I intended to start today with some more union news, but I’m sitting here waiting for a UAW livestream to begin so I’ll just start with the ongoing legal battles associated with Tesla being Tesla. Specifically, Tesla settled a lawsuit over board compensation, and the lawyers on the other side of the case are demanding their fair share. But what is their fair share? That’s the $230 million question.
Telsa always seems to be in the middle of probes and investigations from various federal and state agencies, but the most interesting one to me at the moment is the one that it avoided. A whistleblower shared numerous documents with the Securities Exchange Commission and, when that didn’t work, the documents ended up with the press.
Finally, I’ve got some data on the strike from Edmunds that shows that the strike so far hasn’t yet impacted customers looking to buy cars from dealers, yet. Also, I’m writing this from David’s couch, which is where I slept last night. His parting words to me before I went to sleep were “Don’t eat anything in the fridge, trust me.”
Tesla’s Lawyers Complaining About Lawyers Over Lawsuit’s Lawyer Fees
I’ve got a lawyer friend who works in employment law and I love to hear stories about his cases. Often, it’s just one rich hedge fund manager suing an even wealthier hedge fund manager. It seems to me that, in these cases, it’s really the lawyers who win. Lately, this friend has been quite perturbed that Tesla doesn’t seem to want to pay the lawyers in a recent case it settled.
That case is about compensation for the Tesla Board of Directors. Lawyers representing the pension fund for Detroit police officers — a fund that owned Tesla stock — sued the directors in court, claiming that those directors unlawfully over-enriched themselves to the detriment of shareholders (like the pension fund). Rather than go to court, the directors ended up settling and returning over $700 million, though they said their compensation was fair and they were just doing it to stop the litigation.
Oh, but it doesn’t end there. In its story “Tesla fights $230 million fee sought by attorneys who sued over board pay,” Reuters on what happened next:
The attorneys want as their fee 25% of the settlement with the 12 directors, who include James Murdoch, son of media mogul Rupert Murdoch, and Oracle co-founder Larry Ellison.
The case was brought as a so-called derivative lawsuit which benefits the company, rather than shareholders directly.
Tesla argued the shareholder’s attorneys exaggerated the value of the settlement, and by extension their requested fee, by pegging its value to the cost to directors rather than the benefit to the company. Tesla estimated its benefit from the deal was $295 million.
So, Tesla says the lawyers should only get $64 million and the lawyers want the full $230 million. Elon Musk, it should be noted, isn’t a part of this case. You can guess whose side my lawyer friend is on.
The kicker to all of this is that a couple of weeks ago this same lawyer friend said he wanted an EV and couldn’t find a better deal than a Model Y. He asked if I could suggest an EV that offered the same features and was as affordable. I could not. He’s now a Model Y owner and couldn’t be happier with his choice.
Why Did The SEC Ignore A Tesla Whistleblower?
The Tesla news doesn’t end there. There’s a new report from CNBC over a would-be Tesla whistleblower who reached out to the Securities and Exchange Commission claiming the company “improperly categorized repairs and had poor control over internal systems used to capture data that later rolled up to financial reports.”
So far as anyone knows, the complaint was closed and nothing ever happened. From the article:
Agency staff have never spoken with the people who filed the complaint, those people say, and have never taken them up on their offer to review about 18,000 files they say they have for review, including internal Tesla emails, spreadsheets, screenshots, recordings and images, along with public records they gathered to support their allegations.
In response to questions from CNBC, the SEC declined to comment on the existence or nonexistence of a possible submission but said the agency evaluates all tips that are submitted.
I haven’t seen the records, but CNBC did show it to some accounting experts, who found the systems to be “not very transparent.” One of the biggest potential discrepancies is over “goodwill repairs” by Tesla, which are repairs the automaker undertakes not as a warranty claim but as a make-good to a customer. Specifically, the automaker allegedly put a lot of repairs under the “goodwill repairs” category. From the report:
In just under two months in late 2021, Tesla was spending over $17 million on “goodwill” in the U.S. alone, which translated to about $70 worth of goodwill on the average repair order across approximately 247,000 repairs, according to internal Tesla dashboards referenced in the whistleblower complaint and reviewed by CNBC.
Nelson, the accounting professor, explained why miscategorization of repairs might be of interest to financial regulators and investors.
“Where you put stuff in a financial statement matters,” she said. “If I’m taking warranty costs out of the cost of automotive sales, and pushing them down into some other line further down the income statement, that will make my gross profit margin look higher. If I’m moving it from up above in cost of sales, and moving into other expenses, it’s also not as transparent about the quality of the product.”
Since the SEC never followed up, Occam’s Razor suggests that the SEC possibly thought it was a nothing-burger. Alternatively, the article contends that it’s possible the whistleblower was unsuccessful because he or she didn’t get an attorney who was a former SEC official since, unsurprisingly, those officials tend to be more successful in getting complaints to be taken seriously.
No Evidence In Sales Data Of Strike Impact, Yet
Edmunds released some interesting sales data regarding the Detroit Three and the strike in an email to reporters. The bottom line is: In the month since the strike started there’s been no appreciable transaction or inventory impact from the strike.
Overall, new vehicle transaction prices in September hit $47,698, which is down slightly from August and up slightly year-over-year. The same is true for Days To Turn (DTT), which is how long it takes for a vehicle to sell. For now, inventory and demand seem pretty evenly matched.
The notable update here is that there isn’t one to speak of yet. Edmunds analysts are not expecting major movement in ATPs among the Detroit Three yet because the list of vehicles affected by the strike is still short at this stage. The impact can grow significantly if the UAW becomes more aggressive with calls on higher-volume plants to join the strike, as is the case with the recently-reported Ford Kentucky Truck Plant strike.
Both among the Detroit Three and industry-wide, DTT has remained steady and even raised a few ticks in some cases. For now, no major purchase frenzy is apparent.
Obviously, this can’t hold. If the strike continues or expands it’ll eventually hit consumers.
UAW Says They’ve Entered A New Phase Of The Strike
Alright, the live stream has started. Yesterday, I talked about the “surprise punch” that the UAW threw at Ford when it announced a strike without warning the company first. According to Fain in his Friday livestream, there are no more strike warnings coming. Everyone’s on notice.
“We’re done waiting until Fridays to announce our strike” he exclaimed.
Fain’s point is that the automakers were waiting until Friday to make counter proposals and it was therefore slowing the process down.
“They thought they figured out the rules of the game, so we changed the rules. Now there’s only one rule: Pony Up.” he said.
Ford has stated they’ve got no more room to bargain on economic matters and has spent the last day complaining about the strike at the Kentucky Track Plant, to which Fain responded: “As the saying goes: a hit dog will holler!”
The good news for automakers, if there’s any good news here, is that Fain didn’t announce any new strikes. He did finish his livestream with a strong commitment to fight for the working class.
“How come when auto companies close 65 plants over the decades it’s business as usual, but when workers ask for their fair share it’s a ‘crisis’?” he asked.
The Big Question
I’ve got to get to Galpin. I’m in David’s apartment, alone. He’s left me two keys:
- The YJ will happily get me to Galpin with no issues. It’s fun to drive.
- The Nissan Leaf will only go 12 miles and it’s quite likely I won’t make it.
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