Tesla And Potential Criminal Negligence?

| About: Tesla Motors (TSLA)

Summary

Reports on Thursday afternoon mention that NHTSA is looking into a well known, two-year-old suspension issue for the Model S.

The safety hazard of the suspension is important, but more important are questions being raised about a cover-up.

The line from "not a recall" to "criminal negligence" could potentially be straighter than most think.

By Scott Tzu with Thom Lachemann

On Thursday afternoon, it was reported that the National Highway Traffic Safety Administration ("NHTSA") is looking into reports of suspension issues with the Tesla (NASDAQ:TSLA) Model S. Bloomberg reported,

Tesla Motors Inc. fell after the U.S. National Highway Traffic Safety Administration said it is looking into a potential suspension issue on the Model S sedan.

The agency is seeking additional information from the company and from vehicle owners, spokesman Bryan Thomas said in an e-mailed statement. The regulator also told Tesla that it shouldn't discourage customers from reporting safety concerns, and Tesla said that wasn't the company's intention, Thomas said.

"NHTSA always encourages vehicle owners concerned about potential safety defects to contact the agency by filing a vehicle safety complaint at SaferCar.gov," he said.

This issue has been relatively well covered over the last year or two, it is an issue where a ball socket joint falls out of place in the Model S suspension, which can be a serious safety issue while still driving.

But it is not the issue of the suspension that could really be a serious liability for Tesla, it is numerous reports that the company has been asking customers to sign non-disclosure agreements in order to have out of warranty repairs made on their vehicle. Such claims have been made not only about these suspension issues, but also by one Model X owner. One of these issues came to light in an article that was passed around on Thursday, describing an individual who needed to sign an NDA in order to have Tesla pay for half of his repairs on his out of warranty Model S that had suspension issues.

The NDA allegedly had language in it instructing the signer to not contact any safety or law enforcement agency. According to the NHTSA statement made to Automotive News on Thursday, that's a big mistake,

"The agency immediately informed Tesla that any language implying that consumers should not contact the agency regarding safety concerns is unacceptable, and NHTSA expects Tesla to eliminate any such language," said NHTSA spokesman Bryan Thomas.

The NHTSA is very much like the FDA in the sense that it relies on not just its own testing and standards, but the feedback of consumers in self reporting databases to report potential safety issues and hazards that may need to be investigated. The FDA has the FAERS system for reporting adverse effects from drugs, and the NHTSA has several methods with which you can contact them in order to report potential safety hazards and issues with vehicles.

While the suspension issue was briefly covered a couple of years ago, the way that Tesla was handling some recent out of warranty repairs had not been reported on in the mainstream media. It is the second stage to a story that seems to simply be about the safety of Tesla's vehicles. Now that this has become a headline, after being reported on CNBC, we expect journalists will start to dig into Tesla's methods of performing out of warranty repairs and this disturbing language reportedly in NDA's issued to customers,

The Goodwill is being provided to you without any admission of liability or wrongdoing or acceptance of any facts by Tesla, and shall not be treated as or considered evidence of Tesla's liability with respect to any claim or incidents. You agree to keep confidential our provision of the Goodwill, the terms of this agreement and the incidents or claims leading or related to our provision of the Goodwill. In accepting the Goodwill, you hereby release and discharge Tesla and related persons or entities from any and all claims or damages arising out of or in any way connected with any claims or incidents leading or related to our provision of the Goodwill. You further agree that you will not commence, participate or voluntarily aid in any action at law or in equity or any legal proceeding against Tesla or related persons or entities based upon facts related to the claims or incidents leading to or related to this Goodwill.

This becomes a big deal because you can draw a straight line from having people sign NDAs encouraging them, or in the case of an NDA directing them, to not report safety issues to the NHTSA. Should that happen, the NHTSA does not have clarity on potential issues that may need to be affected by a recall. We already know that Elon Musk is not a fan of "recalls", as he has stated in the past on Twitter, but the avoidance of a recall through purposely covering up a potential safety hazard could be an extremely serious liability, similar to the liability that is being passed around in the GM (NYSE:GM) ignition switch case. It would be a catastrophe that a young Tesla company would have a lot of trouble dealing with.

We are not saying that Tesla definitely covered this up. We are simply saying that there is a groundwork of circumstantial evidence that appears to be falling into place that could support a theory that Tesla has potentially put into place operations to prevent safety issues from being reported. It is not until the NHTSA conducts a full investigation, not only into the suspension issues, but also the way that they were handled by the company, that we will get a better understanding of how deep the rabbit hole goes.

Those that read us know that we are markedly bearish on Tesla. The company's inability to turn a profit and negative operating leverage give a serious reason to doubt the stock, especially given the environment that the overall market is in right now. There is no financial footing for the company to stand on, despite the cash it continues to raise from equity issuances, and we have real doubts about Tesla commanding the market cap it has now over the course of the long term.

Given that a brand-new, relatively serious contingent liability may have just entered the playing field, we have even more reason aside from the company's atrocious fundamentals to be short the company here moving forward. Optimists will say that it is a tough pretzel to twist to get Tesla from an NHTSA probe to criminal liability, but we would argue that line may be straighter than most people think.

Disclosure: I am/we are short TSLA.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.