Sunday, October 27, 2019

Some Gems from Discovery Elon's Deposition in the Tesla / Solarcity Litigation

When SolarCity (one of the non-economic "greenwashing" companies in Musk's empire) faltered in 2016, he had Tesla acquire it and was sued by Tesla shareholders. The Delaware litigation (previously on CBS) has been dragging on but as it proceeded into discovery this summer it has started to reveal some very eye-opening documents that tend to substantiate bears' theories about Musk's desperation and fraudulent practices. Here are some gems that were made public on Friday.

First, in the fall of 2015, Kimbal Musk's margin lenders were "nervous" about the declining share price of SolarCity given his levels of borrowing.

It seems reasonable to assume that emails from margin lenders to Musk and his relations are a constant feature of all the Musk enterprises. They are in this position because they fund their lifestyles and other "investments" by borrowing against their stakes. Obviously there are no dividends from SolarCity, SpaceX, or Tesla (all unprofitable) to pay for things like private jet travel or palatial Los Angeles compounds. It is a very wobbly arrangement that makes their ability to stay in control of the enterprises contingent and path-dependent on the stock price. 

By the beginning of 2016, the situation at SolarCity had deteriorated further. There is a very odd email inside of SolarCity that refers to "movement of payables" in the context of supplier negotiations. It is not clear exactly what SolarCity was asking for, but given Kyocera's response about "internal governance" and "revenue recognition," it sounds like SolarCity was asking for something more than just more time to pay.

Tesla's recent profitable quarter does not make economic sense. In a business with high fixed costs, how did the company shift to a profit on lower volumes, lower average selling prices, and therefore lower revenue? Why didn't Elon want to brag about how this was accomplished? One possible answer is that some costs were "moved around". No one has ever figured out what happened with the accounts payable guy who "embezzled".

The end result with faltering SolarCity was that Musk used Tesla to bail his investment out and prevent an embarrassing collapse of one of the companies in his "pyramid". Notice how upset he gets at the deposition when this is pointed out.

The best summary of the SolarCity is in this flow chart from TSLAQ twitter:

In order to get the bailout through, he made up a fake product - the solar roof tile!

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