elon Musk on down seems genuinely surprised that anyone might think the stock price was ever vulnerable to the news.
We know this because while Musk piggybacked the offering to unload 2.7 million of his own Tesla shares at a paper $570 million profit, the deal actually left him with a bigger stake in the company than ever.
Musk used the sale proceeds to pay taxes on another 2.7 million options he cashed in simultaneously, actually borrowing money in the interim with his existing shares as collateral. If the deal had gone south, he’d end up risking that stock.
That’s not really the behavior of someone looking to take the money out of a wounded company and run. From all appearances, Musk is still in it to win it.
The other insiders have different angles – one isn’t really in the corporate grapevine, another is simply converting options on a quarterly cycle – but in general, their activity seems equally bullish on Tesla.
The timing is awkward, but if they were even in the loop, the prospect of this crash dooming the company wasn’t enough to get them to dump all their shares.
But once again, Tesla insiders seem to have been taken off guard by the idea that this would be a problem at all.
The latest quarterly report was signed May 10, three days after the accident. It was updated to reflect the production chief’s extended vacation starting May 4, but there’s nothing about the fact that the autopilot missed a beat.
Odds are good that detail will show up as a risk factor in the next 10-Q. For now, management seems completely focused on just about everything else.
I will say that it’s nice to see that Musk has his shares in a revocable trust where they can transfer to his heirs on a vastly better tax basis. And automated options exercise plans are always smart diversification strategies for rank-and-file executives.
There’s sound financial planning going on here. It’s just that the messaging could use a little work.