Let’s look at securities violations by Tesla – and by Tesla’s enemies (with tons of data!)
A great deal of attention has been recently placed on the conflict between Elon Musk and the Securities and Exchange Commission (SEC) regarding certain tweets by the CEO of Tesla. What is not clear to many, however, is the extraordinary number of potential securities violations that are happening regularly with regards to Tesla’s stock (NASDAQ: TSLA) that are the work of individuals opposing Tesla’s success. It’s fair to say that a war is presently underway between Tesla and its enemies.
In September, the company’s Model 3 grossed more revenue than any other car sold in the United States, making Tesla a huge threat to legacy automobile manufacturers in the U.S. and abroad, plus their dealership networks. Tesla’s energy products threaten traditional utilities, and the combination of widespread adaptation of electric vehicles plus the company’s progress in defining clean energy plus batteries as the future for both grid and automotive energy threatens the global alliance of oil producers and associated companies.
My purpose in writing this article is to lay out the types of illegal activities that may be employed for sinking Tesla’s stock price and thereby give Tesla investors a good idea of what activities to watch for and report to the SEC. I am not confident that the SEC will do the right thing and investigate these claims with sufficient manpower and tenacity, but Tesla investors must file reports if we are to be taken seriously in the next steps needed to make stock trading on U.S. exchanges a fair proposition when the stock you are trading is the target of a large number of short sellers.
The bulk of potential securities violations are not, however, being committed by industries at risk from Tesla’s success. Instead, two other players, the media and short sellers of Tesla’s stock, are the primary culprits. Short selling involves borrowing shares of a stock, selling them, and paying interest on the borrowed shares until the shares are repurchased (covered) and returned to the original shareholder. Thus, a short seller is betting the stock will go down. He makes money by selling high and then buying low enough to cover the interest payments. Where problems arise is when the short seller decides to help the stock price descend through active means, such as sharing deceptive information about the stock with others or by manipulative trading practices.
Presently, it’s illegal for individuals to make money trading securities (think stocks and bonds) while armed with insider knowledge (though, certain exceptions are made for analysts). Such knowledge must be material (significant to the value of the stock) and non-public. For example, if a short seller knows that a particular high-visibility media source will be releasing a damaging report on Tesla but that knowledge is not public, trading on that knowledge could potentially be a violation of insider trading rules. Another potential violation of securities laws falls under Section 9 (a)(2) of the Securities Exchange Act of 1934. That section says that the following practice is illegal: trading in a security for the purpose of “creating actual or apparent active trading in such security or raising or depressing the price of such security, for the purpose of inducing the purchase or sale of such securities by others.” In other words, if your trading is primarily done to influence the selling or purchasing of a security by others, you have broken the law.
The war between Tesla and its enemies has reached a fever pitch lately because in the 2nd quarter 2018 earnings report and conference call, Tesla reaffirmed that enough cash will be generated through operations for the company to cover its financial obligations through internally generated funds alone, and no borrowing of funds is needed in the foreseeable future. Short sellers have been under the opinion that Tesla will run out of cash in March of 2019 when a large obligation comes due. Tesla’s 3rd quarter production and delivery report showed a beat in both metrics, strongly suggesting that Tesla is on track to generate hundreds of millions of dollars in positive cash flow in Q3 and, together with Q4, alleviate cash concerns for early 2019. Thus, the most astute shorts need to extricate themselves from their TSLA short positions prior to the early November Q3 earnings report, placing a short timeframe on maneuvering the value of Tesla’s stock further downward and covering their exits before that report is released.
Before looking at the specific potential securities violations occurring most frequently with Tesla’s stock, it’s absolutely necessary to dial in a realistic view of the current SEC. One needs to understand that this is a governmental body that is far too understaffed to thoroughly police the ocean of trading taking place on U.S. exchanges every year. They do their best, using algorithms to detect insider trading and other violations, but the quantity of potential violations out there is staggering. Without the means to effectively police the exchanges for violations of the law, the SEC must give priority to projecting an image of oversight adequacy. One way they do this is by prosecuting well known individuals, much in the way that the IRS goes after celebrities.
Unfortunately, when Musk ran afoul of the SEC with his “funding secured” tweet, TV personality Jim Cramer suggested that Musk was effectively safe because it would take the SEC years before they could ever get to prosecuting Musk for this tweet. Such a statement was the equivalent of throwing gasoline on the fire, and it really required a response from the SEC if the commission was to retain its image of adequacy. One side effect of the SEC’s staffing issues and ability to appear adequate is the fervor the commission employs once it has latched onto a celebrity suspected of violating its rules. If an individual’s chances of being caught by the SEC are rather light, a harsh response to those who are accused is needed to dissuade other potential violators.
Right after Elon Musk turned down the SEC’s initial settlement offer, Mark Cuban reportedly contacted Musk, advising him to settle the suit with the SEC. Cuban, who won his court battle, pointed out how years of distractions from your business just weren’t worth the effort. “I explained where the SEC used questionable practices in my case, and how he could expect the same,” Cuban said. The reality was that taking on the SEC was a loss if you lost the court battle and loss if you won the court battle dilemma. The only reasonable solution was to settle.
With this perspective on the SEC in mind, giving some idea of the commission’s available resources, let’s look at how the enemies of Tesla can potentially work together to lower the stock price and thereby threaten Tesla.
Insider trading is a crime and can involve cooperation between individuals, such as when a stock analyst or a report shares word with an outsider about upcoming news that will likely lower the value of a stock. If the outsider trades on this material, non-public information, he has committed insider trading.
Sometimes the daily trading chart gives a clue that something is amiss. Take a look at the chart below and notice the very significant dip at day’s end. The chart is from October 5, 2016.
What caused the dip and the very substantial increase in volume late in the day on Oct 5, 2016? It turns out that macros weren’t the issue. Instead, the following day, Goldman Sachs announced that it was downgrading TSLA from 240 to 185.
Appearances suggest that quite a few people learned early that the downgrade was coming. This event should have been a red flag for SEC investigation. Since then, Goldman’s analyst about twice a year issues dire warnings that TSLA is going to lose about 30–50% of its value in the coming 6 months. These negative notes can knock TSLA down 5% on date of issue. If word gets out about the coming Goldman downgrade, there’s money to be made. The most concerning part about Goldman’s negative notes is the timing. They seem to come exactly when the shorts are putting on a new push down and need help with the next leg of the downward push, such as during a 4th of July trading week.
Other types of likely insider trading get shared on Twitter and no doubt shared with the SEC too through tips. We need to eventually learn what happened in the investigation of this post below.
Someone bought 1,000 $TSLA puts (expiring tomorrow) at 9:36 AM, when the stock was at $314.89. The gain is around $1.25MM at $265.
I'm sure it was coincidence. pic.twitter.com/2Vamt22U5e
— Income Disparity (@IncomeDisparity) September 27, 2018
September 27 was the Thursday in which the SEC disclosed after market close that it was pursuing a suit against Elon Musk. TSLA closed in the mid 260s the next day, Friday, when the puts expired. Buying nearly a thousand far-out-of-the-money puts that expired the next day suggests either knowledge of a big negative event that was coming or a suicidal trading methodology. Tesla would have to drop 4% in a day just to get the bet close to the break-even point. It’s also very concerning that the apparent insider trading came from a tip about an upcoming SEC action, of all things. Just how did the buyer of the puts find out?
Manipulative Trading Patterns
The most effective method to artificially lower the stock price combines bad news and manipulative selling. The bad news can be actual bad news or manufactured/amplified bad news (FUD). The idea is to instill a dread into the minds of TSLA investors that something bad might happen in the future and then produce stock price movements that reinforce this dread by suggesting long investors are selling and thereby leading to an exodus by actual investors.
When talking about manipulative trading patterns, I’m not referring to simply selling to enter a short position and then buying back the stock at a later date. Selling typically has some negative effect upon a stock price, and this is expected. I’m referring instead to techniques of selling that maximize the negative effects upon the stock price, buying the stock back in patterns that minimize the positive effects on stock price, and then repeating.
For example, selling lots of shares of a stock during the low-volume mid-afternoon hours can create a noticeable downward push on the stock price, but buying those same shares back during the busy final minute of the trading day might have little if any effect on the stock price.
Another common technique is to dump lots of shares within a minute, which often causes algobots to jump in and sell because they detect a negative trend developing. Sometimes stop-loss targets are hit for various long investors, which leads to automatic selling. Shorts can then cover slowly after the big sell, and even though their net short position hasn’t changed after the covering, they have effectively lowered the stock price by using psychology and by activating automatic selling mechanisms present in the market. This process can sometimes be repeated multiple times within the same day by a short seller. When lots of these large stock dumps are combined by shorts amplifying each other’s moves, dips can go quite deep. With attempts by longs to buy the dips, you see daily trading charts emerge with lots of icicle-like dips.
Above, you can see the “icicles” during September 11, 2018, trading when large quantities of stock are sold in a short time, resulting in dips that are then bid back up by long investors. Enough icicles strung together can create a downtrend. When big institutional investors buy into a company, they do so in slow buying over a long period in order to minimize the effect upon the stock price and thereby maximize their final profit. When short sellers enter a position by selling in large quantities, they do just the opposite: maximize the market’s reaction to their entry. Thus, they incorporate a technique more focused on pushing the stock price down than on earning a profit from that particular transaction.
Some of the patterns of stock price manipulation we see all the time with Tesla are so common they have received names, such as mandatory morning dip, dip on steroids, sticky dip, low-volume dip into close, and capping.
Above is the chart from Oct 2, 2016, the first day of trading with the newly released Q3 production and delivery report available. As you can see by the green, it was a very positive report, but one that could have generated significantly more green if not hobbled by manipulations.
Mandatory Morning Dip
At the arrow is the very weak “mandatory morning dip,” which occurs when short-sellers attempt to define the trading day as far less promising than the market expected after an excellent report.
The market corrected upwards, but look at how horizontally the trading proceeded for the remainder of the day. Shorts managed to cap the pre-market trading at about 212 with a few excursions, then set out to cap the market trading at 214.
“Capping” is accomplished by selling enough shares to counteract the buying at that price point and keep the stock price from rising. When opportunity allowed, shorts pushed TSLA down to 213 at times. By capping TSLA at about 213, shorts set up the stock for a methodical march downward in the coming days.
Sticky Dip on Steroids
The charts above are from October 8, 2018, with the TSLA chart on top, Amazon (a frequently shorted tech-like stock) in the middle, and the NASDAQ chart below, for comparison purposes. The Tesla trading is an excellent example of “sticky dip on steroids” manipulation. The TSLA dip is “on steroids” because it is being magnified by short selling. It is a “sticky” dip because sufficient short selling capped the stock near 250 in order to prevent a rise with the broader market. It is easier to hold a stock at a low level on a day after investors have been disappointed than it is to force a stock down. Both the “sticky” portion and the “on steroids” portion of the dip are used to disguise the real reason why TSLA is performing so poorly.
For the day, the NASDAQ closed down 0.67%, Amazon down 1.25% (a reasonable multiple of NASDAQ drop for a tech-type stock), and TSLA closed down 4.35% (completely unreasonable considering the stock’s current sale price, the 3Q earnings report coming soon and probably showing free cash flow that will shock the short sellers, and no Tesla news of substance released during market hours).
Bear raids are coordinated efforts by individuals who wish to push a stock’s price lower through collective effort. They are illegal because their purpose is primarily to manipulate the stock price in a way that causes investors to sell. Tesla investors have weathered many bear raids, but the most notorious happened during the 4th of July week. Why this week, in particular? A great many professional stock traders take the week off to be with family, and volume thus slips, making it an opportune time to manipulate. Tesla’s 2nd quarter production and deliveries report is also typically released during this week, which gives the bears a great opportunity to either push TSLA down or minimize the rise. In that week (Friday to Friday) in 2017, TSLA lost 13% of its value, and in 2018 the loss was 10% of its value.
Known Link Between the Media & Short Sellers
The vast majority of the media’s stories about Tesla are negative (see CleanTechica’s #Pravduh statistics), and a large portion of the negative Tesla stories appear first as tweets or other online communications from TSLA short sellers. The irony here is that, with the media becoming the mouthpiece for Tesla’s short seller community, these news outlets have linked themselves with a source that has lost hundreds of millions to billions of dollars betting against Tesla every year. You’d be hard-pressed to find a less credible source. (For a humorous take on 10 years of incorrect doom and gloom, see: “Tesla — Dead For 10 Years.”)
In recent months, for example, both CNBC and The New York Times ran stories on concerns about Model 3 demand because of photos taken by short sellers of Model 3s sitting in parking lots. Not minding that Tesla still had hundreds of thousands of deposits for Model 3s and hadn’t yet even begun deliveries outside of North America, the shorts and some in the media were singing a duet about Tesla demand problems. Whether the story is based upon photographs or upon information, it’s nearly impossible for the media to query the source and write or produce the story without the short seller becoming aware that a negative story is coming soon about Tesla. No doubt, there’s often some trading done on that knowledge.
Tesla short sellers often place a negative spin on all things Tesla through Twitter posts and in online publications such as Seeking Alpha. Some of these efforts by shorts include purposefully deceptive information. Another infraction consists of providing information about a stock but disguising one’s background and reason for making that claim. For example, if a short seller infiltrated a message board and gave information while claiming to be a long investor in that stock, the law has been broken.
A much less certain area for prosecution lies with traditional media sources. Typically, big-scale media outlets require their staff to not trade in any of the securities they are writing about. For this reason, it becomes difficult for the SEC to prosecute writers who deliberately leave a false impression of the health and future of a company such as Tesla. Some outlets, such as Bloomberg (at least in the past), have reportedly given extra pay to writers who move the stock price through their articles, and so an argument can be made that writers at such companies have a financial incentive to cause investors to buy or sell the security. If that article incorporates intentionally deceptive information, there may be grounds for prosecution by the SEC.
The graphic above depicts TSLA trading on January 25, 2018, when a negative report on CNBC came out at 2:22 pm. You can see how quickly the market with its bots responds to a negative report. In this case, Lora Kolodny reported issues at the Gigafactory — ranging from inexperienced workers, to manual labor being used on battery assembly, to batteries with dangerous defects being turned out. The final claim was strongly protested by Tesla and so far it looks like Tesla was indeed correct about manufacturing safe batteries.
Looking Deeper for the Securities Link
Some media outlets have utterly dismal records regarding the percentage of Tesla articles that are negative. The Wall Street Journal, Reuters, and CNN come to mind. In such cases, the problem may not be so much with the writers as with the ownership or management of these news outlets.
Writers of articles likely receive guidance from their superiors in order for the results to be so consistently negative. If this is the case, then it is the ownership and management of these companies that needs to be looked at to determine if there’s a securities position held by these people that encourages them to promote a significantly negative bias in their publication’s Tesla articles. If the articles contain actual factual misrepresentation, then it’s time for the SEC to take a serious look.
It’s the Headlines that Matter
Should the SEC look for the culprit behind a deceptive Tesla article, special attention needs to be put on the headline. With new internet realities, headlines get picked up by news feeds and disseminated far and wide. Bots read headlines and actually trade on them. Many news organizations take control of headlining and place negative headlines on Tesla articles to suit that outlet’s goals. Bottom line: if deceptive headlines is an issue, consider looking beyond the writer to find the culprit.
Here’s an example of deceptive headlining: Bloomberg did a video on October 5, 2018, with analyst James Albertine. Back in August, Albertine lowered his Tesla price target and spoke words of concerns about Musk’s tweets. Albertine was asked to reiterate his concerns with the CEO’s tweets and did so, but then went on to project that Tesla would generate $4 to $5 billion in cash flow from Model 3 alone during the next 12 months. It was news, earthshaking news that buried the fears sown by Tesla perma-bears and gave a good hint at what was coming in Tesla’s Q3 earnings report in November. Nonetheless, Bloomberg named the video “Tesla Analyst Finds Elon Musk ‘Destructive’ to the stock” in order to give no hint of breakthrough cashflow right around the corner.
Other times, headlines have been just plain wrong. When Tesla met its production and delivery targets in the Q3 2018 report, both the Wall Street Journal and Business Insiderheadlines for their stories depicted misses. Only after hours of these incorrect headlines being transmitted over the news feeds and being read by investors did these two media companies correct the headlines.
Many times, negative stories are provided slight updates and then published again with a new headline. This increases the number of negative headlines and creates an appearance of a flood of bad news.
The New York Times
Here’s the only news outlet on the CleanTechnica list that recently scored a perfect 100% for negativity on Tesla articles.
Tesla owners will remember the infamous John Broder New York Times review of the company’s Supercharger network back in 2013, when Mr. Broder sabotaged a Model S trip during a New England winter by driving faster than Tesla recommended, putting less energy in the vehicle at each stop than suggested, and even driving around in circles to deplete the battery, according to Tesla. Fortunately for Tesla, the parameters of the drive were preserved and could be reviewed by the company. It was determined that running out of energy short of the destination was in fact very much a planned exercise. Since that time, the term “Brodering a review” in the Teslaspeak lexicon means to intentionally gork the review. The 2013 review of Tesla’s Supercharger network seems to have included actual fraud, and the New York Times has not improved much since. The publication would be an excellent candidate for an SEC investigation of journalistic practices towards both Tesla and Elon Musk, and here’s why.
In August of 2018, Elon Musk contacted a New York Times reporter and gave a heartfelt interview in an attempt to communicate the personal toll that a combination of hard work and relentless pressure from short sellers was having upon him. He wished the world to understand why he felt such a need to take Tesla private. The anguish was indeed communicated in the article, but the authors painted such an unfairly bleak picture of the man that it appeared he was becoming unglued. Further, the authors quoted an unnamed source as saying the Tesla board of directors was looking for a Chief Operating Officer (COO) and had intensified its search recently.
Tesla investors translated these two pieces as meaning “we might lose Elon,” which is a worst nightmare for many Tesla investors and a dream of many competitors. The first full day that the article was out, Tesla’s stock fell more than $30, thereby costing Tesla’s investors about $3 billion in value and transferring a billion of those losses directly into the hands of Musk’s enemies, Tesla short sellers.
To pour gasoline on the fire, lead writer David Gelles tweeted the next morning, “Tesla $TSLA stock now down close to 4 percent in pre market trading. Wonder why?” Gelles was baiting Musk to react with his own tweet to this unprofessional taunt, to do something that would not only hurt Musk’s career tremendously but plunge the stock into the abyss.
Later we learned that “the unnamed source” was wrong, Tesla’s board was not looking for a COO. Video interviews of Musk that week showed someone sharp and capable. Because of the quantity of money lost by Tesla investors, because of effort to increase the stock losses by taunting Musk on Twitter, because of the ease in making money via insider trading and not being detected due to the massive size of the dip this article caused, and because of the clearly inaccurate information contained within the story, the SEC should investigate this news organization for possible violations. (See: “Tesla Billion Dollar Hit Piece” for more on that story.)
More recently, a New York Times reporter named Neal Boudette ran with an idea cooked up by short sellers that Tesla vehicles parked in lots were a sign of demand problems. Boudette didn’t stop there but instead found individuals betting against Tesla to quote in order to advance even more damning explanations. In reference to trucks for shipping the new Teslas, vocal Tesla perma-bear Mark Spiegel was quoted saying, “Perhaps Tesla doesn’t have the cash to pay for them.” Boudette not only suggested demand issues, but also relayed the suggestion that parked vehicles might be lacking necessary replacement parts that Tesla can’t come up with. He closed the article with a quote from a hedge funder as saying the parts issue is “a sign of a company in financial crisis.” Though Boudette hit below the belt multiple times, at least he labeled his sources honestly.
The same cannot be said of the work by James Stewart, one of the 3-billion-dollar hit piece writers. Stewart later wrote in the New York Times about Musk’s alleged ultimatum to the board regarding settling with the SEC. In that piece, Stewart obtained a scathing quote about Tesla’s board from Yale School of Management Professor Jeffrey Sonnenfeld. The problem with Sonnenfeld is that he is a cohort of short seller Jim Chanos in that department at Yale, and yet Stewart gives the reader no clue in his article that Sonnenfeld is a severely biased source.
Stewart’s use of Sonnenfeld wasn’t the worst case of disguised media bias, however. CNBCused the Yale professor on a July 11, 2018, segment along with Bethany McLean, a writer who signed multiple million-dollar book deals after working closely with short seller Jim Chanos. The two were nothing short of Chanos’s dream team to attack Tesla, and CNBCgave no clue to the biases of the two nor their Chanos connections. They proceeded, of course, to trash Tesla and Elon Musk in their defense of reporter Linette Lopez. The whole affair was a circus, modern theater, but it certainly wasn’t honest business reporting, and one couldn’t help feel sorry for the unsuspecting investors who would sell their Tesla shares because of this deception. Wasn’t there supposed to be some kind of government agency to reign in this type of unabashedly deceptive reporting of a publicly traded company?
Words for the Securities and Exchange Commission
To the SEC, I say it’s high time to spend at least as many hours pursuing the myriad of rules infractions on the other side of the fence as you did scrutinizing Elon Musk’s Twitter behavior. The stakes are high. Tesla will survive this assault, but other companies in the future may not. All of the top short sellers have been active in TSLA, learning how to manipulate the market, win favor in the media, and sow the seeds of doubt in investors. TSLA is their laboratory at the moment.
The manipulations of TSLA are so severe these days that once a downtrend develops, more times than not the stock runs all the way down to the lower Bollinger band before turning around. This is not normal stock behavior and suggests that manipulative trading methods when combined with FUD are very effective. You need to be on at least as steep a learning curve as the short sellers, because once the economy turns downhill you’re going to have one hell of a mess to deal with as the shorts expand their use of these methods to stocks less resilient than Tesla.
One easy solution you ought to explore is instituting the SEC circuit breaker, the alternate uptick rule, as a permanent restriction to short-seller trading, rather than as a 2 trading-day restriction whenever the stock falls more than 10% in a trading session. Short selling can provide some benefits to the market if it is restricted to a passive type of bet, rather than the full-contact sport into which it is quickly evolving.
Please work with Tesla’s investors. We will provide you will plenty of tips. It would be far better for investors and the SEC to work together than for the investors to give up on the SEC and turn to Congress for legislation that will fix the ills of the market. Right now, many Tesla investors feel we’re doing our trading in a dishonest casino. Let’s work together to change that.
Words for Elon Musk
Months ago, Tesla investors realized that the Twitterverse was infesting with all sorts of enemies of Tesla, attacking the company, attacking you, and attacking any journalist who gave Tesla a fair shake. Look at what happened to Dan Neil. Tesla’s investors have rallied and people such as myself who never spent much time on Twitter before are daily defending this great company you have built. Even your lovely mother has rolled up her sleeves, jumped in, and she’s really doing a kick ass job of it.
Now there’s this issue with the SEC. Once again, Tesla’s investors are willing to get involved. We’re going to submit a ton of tips to help the SEC go after lawbreakers. If the SEC doesn’t do its job, Tesla’s investors will go to Congress and ask for laws that will fix the shortcomings in the market. If you like what we’ve done on Twitter, you’ll probably like what we’re about to do address the inadequacies of the market.
Every time I drive my Model S, every time I see photos and videos of the latest SpaceX launch, every time I hear stories about how the South Australian virtual power plant of Tesla Powerpacks combined with clean energy has brought huge benefits to the people of that region, I am thankful for your hard work and genius. Now is the time to trust Tesla’s investors with taking on the Twitter trolls and bringing some fairness back to the market while you concentrate on what you do best. We’ll all sleep much better with that arrangement.