Wednesday, July 25, 2018

Tesla Class Action Plaintiffs' Opposition to Defendants' Motion to Dismiss

This case (Wochos v Tesla) is in the Northern District of California federal court.

"[T]here is a difference between knowing that any product-in-development may run into a few snags, and knowing that a particular product has already developed problems so significant as to require months of delay." In re Apple Computer Sec. Litig., 886 F.2d 1109, 1115 (9th Cir. 1989). As 2017 started Tesla faced an existential crisis. It had burned through more than a billion dollars in 2016 developing the Model 3, diverting profits from its existing luxury cars to satisfy the cash demand for the Model 3. By the beginning of the Class Period, Defendants disclosed that they would mass produce the Model 3 by the end of 2017 despite contemporaneous facts and warnings from executives, suppliers, and vendors that Tesla's timeline was impossible to meet. Tesla had to build and operate automated production lines for the Model 3 body in its Fremont, California facility, and mass produce 5,000 batteries per week in its "Gigafactory" in Reno, Nevada.

First, the Complaint adequately pleads material falsity. In May and August, 2017, in SEC filings and in earnings calls with analysts, Defendants reported on their progress in first building, and then operating, automated production lines in Fremont and at the Gigafactory. Defendants leveraged these statements of present progress, claiming to be on track to meet Tesla's mass production goal by late 2017. These statements of present progress were materially false. Tesla was building small numbers of Model 3s by hand in its beta shop, where prototypes were constructed. In May, 2017, the automated line, itself, was in the very early stages of construction. Tesla continued to build Model 3s by hand as neither the automated production line, nor the body in white line, would produce a single Model 3 in Fremont until at least October, 2017. As with the Fremont facility, it was only in October, 2017 that the first car-ready battery came off an automated line at the Gigafactory. Similarly, supply issues abounded, and workers constructing the automated production line were regularly idle, lacking parts and instructions.

Defendants' statements that they were "on track" to meet mass production goals are actionable representations of present or historical fact. See Mulligan v. Impax Labs., Inc., 36 F. Supp. 3d 942, 946, 964 (N.D. Cal. 2014); Westley v. Oclaro, Inc., 897 F. Supp. 2d 902, 918–19 (N.D. Cal. 2012); In In re MGM Mirage Sec. Litig. , No. 2:09-CV-01558-GMN, 2013 WL 5435832, at *8 (D. Nev. Sept. 26, 2013). Further, Defendants are liable for expressions of opinion when they know facts undermining the positive statements. See In re Atossa Genetics Inc Sec. Litig., 868 F.3d 784, 802–03 (9th Cir. 2017) dismissal of opinion because it did not fairly align with facts in possession at the time).

By August, 2017, Tesla was, by its own timeline, supposed to have been in the second month of automated production at both facilities. Again, Tesla told investors about progress they claimed had already occurred in Fremont and at the Gigafactory that supported its readiness to mass produce the Model 3 in 2017. And, again, Tesla repeatedly lied. About automated production, Tesla told investors that a "gigantic machine" meant to produce 5,000 vehicles weekly was—at that time—"producing a few hundred vehicles a week." Directly contrary to that statement, not a single complete Model 3 had been produced on the still-incomplete production line in Fremont, necessary robots were not even on site, and all Model 3s continued to be built by hand. Similarly, at the Gigafactory, no automated production occurred until September, 2017, and as late as October, 2017, only two batteries per day were completed. There had been no "great progress." Defendants' warnings of risk to their mass production goals were meaningless in the context of the facts they knew to be true no later than May 3, 2017. Their statements were provably false, and therefore, not forward-looking. Oclaro, 897 F. Supp.2d at 918-19 ("a statement about a past or present fact can demonstrably be proven false" and is not forward-looking). Warnings about possible problems is insufficient to rebut falsity allegations when the risks are no longer theoretical, but have materialized. Nor do Defendants' remaining arguments undermine the falsity allegations. The cases they cite in support of their claim that Plaintiffs must produce Tesla's specific timelines for specific tasks offer no support for this assertion. The "on track" cases they cite are distinguishable; almost all concern financial projections, and not statements of existing fact, on the ground.
I wonder how many of the longs have read this stuff? Just does not seem like a $50 billion company.

1 comment:

Michael Goode said...

Link to suit docket: