Recently unsealed court records in a shareholder lawsuit filed against Tesla and its board alleges that key information was hidden from their auditors who reviewed Tesla’s buyout of SolarCity, which was on the edge of financial ruin.
In addition, the unsealed court records allege that Elon Musk, the CEO of Tesla, knew that SolarCity was financially unstable. Yet, he pushed for the acquisition after meeting with his cousin, who is co-founder of SolarCity, at a family function in Lake Tahoe in February 2016, the newly released documents state.
Some of Tesla’s largest shareholders filed the lawsuit in 2016 shortly after the company bought SolarCity for $2.6 billion. Musk is cousins with Lyndon Rive and Peter Rive, who co-founded SolarCity in 2006.
Musk also was one of the largest investors in SolarCity, a company that was never profitable. SolarCity reported more than $2 billion in net losses from 2012 to 2016.
Since Tesla acquired SolarCity, it has fallen from first to third in the residential solar market.
The shareholder’s lawsuit contends that the acquisition should not have happened because Tesla overpaid for SolarCity and failed to disclose information that casts the solar panel manufacture in an ugly light.
In addition, the court filings argue that Musk said he recused himself from voting on the deal because of the conflict with his cousins, but he still lobbied investors and gave opinions about the merger.
As a result, the shareholders argue that Musk helped orchestrate a bail out of his cousins’ company and engaged in a public relations game in 2016 to change investor sentiment by publicly revealing the Solar Roof, a product that is purportedly being made at the Riverbend facility in Buffalo.
All of this took place behind the scenes at a time when New York Governor Andrew Cuomo’s administration had already agreed to use $750 million in taxpayer funds to build and equip a solar panel manufacturing facility for SolarCity at Riverbend in Buffalo. The project is the centerpiece of Cuomo’s Buffalo Billion initiative.
The unsealed documents, which are posted by the website Plainsite, allege that in an attempt to maintain cash balance, SolarCity not only delayed payments to vendors but forwent capital expenditures at the Riverbend facility per its lease contract with the state, thus passing this liability on to Tesla shareholders.
The unsealed court records state that almost immediately after Tesla’s acquisition closed, “SolarCity’s auditors E&Y confirmed that SolarCity was, in fact, insolvent.”
In addition, it is alleged that the auditors discovered that the 2017 financial projections provided to them by SolarCity had failed to include large payments from SpaceX, a company founded by Musk. The shareholders contend that Musk helped keep SolarCity financially afloat in 2015 and 2016 by purchasing $165 million in SolarCity bonds, in violation of SpaceX’s own internal policies.
“For its year-end audit, E&Y concluded that SolarCity was ‘short of cash by $169M of which if you take out SpaceX, they are barely at break even’,” the plaintiff’s allege in the unsealed court records.
“Thus, E&Y’s January 2017 ‘going concern analysis’ concluded ‘that as a standalone entity [SolarCity] will not have sufficient cash to meet its obligations…’”
Tesla, in a prepared statement emailed Tuesday, said Tesla made the required disclosures to stockholders in the proxy, including the bonds purchased by SpaceX.
“These allegations are based on the claims of plaintiff’s lawyers looking for a payday, and are not representative of our shareholders who support our mission and ultimately voted in favor of the acquisition,” Tesla said.
“The accusations made in the plaintiff’s brief are false and misleading, as Tesla and SolarCity published all material information in its proxy and other public filings for all shareholders to consider before deciding on the transaction. Providing clean, renewable energy generation through solar has been a critical part of our mission ever since 2006, and our acquisition of SolarCity has enabled and continues to enable a significantly faster path to achieve our goals.”
Solar Roof unveiled
On Oct. 28, 2016, Tesla and SolarCity held a joint press conference to unveil the Solar Roof.
The goal was to have “solar roofs that look better than a normal roof, generate electricity, last longer, have better insulation, and actually have a cost – and installed cost that is less than a normal roof plus the cost of electricity.”
A week later in November 2016, Musk said that the first deployments would start next summer.
Again, at a Nov. 17, 2016, special meeting of stockholders, Musk said, “we expect to start doing the solar roofs in volume somewhere next year.”
Obviously, that never happened.
In fact, the shareholders’ lawsuit contends that Musk’s remarks “were unsupportable and directly contradicted by the contemporaneous record.”
The latest information Tesla has provided on the Solar Roof is that it is in its third iteration but has not hit the mass market in any great volume as the company continues to test its durability and safety.
Tesla has never displayed the SolarRoof in Buffalo and only allowed the media inside the plant once, in what former employees described as a staged “dog-and-pony show.”
The court records state that by November 2016, SolarCity had “zero visibility on how much it is going to cost [to] make a solar roof, install it, R&D, where it will be manufactured, build up cost of getting raw materials, etc.” and that they were “running blind” to Musk’s new product.
“None of the solar roof tiles at the public demonstration were even operational,” the shareholders’ lawsuit contends.
“Indeed, the solar roof was just a ‘nascent product’.”
Originally, the Cuomo administration struck a deal with Silevo to build and equip a new facility in Buffalo, where Silevo was to make a new solar cell technology that cost less and captured more energy than products by competitors.
New York state officials deemed the technology “of critical importance to the United States economic competiveness and energy independence.”
SolarCity bought Silevo in 2014, which led the Cuomo administration on a series of 10 amendments of the contract, quietly reducing job targets, removing the requirement for “high-tech” jobs that would have likely brought higher wages, and provided an exit strategy for the solar panel manufacture if changes to local, state or federal regulations or policies adversely affected the business.
News 4 Investigates first reported in February that the average salary at the Buffalo factory is about $16.20 an hour, a far cry from what some state lawmakers said they were led to believe by the Cuomo administration.
In addition, former employees of the Tesla plant in Buffalo told News 4 Investigates in February that managers lacked a sense of urgency considering the huge public investment, while casting doubt on the company’s future.
Tesla now partners with Panasonic at the Buffalo facility, and the Silevo technology never hit the market.
In May, officials with Empire State Development, the state’s economic development agency, said that the significant changes to the corporate structure, business model and industry environment were the reasons the state amended the contract.
Empire State Development did not respond to questions from News 4.
The shareholders have requested a partial summary judgment in the case.
Meanwhile, News 4 Investigates reported in May that the state comptroller is auditing the state’s high-tech programs, with a focus on the Riverbend project. That audit is ongoing, a spokeswoman for the comptroller said.
But on Sept. 10, the Erie County legislature unanimously passed a resolution calling on the comptroller to conduct a full-scale audit on just the Tesla project.
The resolutions wants the audit to include how the $750 million in taxpayer money was spent, production rates at the factory, third-party leases at the factory and the status of its job-creation goals that are required to reach 1,460 jobs in Buffalo by April 2020.
Missing that job target could result in a $41.2 million penalty for Tesla.