Tag Archives: SEC

Tesla’s Warranty Expense “Income”

Note: Tesla is a fascinating case in fraud and of the “wizard” behind the fraud, who has managed to pull the wool over a large population of stock gamblers. Tesla is a saga for the ages and likely the biggest Ponzi scheme in U.S. history.  The Company and its CEO are truly emblematic of the fraud and corruption that has engulfed the entire U.S. economic, financial and legal/political  system. If this country survives what’s coming, there will be semester long classes in top-10 business schools and psychology masters programs devoted to the case study of Tesla.

A long-time Tesla critic published an article in Seeking Alpha outlining the fraudulent nature of Tesla’s accounting for “warranty expense.” I did not read the article beyond the summary because it was placed behind Seeking Alpha’s subscription firewall.  But I’ve detailed this aspect of Tesla’s accounting fraud in previous issues of the Short Seller’s Journal . Tesla has been reducing its provision for warranty expenses relative to the number of vehicles it sells for several quarters. While the warranty provision should rise in correlation with the rising number of vehicles delivered, Tesla and its auditor have decided an inverse relationship between these two variables makes more sense.

In addition, as it turns out Tesla in many instances allocates warranty expenditures incurred to “goodwill” and other non-warranty expense categories, which enables it to move the expense – a cash expense incurred – off its income statement and on to the balance sheet or to the “operating expenses” section of the income statement.

GAAP accounting no longer requires a company to amortize goodwill evenly over time as an expense on the income statement. Those of you who might know GAAP warranty accounting rules might say that the warranty expenses as they incur only affect the income statement to the extent they exceed the “provision for warranty expenses” that accumulates on the balance sheet.

However, in all likelihood Tesla is playing these games with its warranty expenditures because it has already exceeded the amount it has previously reserved for warranty expenses. OR over time if Tesla reports – fraudulently – less on actual warranty expenditures than it has reserved for them, it can “release” the warranty expense reserve into the GAAP income statement as a contra expense to boost gross margin and operating margin. This in turn contributes to the accounting manipulations used in any attempt to generate positive net income.

Furthermore, understating current warranty expenditures enables Tesla to understate future provisions for warranty expense, which should be expensed every quarter as part of the cost of goods sold. In other words, moving warranty expenditures into other expense categories or into goodwill reduces the cost of goods sold thereby artificially and fraudulently boosting the reported GAAP gross margin.

Moreover, the amount of warranty expenditures tossed fraudulently into goodwill never hits the income statement. It sits in the goodwill asset account on the balance sheet which no longer has to be amortized into operating expenses, thereby boosting operating and operating margin OR reducing operating losses. Yes, there is an accounting rule that applies to the revaluation of goodwill but don’t hold your breath waiting for Musk to adhere to any accounting regulations.

This is crucial to understanding the breadth and scale of Tesla’s accounting fraud. Tesla has made it a point of emphasis to boast about its gross margin, which is much larger than the gross margin for the legacy auto OEMs.  Also, Wall Street analysts focus on Tesla’s gross margin. When the gross margin reported is higher than expected, the stock price jumps. This accounting scheme also fraudulently boosts Tesla’s operating and net incomes. In fact, if Tesla adhered to strict GAAP accounting, its gross margin would be substantially lower and in all likelihood the Company would have never been able to report positive earnings per share in Q3.

But wait, there’s evidence that backs my assertion above that Tesla fraudulently misclassifies warranty repair expenditures. Tesla owners who have taken their car in for warranty-related repairs have been reporting that on the final invoice the warranty service repair is classified as “Goodwill – service.”  You can see a photocopy of one such example in an article published by InsideEvs.com. There are also several lawsuits filed against Tesla with documentation showing that Tesla’s misclassification of warranty service expenditures is standard operating procedure at the service centers.

As it turns out, Tesla labels warranty service expenditures for two more fraudulent reasons. First, under California’s Lemon Law, in many instances Tesla would be required either to buy back for full price the tarnished vehicle from the owner or replace it with a brand new vehicle. Likely this law is similar in most States. Second, repeated warranty repairs for the same problem would require per NHTSA regulations for a recall of the defective parts involved. But labeling these repairs as “goodwill” enables Tesla to fraudulently avoid both of these costs of adhering to the law.

Musk’s business per se is not to be sell cars but sell stock in a company that sells cars.  Musk’s accounting schemes are aimed directly at pushing the stock price higher. The primary motive behind this effort  is Tesla’s insane CEO compensation plan, which would award Musk with $364 million in stock/options if the market cap hits $100 billion (which is more than Ford and GM combined).

Though I can’t prove it without access to the actual records, I suspect that Goldman Sachs and Morgan Stanley have a lucrative fee-generating business lending money to Musk against the value of his Tesla shares.  In other words, Musk – along with Gold man and Morgan Stanley,  will do and say anything to try and force the stock higher in order to achieve that compensation milestone level and to protect the value of the collateral used secure loans to Musk.

SoT Market Update: Wall Street Wants To Trap Your Money

SEC Chairman, Mary Jo White, is not on your side.  If she had any sort of backbone and wanted to protect the public from Wall Street’s den of thieves, there would be people going to jail right.  She does not have your best interests at heart.  BlackRock?  They just want all your money.   – Rory Hall, Shadow of Truth

Consider yourself warned.  In fact, the first warning from the elitists was fired in January 2010, when the SEC voted almost unanimously to allow Money Market Funds to suspend investor redemptions during periods of “extraordinary circumstances.”  Of course, it’s during those periods of time – when the financial system is melting down – that investors would want to get their money out of money market funds.

As of September 10, a total of $2.66 trillion was held in money market funds.  I would surmise that 98% of the investors in these funds have no idea that their money will be “frozen” the next time financial panic hits this country.  Undoubtedly their “trusty” financial adviser never disclosed the existence of “redemption gates” on money market funds.   Returns are so skinny on these funds there’s really no reason to leave your money in them.  The eventual cost of the convenience these funds offer will be the amount of your investment.

It was only a matter of time before the trend in redemption gating the fund industry moved to mutual funds.  While the latest proposal being considered by the SEC is not a hardcore redemption gate, the agency is looking into allowing mutual funds to impose a surcharge on investors who want to get their money of these cesspools during times when the market is dropping quickly.

The current proposal would allow mutual funds to charge extra fees to investors who leave the fund when the market is taking a dump.  The rationalization being that there’s extra “trading costs” involved in selling securities when the market is “volatile.”  This is highly misleading because “trading costs” are accounted as operating costs, which are costs incurred ratably by all investors in the fund.

It’s interesting that these “extra costs” didn’t seem to occur in 1987 when the stock market dropped in 22% in one day.  Or in  March 2000, when the Nasdaq fell 93% over the next 29 months.  Or in October 2007, when the S&P 500 fell over 50% over the next 17 months. These were all periods of “high volatility” and fund investors were fleeing en masse.

And, of course, there didn’t seem to be any “extra trading costs” involved when the market volatility was heavily skewed toward the upside starting in April 2009 and the masses were rushing back into these funds.

Make no mistake about it, this is the next step closer toward enabling the mutual fund industry to impose redemption gates on all mutual funds.  After all, what better way to help the Fed prop up a collapsing stock market – which will be collapsing for valid fundamental reasons – than to prevent investors from taking their money out.

Wall Street, with the Government’s full backing, has two goals in mind:  1)  seduce the retail public into putting all their money in mutual funds, especially funds loaded with hidden risks and derivatives;   2) figuring out how to force them to keep it there.   Be clear about one thing, the entire Governmental system is moving toward totalitarianism.  One of the cornerstones of a totalitarian system is capital controls.

Rory and I discuss the latest scheme by Wall Street to trap your money in this Shadow of Truth Market Update:

Consider yourself warned…

The Natural Life-Cycle Of A Collapsing System

Retired SEC lawyer James Kidney:  “Kidney said his superiors were more focused on getting high-paying jobs after their government service than on bringing difficult cases. The agency’s penalties, Kidney said, have become “at most a tollbooth on the bankster turnpike.”  Bloomberg link

This retired lawyer from the SEC came out and essentially admitted that the SEC does nothing except apply window dressing with respect to enforcement of securities laws.  Of course, it’s not like this guy split the atom for the first time with this revelation.

The SEC has been nothing but a lap-dog for Wall Street for years.  Everybody who gives a rat’s ass about this issue already knows that.  The current head of the SEC, Mary Jo White, was the chief legal defense bull-dog for Jamie Dimon and JP Morgan at Debevoise &  Plimpton.   Putting her in charge of the SEC is the equivalent of putting a serially convicted pedophile in charge of Kindercare.

Does anyone remember when Obama put that 29 yr. old kid from Goldman Sachs  in charge of the enforcement division of the SEC?   Good job Barack.   And then it was revealed that many SEC rank and file spent more time surfing porn than doing their job.  Again, Mr. Kidney there didn’t exactly invent plutonium with his newest revelations.

I was discussing today’s press release with a colleague, who was happy that the issue was getting media attention.  But I had to point out that a Bloomberg news report is only seen by an audience that already knows that the SEC is useless in its enforcement duties.  In fact, the SEC enables Wall Street’s fraud and corruption.

Most of the country probably is aware that our entire system is deeply corrupt.  But the interest in news and truth for the majority does not go beyond missing planes or the marital status of Hollywood starlets.

The truth is our system is rotten to the core and the marriage between Wall Street, corporate America and the Government is nothing more than the natural life-cycle of a collapsing system.

The only lesson we’ve learned from history is that we don’t learn the lessons of history.