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Tesla Investigated by SEC for Possible Securities Laws Violations

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By Jonathan R. Tung, Esq. on July 12, 2016 4:07 PM

Not that there's ever a convenient time for someone to die in a car crash, but the recent fatality associated with Tesla's Autopilot feature that killed Joshua Brown was decidedly timed badly for the electric car company. Now Tesla is being investigated by the SEC amidst allegations that it breached securities laws in connection with that crash.

On top of being a phenomenally bad crash for the company, it could potentially cast a long and dark shadow over the technology for a while yet.

Disclosures Only to Select Few

The public is now widely aware of the May 7th accident that killed Joshua Brown, 40, when he crashed into an 18-wheeler while using the Model S's Autopilot system. Brown regularly posted videos of his car rides in the car, and he was a clear fan of the car's feature.

Soon after that crash, Tesla contacted the NTSA and an investigation was launched in order to determine and investigate the cause of the crash. But it wasn't until later in the investigation that the public learned that Brown was using the car's auto-drive feature at the time. However, Tesla did not similarly disclose the crash to its shareholders.

Now, Tesla has a couple of legal problems to face. First, the NTSA is breathing down its neck about the safety ramifications of Autopilot technology. This could present a real issue for Tesla and other car companies who are looking to push driverless technology as a selling point of electric vehicles. The public fear of driverless technology is now heightened, perhaps unfairly, but the market really doesn't care about fairness.

Too Soon to Tell?

At this stage, the SEC is concerned with "materiality", that is whether or not the crash was considered a material event under the seminal Securities Act of 1933 and other federal laws. Under these laws, news concerning the value of company stocks is "material" if they would otherwise be important to the reasonable investor interested in buying or selling securities. Right now, it's too soon to tell if anything was amiss.

Timing Looks Bad

Tesla has a few timing pickles to worry about. One, it informed the NTSA of the crash on May 16 and began conducting its own investigation. At this time, it hadn't determined that Brown was using Autopilot.

Two days after contacting the NTSA, Tesla prepared the sale of $2 billion in stock but did not make disclosures of the crash in its May 18 filing. But then, on the same day, Tesla sent an investigator to get the car's data. In other words, the investigation revealed the use of Autopilot after the sale on the 18th and 19th. The public eventually got wind of the crash on June 30th.

Meanwhile, Elon Musk has voiced caution in using the feature, but he is still a vocal supporter of the technology.

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