Case 3:17-cv-05828-CRB Document 46 Filed 09/28/18 Page 1 of 82 Laurence M. Rosen, Esq. (SBN 219683) 1 THE ROSEN LAW FIRM, P.A. 2 355 South Grand Avenue, Suite 2450 Los Angeles, CA 90071 3 Telephone: (213) 785-2610 Facsimile: (213) 226-4684 4 Email: lrosen@rosenlegal.com 5 Jacob A. Goldberg, Esq. 6 Gonen Haklay, Esq. 101 Greenwood Avenue, Suite 440 7 Jenkintown, PA 19046 8 Telephone: (215) 600-2817 Facsimile: (212) 202-3827 9 Email: jgoldberg@rosenlegal.com ghaklay@rosenlegal.com 10 11 Lead Counsel for Plaintiffs and the Class 12 UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA 13 14 GREGORY WOCHOS, Individually and on Case No. 3:17-cv-05828-CRB 15 Behalf of All Others Similarly Situated, 16 Plaintiff, SECOND AMENDED CLASS ACTION COMPLAINT FOR VIOLATION OF 17 vs. THE FEDERAL SECURITIES LAWS 18 TESLA, INC., ELON R. MUSK, DEEPAK 19 AHUJA, and JASON WHEELER, JURY TRIAL DEMANDED 20 Defendants 21 22 23 24 25 26 27 28 1 Case 3:17-cv-05828-CRB Document 46 Filed 09/28/18 Page 2 of 82 1 Lead Plaintiff Kurt Friedman and Named Plaintiff Uppili Srinivasan (collectively, 2 “Plaintiffs”), individually and on behalf of all other persons similarly situated, by and through their 3 attorneys, allege the following based upon personal knowledge as to Plaintiffs’ own acts, and 4 information and belief as to all other matters, based upon, inter alia, the investigation conducted 5 by and through Plaintiffs’ attorneys, which included, among other things, review and analysis of 6 the Defendants’ public documents, conference calls and announcements made by Defendants 7 Tesla, Inc. (“Tesla” or the “Company”), Elon R. Musk (“Musk”), and Deepak Ahuja (“Ahuja”), 8 United States Securities and Exchange Commission (“SEC”) filings, wire and press releases 9 published by and regarding Tesla, analysts’ reports and advisories about the Company, interviews 10 with former employees of the Company, and information readily obtainable from public sources. 11 Plaintiffs believe that substantial evidentiary support will exist for the allegations set forth herein 12 after a reasonable opportunity for discovery. 13 NATURE OF THE ACTION 14 1. This is a federal securities class action on behalf of a Class consisting of all persons 15 other than Defendants who purchased or otherwise acquired common shares of Tesla between May 16 3, 2017 and November 1, 2017, both dates inclusive (the “Class Period”). Plaintiffs seek to recover 17 compensable damages caused by Defendants’ violations of the federal securities laws and to 18 pursue remedies under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the 19 “Exchange Act”) and Rule 10b-5 promulgated thereunder. 20 2. Despite firing public imagination with its niche, luxury electric vehicles, for Telsa 21 to survive as an automobile manufacturer in the face of stiff competition from well-established, 22 far better capitalized legacy automobile manufacturers, it must mass produce affordable electric 23 cars. 24 3. By 2017, to much fanfare, Tesla launched its “affordable” Model 3, accumulating 25 $1,000 deposits from over 500,000 potential customers. 26 4. Beginning on May 3, 2017 and continuing throughout the Class Period, Defendants 27 misrepresented to investors the then-current state of affairs with respect to whether the Company 28 was “on track” to mass produce the Model 3 in 2017, and whether “progress” had been made 2 Case 3:17-cv-05828-CRB Document 46 Filed 09/28/18 Page 3 of 82 1 supporting Defendants’ claims that 5,000 Model 3s per week would be produced before the end 2 of 2017. Defendants’ statements were false. 3 5. Serious supply chain and production problems existed by the beginning of the Class 4 Period, including incomplete and/or non-existent automated production lines, causing unresolved 5 bottlenecks at both the Company’s Fremont, California assembly line and at Tesla’s 6 “Gigafactory,” its purportedly state of the art, Reno, Nevada battery manufacturing facility. These 7 issues rendered mass producing the Model 3 in 2017 impossible. Defendants knowingly or 8 recklessly misrepresented the then-existing facts on the ground, and misrepresented the 9 Company’s ability to mass produce the Model 3 by the end of 2017. 10 6. In 2016, riding the success of Tesla’s niche, luxury Model S, Defendants announced 11 not only their intention to mass produce an “affordable” “Model 3” sedan, but touted the 12 Company’s ability to do so in the near term. In 2016, Defendants boasted that production hurdles 13 they had overcome in producing the Models S and X would benefit their ramp-up to mass 14 production of the Model 3. 15 7. Tesla’s long-term success in the auto industry hinged on its ability to mass produce 16 the Model 3. The stakes were existential. Far larger, well-established car companies such as 17 Chevrolet, Mercedes-Benz, Hyundai, Nissan, and Porsche, had already committed billions of 18 dollars to advance electric car technologies. Each already made millions more cars per year than 19 Tesla, and had the know-how and capacity to mass produce cars, regardless of the car’s power 20 source. Further, producing the Model 3 cost Tesla billions of dollars, and the Company needed, as 21 quickly as possible, to recoup these expenditures through mass sales of the Model 3, or face a cash 22 crunch. 23 8. Investors and the public enthusiastically greeted Tesla’s announcement that it 24 would mass produce an affordable electric vehicle. The costs and risks for Tesla of failing to mass 25 produce the Model 3 in a timely manner were high. 26 9. Defendant Musk announced that the Company would divert all income from sales 27 from Tesla’s niche luxury vehicles, the Models S and X, to fund mass production of the Model 3. 28 10. Tesla has admitted that its capital expenditure on the Model 3 was $4 billion in 2017, a year that ended with Tesla failing to mass produce the Model 3. 3 Case 3:17-cv-05828-CRB Document 46 Filed 09/28/18 Page 4 of 82 1 11. A March 12, 2018 Bloomberg article by author Tom Randall captured the 2 consensus about Tesla: the Model 3 production rate was “of existential importance” to Tesla. 3 Analysts concluded that unless Tesla met its promise to produce 5,000 Model 3s per week, it would 4 burn through its remaining cash in a year’s time and need to raise capital. The only way to begin 5 recouping these expenditures was to mass produce and sell Model 3s as quickly as possible. 6 12. Mass production of the Model 3 was dependent not only on designing, installing, 7 testing, and operating fully functional automated lines in Tesla’s Fremont, California facility, but 8 on achieving similar mass production success in Tesla’s Gigafactory, where Tesla planned to 9 produce its own batteries for the battery-powered Model 3, rather than outsourcing battery 10 production. Failure in either would materially postpone the Company’s mass production of the 11 Model 3. Time was of the essence. 12 13. Beginning in May of 2017, Defendants repeatedly stated that not only would Tesla 13 mass produce 5,000 Model 3s per week before the end of 2017, but that the actual present facts on 14 the ground – “progress” in automated production at both the Fremont and Gigafactory facilities – 15 showed that the Company was “on track” to mass produce Model 3s before the end of 2017. The 16 Company repeated such declarations throughout the Class Period. 17 14. In May 2017, when Defendants stated that the Company was “on track” to meet its 18 mass production goal, as production on a fully automated production line was supposed to be ready 19 to begin, and in August 2017, when production on a fully automated production line was supposed 20 to have already begun a month earlier and Model 3s were supposed to be coming off the line, 21 according to a number of former employees the Company had not yet finished building its 22 automated production lines in either Fremont or Nevada. Tesla was neither ramping up mass 23 production, nor “on track” to mass produce Model 3s at any time on or around the end of 2017. 24 15. In fact, all of Defendants’ statements regarding progress that the Company had 25 achieved in both Fremont and at the Gigafactory, and the statements they based on these 26 affirmative declarations of actual progress in Model 3 mass production, were false. 27 16. As early as mid-2016, Tesla executives responsible for planning and building the 28 Model 3 production line plainly told Defendant Musk and the other Defendants– in person, providing specific support for their statements – that the Company could never mass produce the 4 Case 3:17-cv-05828-CRB Document 46 Filed 09/28/18 Page 5 of 82 1 Model 3 by the end of 2017. These Tesla executives told Musk and the other Defendants that it 2 was an impossible goal. 3 17. Former Employee (“FE”) 1 was Director of Manufacturing at Tesla’s Fremont plant 4 before the Class Period. At a May, 2016 meeting FE1 Told Musk directly that there was zero 5 chance that the plant would be able to produce 5,000 Model 3s per week by the end of 2017. FE1’s 6 conclusion was based on an actual plan: 7 • As of FE1’s departure in June 2016, Tesla did not yet even have a finalized design 8 for the Model 3, so Tesla could not release information so molds for body parts 9 could be built. Molds take from 9-12 months to make; 10 • Tesla had not yet begun ordering manufacturing equipment to be installed at the 11 Fremont plant. The timeline for functioning manufacturing equipment includes 1- 12 2 months to seek bids and negotiate contracts with suppliers, 6 months to 13 manufacture equipment, 6 months to install the equipment in the Fremont plant, 14 and 6 months to get the equipment working up to speed; 15 • Thus, the automated assembly line for the Model 3 could not possibly mass produce 16 cars in 2017. FE1 told Musk directly at the meeting that the start of manufacturing 17 would be at least 6 months later than July 2017, i.e., in 2018. 1 18 18. Tesla itself confirmed FE1’s production plan timeline in announcing the 19 requirements necessary to mass produce the Model 3 in 2017. Tesla verbalized an actual plan by 20 which certain aspects of planning, construction, and automation needed to be complete for the 21 Company to reach its mass production goal in 2017. 22 19. In a May 10, 2017 10-Q for the first quarter of 2017 (“first quarter 2017 10-Q”), 23 the Company told investors that, regarding activity in the first quarter of 2017, that “[w]e have 24 started the installation of Model 3 manufacturing equipment at the Fremont Factory and 25 Gigafactory 1, and we are on-track for start of Model 3 production in July 2017.” 26 20. Tesla thus told investors that it needed to have begun installing the automated lines 27 in Fremont and at the Gigafactory in the first quarter of 2017 in order to begin automated 28 1 Musk told FE1 to look for new employment. 5 Case 3:17-cv-05828-CRB Document 46 Filed 09/28/18 Page 6 of 82 1 production in July, and that beginning automated production in July 2017 was necessary in order 2 to mass produce the Model 3 in 2017. 3 21. In fact, as witnesses attest, Tesla did not begin automated line installation in the 4 first quarter, and did not begin until late April or early May 2017. Defendants knew, therefore, that 5 actual automated mass production was not on schedule to begin in July, 2017. Given the 6 company’s statements that beginning installation in the first quarter was necessary to complete 7 line installation (4-6 months) so the Company could begin automated production in July, and that 8 it would take 6 months to ramp up to mass production (July-December), the company knew that, 9 at a minimum, it needed to begin installing the automated lines at least 10-12 months before mass 10 production could be achieved. 11 22. When the Company spoke in May, 2017, it knew that installation of the automated 12 lines had not started early enough to mass produce the Model 3 in 2017, and that, by its own 13 timeline, mass production could not be achieved until well into 2018. 14 23. As attested to by former employees in both Fremont and at the Gigafactory, actual 15 progress was far more than two months behind what Tesla announced, falsely, it had already 16 accomplished. 17 24. Tesla perpetuated the lie that it was “on track” for mass production in 2017 during 18 the July 28, 2017 “handover” event, televised online, where Tesla “handed over” the first 30 Model 19 3s to buyers. During that event, Musk, directing the audience’s attention to 50 shiny Model 3s, 20 stated that “there’s actually a total of 50 production cars that we made this month….” “Production 21 cars” is a term of art in the automotive industry, a fact Musk, the CEO of a car-making company, 22 knew. A “production car” is produced by automation, such that all vehicles are identical, and 23 offered for sale to the public. Thus, Musk told the world that the 30 cars sold to buyers had been 24 produced on an automated line in July, and that the Company had achieved, and was “on track,” 25 with its July, 2017 automated production plan goal. 26 25. Tesla had not, however, produced the vehicles at the handover event on automated 27 lines. According to witnesses, every single Model 3, and every battery in those Model 3s, had been 28 built by hand, because there was no completed automated line in Fremont, nor would there be for months. While the July 28, 2017 false statement led investors to believe Tesla was still “on-track” 6 Case 3:17-cv-05828-CRB Document 46 Filed 09/28/18 Page 7 of 82 1 for 2017 mass production, by Tesla’s own production schedule it knew that it would not mass 2 produce the Model 3 in 2017, and until March 2018, at the earliest. 3 26. Defendants Musk and Ahuja, who visited the Fremont facility on a regular basis, 4 knew that the Model 3 production line was significantly behind the publicly announced schedule 5 and that it would never mass produce the Model 3 in 2017. 6 27. As Defendants claimed to be on track for mass production in 2017, the Fremont 7 facility was assembling Model 3s by hand in the “beta” or “pilot” shop,” a facility to assemble 8 prototypes. The actual mass production line at Freemont was yet to be completed. Workers in the 9 pilot shop were not even able to build enough Model 3s to carry out the necessary testing on the 10 vehicles, and most Model 3 workers were being reassigned, or spending their days cleaning. It was 11 evident to anyone who visited the Fremont facility – and Musk himself visited the unbuilt 12 production line area every Wednesday, known internally as “Elon Day” – that the production line 13 was not yet built, that parts for the necessary robots were not present, and that construction workers 14 were spending most of their shifts sitting around with nothing to do. Multiple former employees 15 corroborate the fact that there was no fully functioning automated production line when Tesla was 16 telling the world that there was, and that the construction site where the line was being built was 17 clearly and visibly far from completion. 18 28. Further, in May 2017, when Defendant Musk stated specifically that, based on what 19 Tesla had already accomplished, the Company was “on track” to mass produce Model 3s in 2017, 20 the Gigafactory did not have sufficient fully functioning production lines, batteries were being 21 built by hand, and only a handful were being produced per week. As in Fremont, the facts on the 22 ground at the Gigafactory, which Musk himself visited, belied Musk’s “on track” comment, as 23 well as all of the Company’s subsequent statements during the Class Period. 24 29. Former employees state that there was no chance that the Gigafactory would 25 produce 5,000 batteries per week at any time in 2017, and mass production of Model 3s required 26 mass production of Model 3 batteries. 27 30. In fact, in February 2018, months after the end of the Class Period, Tesla admitted 28 that its ability to ever produce more than 2,500 Model 3 batteries per week at the Gigafactory required the Company to disassemble a production line that was still in Germany, ship it to Nevada, 7 Case 3:17-cv-05828-CRB Document 46 Filed 09/28/18 Page 8 of 82 1 and reassemble it in Nevada. This gating requirement was omitted from the Company’s numerous 2 statements to analysts and investors during the Class Period. 3 31. Multiple former employees, at both the Fremont facility and at the Gigafactory, 4 have confirmed what was obvious to anybody walking through those facilities both before and 5 during the Class Period. Tesla was never “on track” for mass production of the Model 3 before the 6 end of 2017, much less “on track” to produce 5,000 Model 3s per week before the end of 2017, 7 and the “progress” which Defendants claimed had occurred and supported their mass production 8 statements was illusory. 9 32. Without mass production lines and without batteries, it was impossible for Tesla to 10 mass produce the Model 3 in 2017, and Defendants knew Tesla had neither. 11 33. On October 2, 2017, in a press release detailing the Company’s vehicle production 12 and deliveries for the third quarter of 2017, showing that the Company produced fewer than three 13 Model 3s per day during the quarter, Tesla cited “production bottlenecks” as the reason for its 14 failure to meet its production goals for its Model 3 sedan. 15 34. On October 6, 2017, the Wall Street Journal published an article, based in part on 16 eyewitness observations by workers at the Fremont plant, that very few Model 3s were being built, 17 and the Model 3s that were completed were being built almost entirely by hand, and not on a 18 finished production line. On this news, Tesla’s stock dropped $13.94, or 3.91%, to close at $342.94 19 on October 9, 2017, damaging investors. 20 35. On November 1, 2017, Tesla itself finally acknowledged that mass production in 21 2017 would never happen, even as they refused to acknowledge all of their Model 3 production 22 problems, stating that the Gigafactory’s lack of battery production had produced a bottleneck 23 preventing the Company from mass producing Model 3s. On this news, Tesla’s stock dropped 24 $21.82, or 6.8%, harming investors. 25 36. Throughout the Class Period, Defendants made false and misleading statements and 26 failed to disclose that: (i) contrary to Defendants’ representations that the Company was prepared 27 for mass production of its Model 3 sedan by year-end 2017, in reality, the Company did not have 28 working production lines, and could not possibly build the production lines in the promised time- frame, and was woefully unprepared to mass produce the Model 3 sedan and Model 3 battery as 8 Case 3:17-cv-05828-CRB Document 46 Filed 09/28/18 Page 9 of 82 1 claimed; (ii) as a result, Defendants’ public statements about the state of affairs in Fremont and at 2 the Gigafactory necessary to support mass production, and their statements about the scheduled 3 date for commencement of mass production of the Model 3 were false and misleading at all 4 relevant times. 5 37. When the true facts concerning mass production of the Model 3 were disclosed to 6 the market, Tesla’s share price dropped and Plaintiffs and the Class suffered damages, 7 PARTIES 8 38. Lead Plaintiff Kurt Friedman, as set forth in his Certification previously filed with 9 the Court, which is incorporated herein, purchased common shares of Tesla at artificially inflated 10 prices during the Class Period and was damaged upon the revelation of the alleged corrective 11 disclosures. 12 39. Named Plaintiff Uppili Srinivasan purchased common shares of Tesla at artificially 13 inflated prices during the Class Period and was damaged upon the revelation of the alleged 14 corrective disclosures. The Certification of Uppili Srinavasan was previously filed with this Court 15 as Exhibit A to the Amended Class Action Complaint (ECF No. 24). 16 40. Defendant Tesla is incorporated in Delaware, and the Company’s principal 17 executive offices are located at 3500 Deer Creek Road, Palo Alto, California 94070. Tesla’s 18 common stock trades on the NASDAQ under the ticker symbol “TSLA.” 19 41. Defendant Elon R. Musk (“Musk”) has served at all relevant times as the 20 Company’s Chief Executive Officer (“CEO”), Chairman, and “Product Architect.” 21 42. Defendant Deepak Ahuja (“Ahuja”) served as the Company’s first Chief Financial 22 Officer (“CFO”) from April 2010 until 2015, returning to that position in March 2017. He remains 23 CFO to this day. 24 43. Defendants Musk and Ahuja are sometimes referred to herein as the “Individual 25 Defendants.” 26 44. Each of the Individual Defendants: 27 (a) directly participated in the management of the Company; 28 (b) was directly involved in the day-to-day operations of the Company at the highest levels; 9 Case 3:17-cv-05828-CRB Document 46 Filed 09/28/18 Page 10 of 82 1 (c) was privy to confidential proprietary information concerning the Company 2 and its business and operations; 3 (d) was directly or indirectly involved in drafting, producing, reviewing 4 and/or disseminating the false and misleading statements and information alleged herein; 5 (e) was aware of or recklessly disregarded the fact that the false and 6 misleading statements were being issued concerning the Company; 7 (f) signed false certifications attesting to the material accuracy of documents 8 filed with the SEC; and/or 9 (g) approved or ratified false and misleading statements in violation of the 10 federal securities laws. 11 45. Tesla is liable for the acts of the Individual Defendants and its employees under the 12 doctrine of respondeat superior and common law principles of agency because all of the wrongful 13 acts complained of herein were carried out within the scope of their employment. 14 46. The scienter of the Individual Defendants and other employees and agents of the 15 Company is similarly imputed to the Company under respondeat superior and agency principles. 16 47. Defendant Tesla and the Individual Defendants are referred to herein, collectively, 17 as the “Defendants.” 18 SUBSTANTIVE ALLEGATIONS 19 Tesla’s Origins and Business 20 48. Tesla was formed in 2003 by Martin Eberhard and Marc Tarpenning. Tesla is 21 headquartered in Palo Alto. 22 49. By 2004, Tesla had developed a prototype electric car, the “Tzero,” which could go 23 from zero to 60 mph in under 4 seconds. Tesla planned to commercially produce the Tzero under 24 the model name “Roadster.” A prototype was finished by November 2004. Tesla floated a price 25 tag of $100,000 for the Roadster. 26 50. Elon Musk first became involved in Tesla’s Series A funding in 2004. By October 27 2008, Defendant Musk controlled Tesla, having forced out Eberhard and fired a quarter of Tesla’s 28 employees. Musk became Tesla’s CEO, Chairman, and “Product Architect.” 10 Case 3:17-cv-05828-CRB Document 46 Filed 09/28/18 Page 11 of 82 1 51. To this day, Tesla is a niche automobile manufacturer, producing fewer than 6,400 2 cars per month in 2016, all luxury models with an MSRP starting at over $74,000. 3 52. Tesla competes with established, well-capitalized automobile companies 4 worldwide, all of which are competing or beginning to compete in the electric automobile space. 5 Ford, General Motors, and Fiat-Chrysler dwarf Tesla’s production. In 2016, Tesla delivered just 6 76,000 electric vehicles of all makes, while General Motors sold 10,000,000 cars and trucks, Ford 7 sold over 6,650,000 cars and trucks, and Fiat-Chrysler sold over 4,600,000 vehicles. Tesla’s 8 revenue and profitability reflect its relatively few unit sales. On a net basis, in 2012 Tesla Motors 9 lost $396 million on revenues of $410 million, in 2013 Tesla lost $74 million on revenues of $2 10 billion, in 2014 Tesla lost $294 million on revenues of $3.2 billion, and in 2015 Tesla lost $889 11 million on revenues of $4 billion. By contrast, Tesla’s competitors typically turn a profit, on much 12 higher revenues. For example, in 2015, General Motors earned net income of $9.6 billion on 13 revenues of $152.4 billion. 14 53. Tesla’s competitors reach their sales figures and profits because they mass produce 15 and sell affordable vehicles. Among many others, Ford sells the Ford F-150, General Motors the 16 Silverado, and Fiat-Chrysler the RAM pickup. All of these vehicles start at about $30,000, and 17 these companies have many other offerings at this and other attractive price levels. 18 54. Until 2016, Tesla produced only two luxury models, the Model S, a sedan, and the 19 Model X, a sport utility vehicle. According to Kelley Blue Book, in 2016, the average new car in 20 the United States sold for approximately $33,000. The base MSRP for the Model S and Model X 21 was more than twice as much. As of December 31, 2015, the least expensive Model S and Model 22 X were approximately $70,000. Premium configurations raised the price as high as double this 23 amount. 24 55. Tesla’s luxury models are not mass-market cars, nor did Tesla ever intend to mass 25 produce them on a large scale. 26 56. Tesla acknowledges that the market for Models S and X is small. On a May 3, 2017 27 earnings conference call to discuss Tesla’s first quarter 2017 earnings (“May 3, 2017 Conference 28 Call”), Defendant Musk admitted that the demand for luxury sedans is “like nothing – less than 1% of the market, 0.5%.” 11 Case 3:17-cv-05828-CRB Document 46 Filed 09/28/18 Page 12 of 82 1 57. On the call, Musk also stated that annual sales of premium sedans in the United 2 States were approximately 100,000, out of 17 million vehicles sold annually in the United States. 3 Musk essentially acknowledged the existential importance of Tesla succeeding in mass producing 4 the Model 3 in a short period of time. 5 Tesla Overpromises in Production Goals for Earlier Vehicles 6 58. Before the Model 3, Tesla only built three cars: the Roadster, the Model S, and the 7 Model X. In announcing the Model 3, Tesla claimed it had learned from mistakes made during the 8 ramp up of production of its luxury models. Those mistakes were numerous. 9 The Roadster 10 59. Tesla first designed and built the Roadster, a sports car. Lotus Cars (“Lotus”) 11 actually built the Roadster using gliders (car bodies without an engine). 12 60. Tesla initially planned to begin commercial-level production of the Roadster by 13 2006. It did not achieve this goal. 14 61. In July 2006, Tesla took 127 preorders for Roadsters. Customers had to put down 15 the full purchase price of $100,000. 2 In Musk’s customer letters, Tesla promised delivery by the 16 summer of 2007. 3 This was just the first in a long line of Defendants’ false promises. 17 62. By January 2007, Lotus had delivered to Tesla, which was responsible for all 18 aspects of the design of their first car, a list of 940 outstanding production problems. Of these, 19 Tesla had resolved only 94. 4 20 63. Tesla then announced that it would begin shipping Roadsters in the first quarter of 21 2008 – a promise that was reiterated as late as November 2007. 22 64. Tesla, however, did not begin production of Roadsters until March 2008, failing to 23 deliver the first until the fall of 2008. By April 2009, the Company had delivered a total of 320 24 Roadsters. 25 26 27 2 See “The Making of Tesla: Invention, Betrayal, and the Birth of the Roadster,” http://www.businessinsider.com/tesla-the-origin-story-2014-10. 28 3 Id. 4 Id. 12 Case 3:17-cv-05828-CRB Document 46 Filed 09/28/18 Page 13 of 82 1 65. By May 2009, however, Tesla recalled all 345 Roadsters built before April 22, 2 2009. Tesla told customers that without adjustment the driver could lose control of the car and 3 crash. 4 66. In October 2010, Tesla recalled a further 439 Roadsters, or about one third of the 5 Roadsters that had been sold to date, because of a potential fire hazard. 6 67. Ultimately, only 2,450 Roadsters were sold before Tesla completed its contract with 7 Lotus in 2012. The contract was not renewed. 8 The Model S 9 68. In February 2007, Tesla announced that it would build a luxury sedan, later dubbed 10 the Model S, initially setting the price at approximately $45,000. Reservations cost a minimum 11 down-payment of $5,000. 12 69. As with production promises for the Roadster’s, Tesla delayed the Model S’s 13 production date repeatedly, initially promising production by the fall of 2009, 5 but pushing it back 14 first to 2011 and then to 2012. 6 15 70. Ultimately, Tesla began shipping the Model S in June 2012, with a base MSRP of 16 about $70,000. 17 71. Once again, production problems plagued the car’s quality. In June 2013, Tesla 18 recalled more than 1,000 Model Ss, because certain parts could cause a collapse of the rear seat 19 back during a crash. 20 72. In January 2014, Tesla recalled 29,000 Model S units because chargers could 21 overheat, creating fires. 22 73. In November 2015, again, Tesla recalled all 90,000 Model S units because their 23 seat belts might not be correctly attached, increasing the risk of injury in case of an accident. 24 74. In April 2017, Tesla recalled another 53,000 Models S and Model X. 25 26 27 5 28 https://web.archive.org/web/20100406182037/http://www.teslamotors.com/media/press_room .php?id=257 6 Tesla IPO Prospectus dated June 29, 2010, at 2. 13 Case 3:17-cv-05828-CRB Document 46 Filed 09/28/18 Page 14 of 82 1 The Model X 2 75. The Model X was first unveiled online in 2012. A physical model was first 3 presented in January 2013. At the time, Tesla promised that production would begin by the end of 4 2013, less than 12 months away, with deliveries beginning in early 2014. 5 76. In early 2013, Tesla pushed back the start of production to late 2014. In November 6 2013, Tesla pushed back deliveries to the second quarter of 2015. In November 2014, Tesla pushed 7 production back again, to the third quarter of 2015. Deliveries finally started on September 29, 8 2015. 9 77. On an earnings conference call on May 4, 2016 to discuss Tesla’s first quarter 2016 10 results (“May 4, 2016 Conference Call”), Musk told investors that the Model X is “I think 11 unquestionably the most difficult car to manufacture in the world.” 12 78. Tesla has admitted the many mistakes it made with the Model X. Musk stated 13 during the May 3, 2017 Conference Call that the “[Model] X became kind of like a technology 14 bandwagon of every cool thing you can imagine all at once. It's like everything all at once. That 15 was a terrible strategy.” Musk blamed “hubris and real overconfidence.” 16 Announcement of the Model 3 – Tesla States this Time Production Will be Different 17 79. During a February 15, 2012, earnings conference call, Defendant Musk announced 18 that the next Tesla car after the Model X would be an affordable mass market vehicle Tesla dubbed 19 the “Gen 3.” During a November 5, 2014, earnings conference call, the Company affirmed that a 20 car like the Model 3 “has been the goal of the company all along.” 21 80. In 2016, over four years after first announcing its intention to design and mass 22 produce an affordable, mass market electric vehicle, Tesla disclosed concrete plans to market and 23 sell the Gen 3, which it now dubbed the “Model 3.” Designed to be affordably priced starting at 24 $35,000, the Model 3 was Tesla’s first car intended to be mass produced and appeal to a mass 25 market. The Roadster, Model S, and Model X were luxury, niche vehicles never intended for mass 26 production. 27 81. On the May 3, 2017 Conference Call, Musk boasted that the demand for the Model 28 3 at $35,000 was between thirty and seventy times the demand for the Model S. Within one day 14 Case 3:17-cv-05828-CRB Document 46 Filed 09/28/18 Page 15 of 82 1 of Tesla beginning to accept $1,000 refundable deposits to reserve a Model 3, 198,000 people had 2 paid the deposit. 3 82. From the time of Defendants’ 2016 disclosure of plans to produce the Model 3, 4 Defendants told investors that they had learned from their previous mistakes, and that Model 3 5 production would be different. 6 83. Defendants downplayed their previous failures to meet production deadlines with 7 their earlier cars in touting their Model 3 production capabilities. 8 84. On February 10, 2016, during Tesla’s fourth quarter 2015 earnings conference call 9 (“February 10, 2016 Conference Call”), Musk told investors that while the Model S was essentially 10 a “proof-of-concept” car that Tesla had designed and produced to convince the world that electric 11 cars could be attractive, Tesla designed the Model 3 “for ease of manufacturing.” 12 85. According to Defendants, the Model 3 was “quite a bit less complex to manufacture 13 than the Model S.” According to Defendant Musk, manufacturing costs for the Model 3 would be 14 only 50% of the manufacturing costs of the Model S, due to decreased complexity and economies 15 of scale and general design improvement. 16 86. During the May 4, 2016 Conference Call, Tesla told investors it anticipated Model 17 3 sales of approximately 300,000-400,000 in 2018, increasing materially thereafter. At those 18 numbers, Tesla would produce and deliver between 5,769-7,692 Model 3s per week in 2018, so 19 Defendants were announcing to the market at this early date that they intended to mass produce 20 the Model 3 before the end of 2017. 7 On that same call, Defendants represented to investors that 21 Tesla had a volume target of close to one million vehicles in 2020 – the vast majority of which 22 would be Model 3s. Musk represented that Tesla was “highly confident that [the Model 3] can be 23 made profitably.” 24 87. During the August 3, 2016 earnings conference call (“August 3, 2016 Conference 25 Call”), Musk repeatedly stated that the Model 3 was Tesla’s primary focus, stating, e.g., that “the 26 Model 3 [is] our focus,” and “the focus really is on Model 3.” 27 28 7 By contrast, Tesla’s announced target for 2018 production of Models S and X on the May 4, 2016 Conference Call, combined, was 100,000-150,000. 15 Case 3:17-cv-05828-CRB Document 46 Filed 09/28/18 Page 16 of 82 1 88. According to Defendants, the Company would eliminate the production problems 2 that plagued manufacture of Models S and X, and streamline the manufacture and delivery of the 3 Model 3. During a February 22, 2017 Conference Call to discuss Tesla’s fourth quarter 2016 4 earnings (“February 22, 2017 Conference Call”), Defendant Musk admitted that the relatively 5 small numbers of Models S and X that Tesla produced left Tesla unable to attract premier parts 6 suppliers to make parts for and dedicate their best employees to producing those vehicles. Musk 7 admitted that the parts were manufactured by “the worst team on second-tier suppliers.” By 8 contrast, Tesla bragged that because of the Model 3 volume Defendants anticipated, the Company 9 was able to get “the best team on first-tier suppliers,” which Musk stated made “really a big 10 difference.” 11 89. As Tesla President of Global Sales & Service Jon McNeill touted on the February 12 22, 2017 Conference Call, Tesla claimed to have learned from its experience with the Model X: 13 I might just add that we really learned a lot of lessons especially from the 14 difficult Model X ramp, and that is something that's in our recent memory. 15 We fought through it and succeeded, but I think in the design the Model 3 16 and the systems and the lines that produce it, many of those learnings have 17 been incorporated from the beginning. So if the amount of complexity and 18 the operations to assemble the car is dramatically reduced, the amount of 19 operations that involve some sort of assembly craft, where there is more 20 judgment of the operator, is dramatically reduced, almost eliminated. And 21 a lot of these things that we could identify directly as the bottlenecks that 22 hurt us on the X ramp, we have been able to target specifically and reduce 23 or eliminate. So that has -- though painful, it was a helpful experience for 24 us to get ready for Model 3. 25 90. Musk agreed, stating during the May 3, 2017 Conference Call, on the first day of 26 the Class Period, that the Model 3 would be a radically simpler car to produce than Models S or 27 X.: 28 16 Case 3:17-cv-05828-CRB Document 46 Filed 09/28/18 Page 17 of 82 1 We've gone to great pains with the Model 3 to design it for manufacturing 2 and to not have all sorts of bells and whistles and special features that, like, 3 for example, with X. 8 4 **** 5 So with Model 3 it's the opposite. We've designed it to be easy to make. 6 We’ve got I think a much better supply chain in place where we’ve got the 7 A team from the A suppliers. We didn’t have that for the Model X or the S. 8 And as far as we know, there are no issues. 9 91. Further, Tesla intended to automate far more of the Model 3 production than for its 10 previous vehicles. According to Jeffrey B. Straubel, Tesla’s Chief Technology Officer, during the 11 May 3, 2017 Conference Call, the Model 3 is “vastly more automated” than Models S or X, perhaps 12 “3 to 4x more automated.” Defendant Musk added that the production speed for the Model 3 will 13 be “at or probably slightly better” than the next best car in the world. 14 The Gigafactory 15 92. Tesla’s ability to achieve mass production of the Model 3 was always dependent 16 on a fully automated, Model 3 dedicated production line in Fremont, California. 17 93. In addition, for the Model 3 Tesla determined to manufacture its own batteries at a 18 Reno, Nevada facility called Gigafactory 1 (“Gigafactory”). 9 Citing a battery shortage as the main 19 reason Tesla had, until that time, been unable to market its vehicles as aggressively as they 20 otherwise would have, in 2013, the Company announced plans to manufacture its own battery 21 production facility, the Gigafactory. 10 22 23 8 During the February 22, 2017 Conference Call, Musk cited as examples of “bells and whistles” 24 on Models S and X that would not be in the Model 3 design “self-presenting door handles,” a 25 feature where the driver-side door handle automatically sticks out when the owner approaches, and “buckling doors,” where the entire door opens as the owner approaches. 26 9 The Gigafactory 1 (“Gigafactory”) is a lithium-ion battery factory. The numerical “1” 27 designation is indicative of Tesla’s plans to build multiple Gigafactories in the United States, Europe, and China. See http://www.thedrive.com/tech/9819/tesla-may-announce-four-new- 28 gigafactories-this-year. 10 See https://www.techspot.com/news/54600-tesla-wants-to-build-a-massive-battery-supply- facility-to-curb-shortages.html. 17 Case 3:17-cv-05828-CRB Document 46 Filed 09/28/18 Page 18 of 82 1 94. Tesla’s ability to mass produce the Model 3 depended on its ability to manufacture 2 enough quality batteries at the Gigafactory. During the July 28, 2017 handover event with Tesla 3 employees, Musk stated that “the production rate will move as fast as the slowest… component in 4 the whole mix. Then on top of that we have the Gigafactory…” 11 During the Class Period, The 5 Company produced all batteries for the Model 3 at the Gigafactory. 12 6 95. Defendants disclosed that they had conceived the Gigafactory as part of a “vertical 7 integration” strategy. Rather than managing a system of producers who would feed in to Tesla, 8 Defendants intended Tesla to control and manage every aspect of production. Defendants’ vertical 9 integration strategy is radically different than the prevailing “lean” production philosophy the auto 10 industry has employed for the past 50 years. 13 With lean production, suppliers deliver components 11 to each team’s work station just-in-time for assembly, encouraging resourceful problem-solving 12 and discouraging the practice – common in vertical integration – of relying on a surplus of spare 13 parts. 14 14 96. Defendants developed Tesla’s vertical integration strategy because Tesla is one of 15 the few automobile manufacturers whose entire line is electric, and none of its previous models 16 was mass produced. Supplies of batteries and other electric vehicle-specific parts was limited, and 17 Tesla was unable to wait for a supply chain to develop to service its demand. 15 18 97. Despite that necessity, Tesla’s plan to produce its own batteries adds an additional, 19 vital manufacturing challenge its competitors do not face. 16 20 21 22 11 Though Musk told employees that the next six months would be “production hell,” he did not 23 waver from a statement the Model 3 would be mass produced around the end of 2017. 12 According to Tesla, the name Gigafactory comes from the word “Giga,” the unit of 24 measurement representing “billions,” given that the factory’s planned annual battery production capacity is 35 gigawatt-hours (GWh), with one GWh being the equivalent of generating (or 25 consuming) 1 billion watts for one hour. See https://www.tesla.com/gigafactory. 13 26 See http://www.businessinsider.com/tesla-has-to-overcome-a-major-problem-for-its- massive-new-gigafactory-to-succeed-2016-7. 27 14 See https://www.economist.com/node/14299730. 15 28 See http://www.businessinsider.com/tesla-has-to-overcome-a-major-problem-for-its- massive-new-gigafactory-to-succeed-2016-7. 16 Id. 18 Case 3:17-cv-05828-CRB Document 46 Filed 09/28/18 Page 19 of 82 1 98. Tesla signed an official partnership agreement with Panasonic regarding the 2 Gigafactory in July 2014. Panasonic was already previously supplying Tesla with millions of 3 battery cells. Tesla broke ground on construction of the Gigafactory around the same time. 4 99. Tesla has stated that it is building the Gigafactory in phases so it can manufacture 5 immediately inside completed sections, while continuing to expand. 17 When the Gigafactory 6 opened in July 2016, a little more than two years after construction began, construction was 7 approximately 14% complete. Currently, the Gigafactory has a footprint of more than 1.9 million 8 square feet, with more than 4.9 million square feet of operational space across several floors. 9 When finished, the Gigafactory is projected to be the biggest building, by footprint, on the planet.18 10 100. The Model 3 battery was designed differently than the batteries for Models S and 11 X to accommodate the Model 3’s lower price point, with different numbers and configurations of 12 modules and battery cells. The batteries for Models S and X are not produced at the Gigafactory, 19 13 and Tesla has confirmed that Model 3 batteries will not be produced on lines that produce Model 14 S and X batteries, nor will the Company change the design of the Models S and X batteries to 15 incorporate the Model 3’s lithium-ion cell. 20 16 101. Further, batteries of different sizes will be produced for the two versions of the 17 Model 3 (220 mile range and 310 mile range). 21 18 102. At the end of the Class Period, Panasonic CEO Kazuhiro Tsuga confirmed that 19 Model 3 battery pack production was not automated during the Class Period. 22 20 21 22 17 23 Currently, the Gigafactory is less than thirty percent complete. 18 See https://www.tesla.com/gigafactory. 24 19 See “Tesla Batteries 101 – Production Capacity, Uses, Chemistry, & Future Plans,” 25 https://cleantechnica.com/2017/12/02/tesla-batteries-101-production-capacity-uses-chemistry- future-plans/. 26 20 See “Dissecting the Tesla Model 3’s 2170 lithium ion battery cell, what’s inside?” https://www.teslarati.com/inside-tesla-model-3-2170-lithium-ion-battery/. 27 21 See “Tesla Model 3: Performance, specs, and news,” https://www.digitaltrends.com/cars/tesla- 28 model-3-performance-specs-news-rumors/. 22 See https://arstechnica.com/cars/2017/10/production-problems-at-teslapanasonic-gigafactory- may-be-at-an-end/. 19 Case 3:17-cv-05828-CRB Document 46 Filed 09/28/18 Page 20 of 82 1 Failure to Mass Produce the Model 3 Presented an Existential Dilemma for Tesla 2 103. Mass producing the Model 3 before the end of 2017 was critical to Tesla. One 3 March 12, 2018 Bloomberg article stated that “[t]he Model 3 production rate is of existential 4 importance to Tesla.” 23 These pressures motivated Defendants to mislead investors during the 5 Class Period to preserve Tesla’s stock price and its ability to raise money to fund operations. 24 6 104. The Wall Street Journal stated that mass production of the Model 3 was “a make- 7 or-break period in which Tesla must boost production of the Model 3 or possibly face severe 8 financial consequences.” 25 Tesla’s commitment to the Model 3 caused it to spend $4 billion dollars 9 for Model 3 production in 2017, alone. Tesla had to spend cash to ramp up mass production of the 10 Model 3, which it depended upon to increase cash flow and allow the Company to continue its 11 development as an electric vehicle company. 12 105. If Tesla did not mass produce the Model 3, it would fail to bring in the cash 13 necessary to continue funding the Model 3. 14 106. During the July 28, 2017 “handover” event, Defendant Musk told the assembled 15 employees that revenues from sales of the Models S and X were being diverted to the Model 3 16 project (“the money that we make with the S and X all goes into building the Model 3”). In a First 17 Quarter 2017 Update filed by Tesla on May 3, 2017, Defendants stated that “we expect that year- 18 to-date expenditures will be slightly over $2 billion by the start of Model 3 production. In the 19 Second Quarter 2017 Update filed by Tesla on August 2, 2017, the company noted that for the 20 21 22 23 24 23 http://bloomberg.com/news/articles/2018-03-12/tesla-s-production-problems-spawn-a- 25 legion-of-model-3-stalkers. 24 26 On August 7, 2017, Bruce Clark at Moody’s stated that Tesla’s credit “rating could be downgraded if there are major production or quality problems for the Model 3, if consumer 27 demand erodes to the degree that the company cannot maintain its 5,000 per week production target through 2018, or if the level of Model 3 reservations supported by $1,000 deposits fall 28 from the current level of 455,000 to below 350,000.” 25 https://www.wsj.com/articles/teslas-make-or-break-moment-is-fast-approaching- 1521111603?mod=e2tw. 20 Case 3:17-cv-05828-CRB Document 46 Filed 09/28/18 Page 21 of 82 1 Model 3 “capital expenditures should be about $2 billion during the second half of 2017.” 26 Tesla 2 has burned through about $10 billion in cash since 2010. 27 3 107. During an August 2, 2017 earnings conference call (“August 2, 2017 Conference 4 Call”), in a colloquy with JPMorgan Securities LLC analyst Ryan Brinkman, the Company 5 reiterated the importance to 2017 results of cash from mass production of the Model 3. Defendants 6 attempted to put investors at ease about the threat of a cash crunch from a failure to mass produce 7 the Model 3 in 2017: 8 Ryan J. Brinkman - JP Morgan Chase & Co, Research Division - Senior 9 Equity Research Analyst: In just thinking about your liquidity position, 10 while you're operating with more cash than you historically have, $3 billion, 11 I see you're also guiding to $2 billion CapEx in the back half and you 12 previously said $1 billion of gross cash is as low as you're comfortable 13 operating at. So you guide to positive cash from operations the back half, 14 presumably on Model 3 ramp in 4Q. But if it's only a little positive, then I 15 guess you would be close to your targeted cash level. So the question is can 16 you help us size up how positive do you expect the cash from operations 17 to be in the back half? And if that level of cash from operations plus 18 whatever remains available to draw on your asset-backed line, if that's 19 sufficient cushion for you relative to your $1 billion target or whether it 20 might make sense to do another equity raise? 21 Elon R. Musk - Tesla, Inc. - Co-Founder, Chairman, CEO and Product 22 Architect: Yes. Deepak, do you want to... 23 24 Deepak Ahuja - Tesla, Inc. – CFO: Yes, sure, sure, Ryan. So we expect our 25 operating cash flows to be significantly better in the second half compared 26 to the first half. At their highest level, scaling generates cash. 27 26 Tesla repeated this statement in a 10-Q filed on August 4, 2017, stating “we expect to invest 28 approximately $2.0 billion in capital expenditures during the second half of 2017.” 27 https://www.wsj.com/articles/teslas-make-or-break-moment-is-fast-approaching- 1521111603?mod=e2tw. 21 Case 3:17-cv-05828-CRB Document 46 Filed 09/28/18 Page 22 of 82 1 2 Elon R. Musk - Tesla, Inc. - Co-Founder, Chairman, CEO and Product 3 Architect: Yes, it certainly does. 4 108. Later in that same August 2, 2017 Conference Call, Musk elaborated, admitting 5 that: 6 This is just because of Model 3 is fundamentally negative gross margin in 7 the very beginning, because you've got a gigantic machine producing -- that's 8 meant for 5,000 vehicles a week and it's producing a few hundred vehicles a 9 week. 28 10 109. During that same call, Musk emphasized the importance of mass production to 11 Tesla’s short term cash position, and to avoid a future cash crunch. Tesla had set a 25% margin for 12 Model 3 sales, and Musk admitted that until Tesla sold 5,000 Model 3s per week, and then for 13 months after, that margin goal would not be met. 29 14 110. UBS analyst Colin Langan has stated that until Tesla mass produces 5,000 Model 15 3s per month, it will continue burning through cash. 30 Tesla had only $3.4 billion cash in hand at 16 the end of 2017, meaning that burning through $4 billion without mass production had created a 17 cash crunch, and failure to mass produce the Model 3 in 2018 would require Tesla to raise funds 18 through debt or equity markets, which would be made more difficult if investors lost confidence 19 in the Company’s ability to quickly mass produce Model 3s and the stock price fell. 31 20 111. Tesla’s existential dilemma is also due to the fact that it is quickly losing any 21 advantage it once had for being first on the market, as far more experienced competitors are 22 investing billions of dollars to compete with Tesla, and some have actually beat Tesla to market 23 24 28 25 Musk made this comment during the third quarter of 2017. At no point in that quarter did Tesla produce “a few hundred vehicles a week.” Model 3 production averaged less than 3 vehicles per 26 day during the third quarter of 2017. 29 During the call, Musk further reassured that the investments made are “taking us to 5,000 and 27 beyond [in Model 3 production].” 30 28 https://www.wsj.com/articles/teslas-make-or-break-moment-is-fast-approaching- 1521111603?mod=e2tw. 31 Id. 22 Case 3:17-cv-05828-CRB Document 46 Filed 09/28/18 Page 23 of 82 1 with affordable electric vehicles. These facts further underline the need for Tesla to mass produce 2 the Model 3 quickly. 3 112. Daimler AG, owner of Mercedes-Benz, announced in the third quarter of 2017 that 4 it would invest $1 billion to produce electric vehicles in the United States.32 Porsche is investing 5 $7.4 billion in electric cars, developing and selling not only electric vehicles but “new 6 technologies, charging infrastructure and smart mobility.” 33 General Motors announced in 2017 7 that it will sell two fully electric models in 2018, and at least 18 more by 2012. 34 Further, GM is 8 establishing significant footprints in countries Tesla has hardly reached, with plans to launch ten 9 electric vehicles in China by 2020. 35 Hyundai has plans to sell the Kona, an electric vehicle with 10 a 292 mile range, which is designed to “battle the Chevy Bolt EV, Nissan Leaf and Tesla Model 11 3.” 36 In July 2017, Volvo announced that as of 2019, every car Volvo produces will have a version 12 that runs on electric power. 37 Toyota has announced similar plans for all its vehicles by 2025. 38 13 113. Competitors already market and mass produce electric vehicles, selling a higher 14 number of affordable electric vehicles than Tesla. GM sells its Chevy Bolt EV for $33,000. Chevy 15 has sold over 130,000 of its Volt model, and over 25,000 Chevy Bolts. Chevy sold nine times as 16 many Bolts as Tesla sold Model 3s in the final quarter of 2017. 39 Nissan sold approximately 50,000 17 of its electric Leaf vehicle in 2016. Privately owned Chinese manufacturer BYD (“Build Your 18 Dreams”), which also makes battery cells, is partially owned by Warren Buffett, and has a joint 19 venture with Mercedes-Benz, sold more electric cars in 2015, 2016, and 2017 than any company, 20 21 22 32 https://www.bloomberg.com/news/articles/2017-09-21/mercedes-plots-tesla-attack-with-1- 23 billion-u-s-electric-push. 33 https://www.theverge.com/2018/2/5/16975752/porsche-electric-cars-investment-smart- 24 mobility. 34 25 https://www.wired.com/story/general-motors-electric-cars-plan-gm/. 35 Id. 26 36 https://www.cnet.com/roadshow/news/hyundai-kona-electric-ev-new-york-auto-show-suv/. 27 37 https://www.wired.com/story/volvos-electric-car-plan/. 38 28 https://electrek.co/2017/12/18/toyota-electric-car-plans/. 39 https://seekingalpha.com/article/4135148-december-sales-general-motors-chevy-bolt-ev- outsold-tesla-model-3-3-1. 23 Case 3:17-cv-05828-CRB Document 46 Filed 09/28/18 Page 24 of 82 1 including Tesla. 40 Internationally, as of July 2017, i.e., during the Class Period, more than 30 fully 2 electric vehicles were available on the international market. 41 3 114. With all of these competitive pressures bearing down on Defendants Musk and 4 Tesla, during the Class Period, Defendants repeatedly told investors and analysts that actual 5 already-existing progress, i.e., facts on the ground, supported that Tesla could and would mass 6 produce the Model 3 before the end of 2017. Each of Defendants’ statements about Tesla’s actual 7 progress towards mass production of the Model 3 was knowingly or recklessly false. 8 115. On May 3, 2017, after the close of the market, Tesla filed with the SEC its “Tesla 9 First Quarter 2017 Update” as Exhibit 99.1 to an 8-K. Defendants Musk and Ahuja signed the 10 Update. Directly referencing actual facts on the ground with respect to completion of the 11 automated line meant to produce the Model 3, i.e., progress that could be seen, the Company stated 12 that: 13 [P]reparations at our production facilities are on track to support the ramp 14 of Model 3 production to 5,000 vehicles per week at some point in 2017, and 15 to 10,000 vehicles per week at some point in 2018. 42 16 116. Later that same day, during the May 3, 2017 Conference Call, Defendant Musk 17 engaged in a colloquy with Deutsche Bank AG analyst Rod Avraham Lache. Again, Musk stated 18 that based on what had been achieved to date, nothing would stop mass production of the Model 19 3 in 2017: 20 Lache: A couple remaining questions. Just one is, since the Model 3 is maybe 21 2 or 3 months away, could you just give us a sense of what some of the most 22 critical outstanding items are that are going to gate the commercial launch 23 timing? And now that there are actual physical test vehicles on the road, are 24 there any significant changes happening? 25 Musk: Well, actually it seems to be -- we're not really seeing any significant 26 27 40 https://www.greencarreports.com/news/1115398_chinas-byd-tops-global-electric-car- production-for-third-year-in-a-row. 28 41 https://www.wired.com/story/volvos-electric-car-plan/. 42 Emphasis added unless otherwise noted. 24 Case 3:17-cv-05828-CRB Document 46 Filed 09/28/18 Page 25 of 82 1 change that needs to occur with Model 3. So it's coming in as expected, as 2 the design continuation has predicted, it's getting pretty close to the bull's-eye, 3 and I'm not aware of anything that would affect our prior statements about 4 volume target. 5 Lache: So there's nothing outstanding vis-à-vis tooling, deliveries or things 6 like that, that you're still viewing as a critical item with some uncertainty? 7 Musk: There's plenty of things with uncertainty, but I don't know anything 8 that would prevent us from starting firstly in July, and exceeding 5,000 9 units per week by the end of the year. There may be some cost up there, I just 10 don't know of what that is today. 11 117. In fact, as described in detail below, Musk was personally aware of existing facts 12 that prevented Model 3 mass production in 2017. 13 118. Just a week later, on May 10, 2017, the Company struck again in the first quarter 14 2017 10-Q, reassuring analysts and investors that progress on the ground was going as planned for 15 mass production in 2017: 16 In the first quarter of 2016, we unveiled Model 3, a lower priced sedan 17 designed for the mass market. Model 3 vehicle development is nearly 18 complete as we approach the start of initial production in July of this year. 19 Release candidate vehicles, built using production-intent tooling and 20 processes, are being tested to assess fit and finish, to support vehicle software 21 development and to ensure a smooth and predictable homologation process. 22 Road testing is also underway to refine driving dynamics and ensure vehicle 23 durability. Simultaneously, preparations at our production facilities are 24 progressing to support the ramp of Model 3 production to 5,000 vehicles per 25 week at some point in 2017 and to 10,000 vehicles per week at some point in 26 2018. We are working closely with all Model 3 suppliers to ensure their 27 readiness ahead of the start of production. 28 119. In the same May 10, 2017 first quarter 2017 10-Q, reporting on developments that had occurred in the first quarter of 2017, the Company told investors that “[i]n the first quarter of 25 Case 3:17-cv-05828-CRB Document 46 Filed 09/28/18 Page 26 of 82 1 2016, we announced our target to increase overall vehicle production level to 500,000 vehicles in 2 2018. We have started the installation of Model 3 manufacturing equipment at the Fremont 3 Factory and Gigafactory 1, and we are on-track for start of Model 3 production in July 2017.” 4 120. The first quarter 2017 10-Q also specifically stated that things were already going 5 well at the Gigafactory to support mass production of the Model 3 in 2017, with the Company 6 writing: Although we continue to remain on track with our progress at Gigafactory 1…. 7 121. At no point in May 2017 did Musk or the other Defendants even hint that 8 preparations for mass production of the Model 3 by the end of 2017 were lagging behind their own 9 production plan, or otherwise of concern. 10 122. Analysts believed Defendants. In a May 4, 2017 analyst report from Oppenheimer, 11 analyst Colin Rusch noted that with respect to the Model 3, “progress on manufacturing to date is 12 performing ahead of our expectations.” 13 123. Similarly, a Deutsche Bank analyst stated on May 4, 2017, without reservation, that 14 “Tesla remains confident in the launch timing of Model 3, with production expected to begin in 15 July. They still expect to reach a production run rate of 5k/week at some point in 2017….” 16 124. At the July 28, 2017 “handover event,” televised online, where Tesla “handed over” 17 the first 30 Model 3s to buyers, Musk assured investors (falsely) that automated production of the 18 Model 3 had begun, stating “there’s actually a total of 50 production cars that we made this 19 month….” Following the July 28, 2017 “handover” event, analysts again expressed confidence in 20 Defendants’ statements that already-existing progress meant Tesla was on-target for mass 21 production in 2017. In a July 30, 2017 KeyBanc Capital Markets analyst report, analyst Brad 22 Erickson even reprinted a chart Musk projected to employees on July 28, 2017, building on Musk’s 23 assertion that automated production began on schedule in July 2017, and showing production 24 reaching 5,000 Model 3s per week in 2017, or after a 6-month ramp-up. 25 125. In fact, the 50 Model 3s were not “production cars,” a term of art in the automotive 26 industry. By using this phrase, Musk was conveying to analysts and investors that the cars had 27 been produced on automated lines, when every part of those Model 3s had actually been built by 28 hand, and Tesla was not even close to automated production of the Model 3. 26 Case 3:17-cv-05828-CRB Document 46 Filed 09/28/18 Page 27 of 82 1 126. When the Company spoke to the public again, in August 2017, Defendants 2 continued telling the public that progress that had already occurred in Fremont and at the 3 Gigafactory supported Model 3 mass production before the end of the year, statements augmented 4 by the fact that in August the Company stated that it was already producing Model 3s at sufficient 5 rates. 6 127. On August 2, 2017, Tesla filed with the SEC “Tesla Second Quarter 2017 Update” 7 as Exhibit 99.1 to an 8-K. Defendants Musk and Ahuja signed the Update. Directly referencing 8 actual facts on the ground with respect to completion of the automated line meant to produce the 9 Model 3, a line which was supposedly already producing cars, the Company stated, based on 10 current production line advancement, that: 11 Based on our preparedness at this time, we are confident we can produce 12 just over 1,500 vehicles in Q3, and achieve a run rate of 5,000 vehicles per 13 week by the end of 2017. 14 128. Later that same day, during the August 2, 2017 Conference Call, Defendant Musk, 15 in prepared remarks, again referenced production achievements that had progressed as planned, 16 stating that: 17 And we remain – we believe on track to achieve a 5,000 unit week by the 18 end of this year. 19 So, I would certainly urge people not to get too caught up in what exactly falls 20 within the exact calendar boundaries of a quarter, one quarter over the next, 21 because when you have an exponentially growing production ramp, slight 22 changes of a few weeks here or there can appear to have dramatic changes, 23 but that is simply because of the arbitrary nature of when a quarter ends. 24 …. 25 And then we – with Model 3, even more vertically integrated. I think people 26 should really not have any concerns that we will reach that outcome [10,000 27 cars per week by the end of 2018] from a production rate. 28 129. Again during the August 2, 2017 Conference Call, in prepared remarks, Defendant Musk told investors that events that had already transpired at the Gigafactory, which by this time 27 Case 3:17-cv-05828-CRB Document 46 Filed 09/28/18 Page 28 of 82 1 was supposed to be producing batteries on a production line to meet the stated mass production 2 goal, were in-line with the stated expectations, stating: “[a]nd then batteries – also making great 3 progress on the battery front.” 4 130. Analysts again credited the Company’s statements about progress as they related to 5 meeting the mass production goal. Deutsche Bank Market Research, in an August 2, 2017 report 6 entitled “Tesla’s Outlook Bullish vs. Expectations,” specifically noted that Tesla had stated that 7 already-completed progress drove their confidence in 2017 mass production, writing that “Tesla’s 8 management sounded very confident in their level of preparedness to achieve production targets. 9 The analyst continued that “the combination of higher margins and a faster production ramp would 10 have significant positive implications for earnings and cash flow.” 11 131. Analyst Guggenheim, in an August 3, 2017 report recommending that investors 12 “buy” Tesla stock, were also convinced that progress on the ground was already occurring on pace, 13 writing “Tesla’s economic model remains all about Model 3…. Model 3 began production in July, 14 hitting a target we do not believe most thought would even be met just 3-6 months ago….” 15 Defendants Made Clear their Production Plan for Mass Producing the Model 3 in 2017 16 132. In May, 2016, FE1, drawing on his experience, told Musk directly that there was 17 zero chance that the plant would be able to produce 5,000 Model 3s per week by the end of 2017. 18 Since, as of FE1’s departure in June 2016, Tesla did not yet even have a finalized design for the 19 Model 3, Tesla could not release information so molds for body parts could be built. Molds take 20 from 9-12 months to make. Tesla had not yet begun ordering manufacturing equipment to be 21 installed at the Fremont plant. The timeline for functioning manufacturing equipment includes 1- 22 2 months to seek bids and negotiate contracts with suppliers, 6 months to manufacture equipment, 23 6 months to install the equipment in the Fremont plant, and 6 months to get the equipment working 24 up to speed. Thus, the automated assembly line for the Model 3 could not possibly mass produce 25 cars in 2017. FE1 also told Musk that there was not enough room in the Fremont facility for 26 equipment to produce 5,000 cars per week, and that expansion would be necessary. For his 27 honesty, Musk told FE1 to leave the company. 28 133. In fact, Tesla’s public statements made clear that they agreed with virtually all of FE1’s production plan, and that it was their production plan. 28 Case 3:17-cv-05828-CRB Document 46 Filed 09/28/18 Page 29 of 82 1 134. In the first quarter 2017 10-Q, Defendants stated that in the first quarter of 2017 2 “[w]e have started the installation of Model 3 manufacturing equipment at the Fremont Factory 3 and Gigafactory 1, and we are on-track for start of Model 3 production in July 2017.” 4 135. Defendants thus largely, and publicly, corroborated FE1’s production plan: 5 • 4-6 months to install equipment, clear from Defendants’ statements that installation 6 starting in Q1 2017 was necessary to begin production in July 2017; 7 • Further, 6 months from the beginning of automated production, in July 2017, to 8 ramp up to automated mass production, by the end of December 2017; 9 • This schedule is virtually identical to what FE1 told Musk in mid-2016. 10 136. Finally, Defendants were belatedly forced to accept as true what Musk rejected, 11 that the Fremont facility was not large enough to house production equipment to mass produce the 12 Model 3. In June 2018, Tesla built a large open-air tent with a third Model 3 production line. Musk, 13 admitting that FE1 was correct that the Fremont main facility was inadequate for mass production, 14 tweeted “[n]eeded another general assembly line to reach 5k/week Model 3 production. A new 15 building was impossible, se we built a giant tent in 2 weeks.” 43 16 137. With a publicly stated production plan, the veracity of Tesla’s “on track” statements 17 can only be understood, simply, to be false. If installation began in the first quarter and was 18 complete by July, and if automated production began in July, then the Company would have been 19 “on track.” Reality, however, which was as obvious to Musk and Defendants as it was to the 20 workers in Fremont and in the Gigafactory, showed that none of the publicly stated production 21 plan points had been achieved, or even come close to being achieved, and Defendants knew they 22 were not “on track” for 2017 mass production. 23 Eyewitness Statements from Tesla’s Fremont and Gigafactory Employees Show that 24 Defendants Knew that they Would Not Mass Produce the Model 3 in 2017 25 138. Tesla’s own former employees confirm what was obvious to the naked eye. 26 Installation of production equipment did not begin in the first quarter of 2017. Automated 27 production did not begin in July 2017, and, indeed, did not begin for a long time afterwards. 28 43 https://electrek.co/2018/06/19/tesla-model-3-assembly-line-inside-tent-elon-musk/. 29 Case 3:17-cv-05828-CRB Document 46 Filed 09/28/18 Page 30 of 82 1 Defendant Musk’s own executives told Musk personally, as far back as mid-2016, that there was 2 zero chance of mass producing the Model 3 in 2017. Former Employee (“FE”) 1 was Director of 3 Manufacturing at Tesla’s Fremont plant from December 2012 to June 2016. He reported directly 4 to Josh Ensign, Vice President of Manufacturing, and FE1 also reported directly to Musk. 5 139. FE1 was responsible for the planning for manufacturing capabilities, as well as for 6 production for the Model 3. FE1’s area of concentration was plastics and coating, known as the 7 “accordion shop” because it is the part of the production process in-between building the body of 8 the car and assembling the rest of the car. FE1 was required to know what was happening in both 9 the processes upstream and downstream from the “accordion shop.” 10 140. Sometime in late April or early May of 2016, FE1 participated in a meeting with 11 Musk, CFO Jason Wheeler, 44 and the Vice President of Engineering. FE1 stated that during that 12 meeting, he told Musk directly that there was zero chance that the plant would be able to produce 13 5,000 Model 3s per week by the end of 2017. 14 141. FE1 stated that there were many reasons why Tesla would never be able to produce 15 5,000 Model 3s per week by the end of 2017, all known as of April or May of 2016. As of FE1’s 16 departure in June 2016, Tesla did not yet even have a finalized design for the Model 3, so Tesla 17 could not release information so molds for body parts could be built. Molds take from 9-12 months 18 to make. 19 142. FE1 further stated that Tesla had not yet begun ordering manufacturing equipment 20 to be installed at the Fremont plant. The timeline for functioning manufacturing equipment 21 includes 1-2 months to seek bids and negotiate contracts with suppliers, 6 months to manufacture 22 equipment, 6 months to install the equipment in the Fremont plant, and 6 months to get the 23 equipment working up to speed. Thus, the automated assembly line for the Model 3 could not 24 possibly even be mass producing cars in 2017. 25 143. FE1 told Musk directly at the meeting that the start of manufacturing would be at 26 least 6 months later than July 2017, i.e., in 2018. FE1 further told Musk that Tesla needed to expand 27 the area needed at the Fremont plant to prepare the body of the Model 3. Musk rejected this idea. 28 44 Wheeler both followed and preceded Defendant Ahuja as CFO. 30 Case 3:17-cv-05828-CRB Document 46 Filed 09/28/18 Page 31 of 82 1 144. At the conclusion of the April or May 2016 meeting, Musk told FE1 that he should 2 look for new employment. FE1 resigned from Tesla because of the false timeline for the Model 3. 3 FE1 stated that it was obvious to everyone in the factory that Tesla would not be producing 5,000 4 cars per week by the end of 2017. 5 145. FE1 stated that Ensign, the Vice President of Manufacturing, also told Musk 6 directly that the Company would never be able to meet Musk’s unrealistic timeline for production 7 of 5,000 Model 3s per week by the end of 2017. FE1 stated that Musk then forced Ensign out of 8 the Company. Ensign left Tesla in May 2016. 9 146. After his resignation, FE1 has continued to speak with former colleagues at Tesla 10 in positions giving them access to the information FE1 now reports. FE1 learned recently that 11 Musk is now expanding the manufacturing area for the Model 3, as well as taking other steps FE1 12 recommended, and Musk rejected, during FE1’s tenure at Tesla. 13 147. FE1 stated that as Musk knew the announced production timeline was false, he was 14 not telling the truth to the public when he stated that current conditions meant that 5,000 Model 3s 15 per week would be manufactured by the end of 2017. 16 148. FE2 was a Senior Project Engineer in Material Flow Engineering for the Model 3 17 at Tesla’s Fremont plant from April 2014 to June 2016. FE2 reported to Govin Ranganathan, 18 Engineering Manager, Material Flow Engineering, and to Kevin Vliet, Director, Material Flow 19 Engineering. Vliet reported to Greg Reichow, Vice President of Production between June 2013 20 and July 2016. Reichow reported directly to Elon Musk. 21 149. FE2’s job was to conceptualize, plan and discuss solutions with suppliers for parts 22 of the production line for the Model 3. FE2 focused on areas of the production line for assembly, 23 receiving the battery packs, and distribution of car parts into and out of the warehouse. 24 150. FE2 and her team dealt with numerous suppliers who would be building and/or 25 installing the equipment, automation and robots that would comprise parts of the Model 3 26 production line. FE2 stated that as of June 2016, FE2 and her team had not yet even finalized their 27 plans for the production line, nor settled on all of the suppliers for the equipment and/or solutions. 28 151. FE2 stated that Tesla’s Model 3-related suppliers, including Ilseman, Intelligrated, and Thematic, told Tesla that the timelines Tesla wanted them to meet were “impossible,” and 31 Case 3:17-cv-05828-CRB Document 46 Filed 09/28/18 Page 32 of 82 1 could not be met. FE2 stated that in conversations with colleagues for other sections of the as-yet 2 unbuilt production line, those colleagues told FE2 that suppliers they were dealing with were 3 telling them the exact same thing. 4 152. When FE2 left Tesla in June 2016, construction of the production line for the Model 5 3 had not yet begun. FE2 described the production concept for most of the different sections of the 6 line as more “conceptual” than practical through the end of FE2’s tenure at Tesla. 7 153. When FE2 left Tesla in June 2016, only one company had a completed contract 8 with Tesla to supply equipment for the production line. 9 154. FE2 stated that everyone, including FE2, knew that the Company would not be 10 producing 5,000 Model 3s per week by the end of 2017. FE2 stated that it would take 18-24 months 11 to construct the system and get it up and running and ready for production to begin. Suppliers were 12 telling FE2 that lead times for obtaining materials for the equipment, and then building the 13 equipment, was at least six months. FE2 stated that delivering, installing, and programming the 14 line in the Fremont facility would take at least an additional six to twelve months. Another several 15 months would be needed to work the bugs out of the production line. 16 155. Further, FE2 stated that Tesla would be dealing with hundreds, or thousands, of 17 vendors, each with a different role in building the assembly line. Suppliers were telling FE2 and 18 Tesla that having to share the space with other workers carrying out different tasks would 19 complicate their ability to complete their work timely, and that as workers with different 20 responsibilities would be working in the same space at the same time, the process would take even 21 longer. 45 22 156. FE2 reported to her supervisors what suppliers were saying about their lead times 23 for the equipment and their inability to meet Tesla’s timelines. FE2 stated that Tesla was aware of 24 these timelines and difficulties. FE2 stated that based on FE2’s and Tesla’s experience in building 25 the production line for the Models S and X, Defendants understood how difficult and time- 26 consuming the process would be. 27 28 45 On July 28, 2017, at the “handover” event, Musk confirmed FE2’s statement about the number of parts and vendors, stating that “there are 10,000 unique parts in a Model 3, and these are coming from all over the world.” 32 Case 3:17-cv-05828-CRB Document 46 Filed 09/28/18 Page 33 of 82 1 157. When FE2 left Tesla in June 2016, FE2’s team had not yet finalized plans for 2 building the production line, or settled on all of the suppliers for equipment and/or solutions. Based 3 on conversations FE2 had after FE2’s departure from Tesla with former colleagues who were still 4 employed by Tesla and in positions to know the information FE2 reports, the plans for the 5 production line were still not finalized as of July or August of 2016. 6 158. By 2017, just before and during the Class Period, the detailed warnings from FE1 7 and FE2, some spoken directly to Musk himself, were proving to be true. Even as Defendants 8 bragged, during the Class Period, about progress that had already been achieved on Tesla’s most 9 important project, the reality in Fremont and at the Gigafactory was far more grim, and visible to 10 anybody visiting the facilities. 11 159. FE3 worked at Tesla from August 2012 to Oct. 18, 2017, or nearly through the end 12 of the Class Period. FE3 began employment as a production associate in Fremont, was promoted 13 to Team Leader, and in October 2015 was promoted to Production Supervisor - General Assembly 14 for Tesla’s luxury Models S and X at the Fremont factory. As a Production Supervisor, FE3 15 reported to Corey Shaw, Assistant Manager. Shaw reported to Ventura Diaz, Unit Leader, who 16 reported to Mario Panera, Production Manager - General Assembly at Tesla. FE3 stated that the 17 Model 3 production line was constructed in the same building as Models S and X. 18 160. From FE3’s vantage point working as a Production Supervisor, every day, FE3 19 could observe the section of the uncompleted Model 3 assembly line where Tesla constructed the 20 chassis, including the battery pack, suspension, and brake hubs. During the entirety of his 21 employment, until October 18, 2017, FE3 never saw a single Model 3 being constructed on the 22 assembly line. 23 161. FE3 stated that the only personnel on the Model 3 assembly line were construction 24 and engineering personnel, responsible for designing and building the line. 25 162. FE3 stated that the Model 3 production line was not yet operational when he left 26 the company in mid-October 2017. FE3 noted that had cars been produced on the Model 3 27 assembly line, FE3 would not only have seen the automated production line actually working, but 28 would also have seen some of the vehicles in what was called the “yard,” an area where cars 33 Case 3:17-cv-05828-CRB Document 46 Filed 09/28/18 Page 34 of 82 1 needing a part or system tweaked, e.g., an air leak in a window seal, were placed after being 2 removed from a working assembly line. 3 163. As of his departure in October 2017, FE3 stated that the Model 3’s “body in white 4 line,” where the vehicle’s body was welded together, was not operational. That section of the 5 factory was still fenced off when FE3 left. 6 164. An October 6, 2017 Wall Street Journal article confirms FE3’s observations and 7 knowledge about the “body in white line.” In the October 6, 2017 article, entitled “Behind Tesla’s 8 Production Delays: Parts of Model 3 were Being Made by Hand,” 46 the Journal reported that it 9 interviewed multiple workers who stated that: 10 equipment for the so-called body-in-white line for the Model 3, where the 11 car body’s sheet metal is welded together, wasn’t installed until by around 12 September. They guessed at least another month of work remained to 13 calibrate the tools. 14 165. FE3 stated that it was common knowledge at the Fremont facility that construction 15 and assembly of the automated production line for the Model 3, whose assembly only started 16 towards the very end of FE3’s tenure at Tesla, was delayed, and not yet completed. 17 166. FE3 further stated that around September 2017, the Company began terminating 18 many employees working on the Model 3 production team. FE3 attributed these terminations to 19 the production delays, as since the production line was not operational, the Company did not need 20 large numbers of production employees. FE3 estimated that the company terminated the jobs of 21 about 200 employees in the period shortly before FE3 ceased working at Tesla. 47 22 167. FE3 also reported a startling fact, not evident from any of Defendants’ statements: 23 during the Class Period, Model 3s were not being made at all on an automated line. Rather, they 24 46 25 https://www.wsj.com/articles/behind-teslas-production-delays-parts-of-model-3-were-being- made-by-hand-1507321057 26 47 FE3’s recollection about mass firings is correct. Fortune.com reported that in early October, 2017, Tesla fired 400-700 workers, including in Fremont. See “Tesla Fires Hundreds of Workers 27 After Their Annual Performance Review, http://fortune.com/2017/10/13/tesla-fires-employees/. Many of the fired workers alleged that they were laid off, unrelated to performance reviews. See 28 “Tesla Employees Detail how they Were Fired, Claim Dismissals Were Not Performance Related,” https://www.cnbc.com/2017/10/17/tesla-firings-former-and-current-employees- allege-layoffs.html. 34 Case 3:17-cv-05828-CRB Document 46 Filed 09/28/18 Page 35 of 82 1 were produced in Fremont’s “beta” or “pilot” shop, which is where prototypes and test versions of 2 the Model 3 were constructed. 3 168. Multiple former Tesla employees confirm this claim. FE4 was a Manufacturing 4 Engineer working on production of the Model 3 from March 2017 to June 2017. FE4 worked in 5 the pilot shop, and reported to Richard Castro, supervisor of the pilot shop. The pilot shop is located 6 in an extension of the main building in Fremont, separated from the main building by a wall and 7 door. The pilot shop was where Model 3 prototypes, or test cars, were built. 8 169. FE4 was a “process owner” of an area of assembly of the Model 3. The process 9 owner was the team leader during a particular shift. 10 170. FE7 also worked in the pilot shop, from February 2017 through the end of June 11 2017, during the same shift as FE4. FE7 was hired through a temp agency, and was responsible 12 for welding together the outer layers of the Model 3. FE7 reported to supervisor Richard Castro, 13 who reported to Mike Lazaro. 14 171. FE4’s team was responsible for the first part of the assembly process of the Model 15 3, installing all of the fasteners, including screws, bolts, and nuts. As “process owner” other team 16 members came to FE4 for parts, questions, and to report problems. FE4 reported to a manager on 17 behalf of the team, and spoke with the leader of the next shift at the end of FE4’s shift. 18 172. When FE4 left in June 2017, after Defendants had already told investors that 19 advancement in the Fremont facility and at the Gigafactory showed that the Company was “on 20 track” to mass produce the Model 3 in 2017, FE4 states that all Model 3s were being constructed 21 in the pilot shop, mostly by hand. A total of 120-130 Model 3s had been built. The pilot shop 22 typically completed 3-5 skeletons of cars per day, with a target of 15-20 per week. The finishing 23 touches were completed in another area, and that work was also done mostly by hand, and not on 24 the automated production line that was still under construction. FE4 stated that the number of 25 production associates in the pilot shop far exceeded the personnel needed to produce the small 26 number of Model 3s actually produced. Production associates sometimes spent their entire shifts 27 cleaning, and some were loaned to the Models S and X production lines. 28 173. FE7 confirmed that through June 2017, Model 3s were still being built by hand in the pilot shop. FE7 further confirmed that in FE7’s last month of employment, the pilot shop was 35 Case 3:17-cv-05828-CRB Document 46 Filed 09/28/18 Page 36 of 82 1 producing 10-15 Model 3s per week. Those vehicles were used for testing, displays and 2 presentations. 3 174. As a process owner, FE4 regularly entered the main factory area where the Model 4 3 automated line was under construction, in order to obtain parts from inventory. FE4 further 5 passed the area where the automated production line was being constructed each day in order to 6 get to her work area. FE4 was able to observe the construction progress on the automated line on 7 a daily basis. 8 175. During FE4’s tenure at Tesla, which overlapped with the Class Period, the fully 9 automated line for producing Model 3s was never in operation, as it was still under construction. 10 FE4 said that the delays were openly visible to anyone in the factory who saw the production line. 11 176. FE4 stated that construction of the permanent line was significantly delayed. FE4 12 spoke with the workers constructing the automated line, who stated that the line was not even close 13 to being completed, and that it would not be completed in 2017, and perhaps not until as late as 14 May 2018. Tesla was not providing the workers constructing the line with instructions in an 15 efficient manner. These workers often had no work to do, as it was assigned to them on a day-to- 16 day basis, and no work to do after the mid-point of their shifts. 17 177. Mauricio Gonzalez, the engineering technician who oversaw FE4’s team, told FE4 18 during an informal conversation that the new projection for completion of the automated line was 19 in 2018. FE4 also heard pilot shop supervisors state that the projection was a 2018 finish date, 20 including during an informal conversation with supervisor Castro. FE4 further named Mike Lazaro 21 and Curtis Hutchins as managers who were contemporaneously aware of delays of the Model 3 22 production. 23 178. FE7 stated that the engineers building the production line spoke with his managers, 24 including Castro and Lazaro, about the progress of the automated line. FE7 stated that it was 25 commonly known by even the lowest ranked employees that the production line was in the very 26 early stages of construction, as construction had not begun until April or May 2017, and was 27 nowhere near completion. 28 179. FE5 was a Robot Programmer on the Model 3 production line at Tesla’s Fremont plant from June or July 2017 to September 2017. FE5 worked for Chicago Robot Works (“CRW”), 36 Case 3:17-cv-05828-CRB Document 46 Filed 09/28/18 Page 37 of 82 1 which was a subcontractor to Comau, an Italian multinational specializing in industrial automation. 2 Tesla hired Comau to install the automated machinery and robotics for the Model 3 production in 3 Fremont. FE5 reported directly to a Comau supervisor. 4 180. CRW and Comau were already installing the automated robotics for the Model 3 5 production line at the Fremont plant when FE5 arrived in June or July 2017. Installation was not 6 yet complete. 7 181. FE5’s job was to pre-program and program robots on the “body shop” section of 8 the production line, where Model 3 body parts would be welded together. FE5 worked amongst, 9 but not with, Tesla engineers. FE5 estimated that the body shop production line alone had about 10 100 robots. 11 182. When FE5 left Tesla’s facility in early September 2017, the body shop for the 12 Model 3 was not yet fully automated, nor was it near completion. It was unclear how much more 13 time would be necessary to achieve full automation of the body shop, though based on his 14 knowledge of the requirements, FE5 estimated that the full production line was approximately 15 45% finished. 16 183. FE5 stated that some robot parts for which Tesla was awaiting delivery when he 17 first arrived at the facility had still not arrived when he left in September 2017. FE5 understands 18 that the parts supplier for the robots being installed in the Fremont facility was itself waiting for 19 parts to be delivered to it. 20 184. FE5 did not know where Model 3s were being built since the full production line 21 was not near completion. However, FE5 stated that Model 3s were not being built in the building 22 where the automated production line for the Model 3 was being installed. 23 185. FE6 worked on the Processing and Manufacturing teams for the Model 3 at Tesla’s 24 Fremont plant from May 2016 to January 2017. FE6 reported to Shawn Hensen, Manager of Body 25 Engineering, and to Matt Higgins, Manager of Body Advanced Engineering. 26 186. Beginning in July 2016, FE6 worked in the pilot shop helping to build the rear 27 underbody of the car. FE6 said that between mid-2016 and early 2017 the team in the pilot shop 28 was building Model 3 test cars, called the C-Sample (previous versions were called the B-Sample), that would be put through various manufacturing and functional tests as part of finalizing the 37 Case 3:17-cv-05828-CRB Document 46 Filed 09/28/18 Page 38 of 82 1 Model 3 design for mass production. FE6 thus confirms FE1’s statement that as of July 2016, Tesla 2 did not yet even have a finalized design for mass production of the Model 3. 3 187. FE6 stated that in or around September 2016, the manufacturing team was told to 4 make twenty C-Samples that would be sent for crash tests, tests for installation and functionality 5 of the battery pack and tests of paint coating, among others. The goal of making 20 C-samples was 6 later reduced to making just 3 C-Samples, because the stamping department, which supplied many 7 of the parts, only produced enough parts to make that many. 8 188. FE6 stated that most large car manufacturers outsource the stamping to mass 9 production plants in China, but Tesla was doing it in-house. The Company, therefore, faced big 10 delays whenever a machine went down or it could not produce sufficient quantities of what was 11 needed. FE6 stated that Tesla used data from B-samples in lieu of the necessary testing to finalize 12 the Model 3 design. 13 189. FE6 stated that during FE6’s last several months at Tesla, everyone at the Fremont 14 plant, including Musk, was aware that the Company would not be able to produce 5,000 Model 3s 15 a week by the end of 2017, and that the timeline was unrealistic. 16 190. FE6 recalled a conversation with William Zochodne, a senior manufacturing 17 engineer who attended meetings with Musk. Zochodne expressed that the deadlines for production 18 were unrealistic, and wondered aloud when Musk would change the timeline and admit that 19 producing 5,000 Model 3s per week in 2017 would not happen. 20 191. The lack of progress in completing automated production lines, necessary for 21 achieving mass production of the Model 3, was not a surprise to Defendant Musk, as Musk 22 regularly visited the Fremont facility. 23 192. FE3 stated that Musk visited the Fremont factory every Wednesday, and that 24 Wednesdays were referred to internally as “Elon Day.” FE3 stated that in advance of Musk’s visits, 25 Unit Leaders sent group texts alerting employees that Musk would be visiting, and included 26 reminders/instructions such as “make sure your areas are clean. The boss is here.” FE3 saw Musk 27 in the factory meeting room on numerous occasions. 28 38 Case 3:17-cv-05828-CRB Document 46 Filed 09/28/18 Page 39 of 82 1 193. FE3 understood that after it was clear that Model 3 production and the production 2 line itself were delayed, Musk convened a meeting where Musk yelled at Model 3 managers about 3 the delays. 4 194. FE2 confirmed that Musk visited the Fremont plant once a week, on Wednesdays, 5 to speak with lead employees about the Models S, X and 3. FE2 stated that FE2’s superiors were 6 informed of what the suppliers told FE2. FE2 understood that those concerns were raised with 7 Musk by superiors during Musk’s visits to the Fremont facility. 8 195. FE6’s desk was in close proximity to employee meeting rooms, and FE6 saw Musk 9 regularly, for meetings with plant directors from engineering, manufacturing and other 10 departments to discuss, among other things, Comau’s budget for installing the production line 11 robots and the timeline for when the line could be up and running. 12 196. Despite Musk’s statement to investors during the Class Period that battery 13 production at the Gigafactory was making “great progress,” the production problems in Nevada 14 were at least as dire as those in Fremont, and it was plain to anybody visiting the Nevada facility 15 that Tesla would not mass produce batteries for the Model 3 in 2017. 16 197. FE8 was a Quality Technician who trained Line Inspectors at the Gigafactory in 17 Nevada, from January of 2014 through September 2017, through most of the Class Period. FE8 18 reported to a manager, Guillermo Gutierrez, and to a supervisor, Anthony D’Amico. 19 198. FE8 stated that each Model 3 battery pack consisted of four modules, each of which 20 was approximately 5-6 feet long. Each module contained approximately 20,000 batteries that were 21 glued together. Workers were required to inspect alignment of the batteries and measure and test 22 the coolant tubes. 23 199. FE8 stated that each Model 3 module was vertically aligned in order for the pack 24 to be placed in the bottom of the vehicle. The battery pack was designed to run the length of the 25 car, from the rear wheels to the front wheels. The battery pack consisted of a clamshell on top, and 26 other wiring and bonding. A bandolier, produced at the end of the assembly line, secured the 27 batteries in the enclosure. 28 200. FE8 stated that the batteries and modules were required to pass several inspection stages, and that there was a high failure rate for the modules produced for the Model 3 during 39 Case 3:17-cv-05828-CRB Document 46 Filed 09/28/18 Page 40 of 82 1 FE8’s entire three year tenure at the Gigafactory. Each module was inspected at a sub-assembly 2 location and inspectors signed off on the inspection and recorded the serial numbers for each 3 module. If the height of even a single battery was incorrect during the sealing process, the entire 4 module would be discarded. FE8 stated that high failure rates and module issues persisted during 5 all of FE8’s employment. Modules that did not pass inspection were sent to the “Non-Comforming 6 Material” area of the Gigafactory facility. 7 201. FE8 further stated that production downtime was common, often lasting 7-8 hours, 8 due mainly to a lack of parts, inadequate machine programming, and automation problems. 9 202. FE9 was a Process Technician for Tesla at the Gigafactory location in Nevada from 10 March of 2017 until October of 2017, assigned to the Model 3 production team. FE9 observed 11 workers on and off the assembly line during both manual and automated assembly. 12 203. When FE9 began working in March 2017, all battery module assembly was manual, 13 a process FE9 described as “messy.” Automated production lines were being built during most of 14 FE9’s tenure at Tesla, and partial automated battery production, which did not encompass all of 15 the production process, did not even begin until September 2017. 16 204. At the end of the Class Period, the CEO of Tesla’s Gigafactory partner, Panasonic, 17 confirmed FE9’s statement that battery production to that point was not automated. 48 18 205. According to FE9, the Gigafactory was plagued by problems related to producing 19 usable modules, and the first battery module was completed long past the deadline when the Model 20 3 was supposed to have been launched. The process required applying adhesive at a specific ratio, 21 which if not done properly caused the batteries to “fall off.” Parts and spaces between parts were 22 small, making correct module completion challenging. FE9 stated that prior to automated 23 production, human error resulted in poorly produced modules “all the time,” with workers rushing 24 products through the line, assuming problems “would fix [themselves],” which they did not. 25 206. FE8 stated that further delays were caused by Panasonic, Tesla’s partner in the 26 Nevada Gigafactory, because Panasonic batteries contained metal fibers, and Panasonic employees 27 28 48 See https://arstechnica.com/cars/2017/10/production-problems-at-teslapanasonic-gigafactory- may-be-at-an-end/. 40 Case 3:17-cv-05828-CRB Document 46 Filed 09/28/18 Page 41 of 82 1 were required to check every pallet of modules to confirm there were no sealing problems with the 2 metal fibers. 3 207. FE9 also recalled that the partial automated production, once it finally began in 4 September 2017, was plagued with production problems. Many of the specifications were 5 incorrect, the automated lines did not work properly, and specific production issues persisted, 6 including insufficient quantities of adhesive. Further delays and production problems were a result 7 of inexperienced employees who did not receive adequate training. 8 208. FE8 corroborated this account of automation-related malfunctions, stating that 9 some problems were caused by incorrect programming, in Germany, of German-sourced 10 machines. FE8 stated that machines were constantly being re-programmed. 11 209. FE8 stated that Gigafactory workers were brought in from Intellisource and other 12 temp agencies, leading to high turnover and a negative effect on production. FE8 recalled busloads 13 of approximately 27-30 workers arriving at the Gigafactory from temp agencies, and that number 14 being weeded out to 3-4 total workers in just two to three weeks. 15 210. During FE9’s tenure, which lasted almost to the end of the Class Period, the 16 Gigafactory produced no more than two battery packs, at most, per day, sufficient for two cars. 17 Realistically, it took a full day – comprised of two shifts – to produce a single battery pack, and, 18 even then, it was not a “customer saleable pack,” i.e., a pack that passed inspection and was ready 19 to be installed in the Model 3. 20 211. The only “customer saleable pack” was completed in October 2017, shortly before 21 FE9 left Tesla. A company-wide email was sent congratulating the engineers and production 22 workers for their hard work. 23 212. FE10 was a Production Associate at the Gigafactory from October 2017 to January 24 2018. FE10 reported to Production Supervisor Timothy Mosher. 25 213. FE10 worked on a battery production line applying glue to the windows of the 26 battery. The battery packs that were assembled on FE10’s line arrived in an elevator. The person 27 next to FE10 scanned the battery into the computer system, and the battery was cleaned at the end 28 of the line. 41 Case 3:17-cv-05828-CRB Document 46 Filed 09/28/18 Page 42 of 82 1 214. FE10 described frequent production stoppage due to equipment breakdown, and 2 line workers being “starved for work.” Malfunctioning equipment included facility elevators, and 3 production machines. A shutdown of any part of the line process stopped work on the entire line. 4 215. FE11 worked as a Materials Handler at the Gigafactory from December 2016 to 5 January 2018. FE11 reported to Material Flow Manager Scott Dowler. 6 216. FE11 confirmed that very few Model 3 batteries were completed during the Class 7 Period. FE11 recalled 14 production lines, each with 5-6 Tesla employees. Panasonic employees 8 would deliver batteries to the Tesla employees, who assembled each battery pack. 9 217. FE11 stated that it took 1-2 weeks for each production line at the Gigafactory to 10 produce one (1) finished battery, so no more than 14 finished Model 3 batteries were completed 11 every 1-2 weeks. 12 218. FE11 stated that it was not uncommon to receive faulty modules, which were sent 13 to technicians to fix. Problems ranged from leakage, to parts of incorrect size, to broken or 14 malfunctioning parts. It took approximately a full week to resolve any issues that arose on the line. 15 219. FE11 confirmed FE8’s statement that Tesla brought in temp workers from staffing 16 agencies, and that Tesla did a poor job training the workers. 17 220. FE12 was Operations Planning Manager at the Gigafactory from May 2017 to June 18 2018. FE12 began working at Tesla after the May, 2017 SEC filings. 19 221. FE12’s job was to oversee planning for production operations that made or 20 assembled Model 3 components at the Gigafactory. His job required him to coordinate with 21 departments involved in different aspects of Gigafactory production, allowing him insight into 22 overall production operations in the Gigafactory. FE12 regularly spoke with managers in material 23 supplies, operations, new product integration (in both Fremont and at the Gigafactory), and Tesla’s 24 liaison with Panasonic. 25 222. FE12 reported to Anoop Thulaseedas, Gigafactory Supply Chain Planning. 26 Thulaseedas reported to Adam Plumpton, Logistics Director, who reported to Sascha Zahnd, Vice 27 President of Global Supply Chain. 28 42 Case 3:17-cv-05828-CRB Document 46 Filed 09/28/18 Page 43 of 82 1 223. Upon beginning employment, FE12 had conversations with Flora Rooker, Senior 2 Material Planner, who told FE12 that