Case 1:18-cv-08865-AJN Document 30 Filed 03/18/19 Page 1 of 18 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK : UNITED STATES SECURITIES AND : EXCHANGE COMMISSION : : Plaintiff, : : v. : No. 1:18-cv-8865-AJN-GWG : ELON MUSK : : Defendant. : : UNITED STATES SECURITIES AND EXCHANGE COMMISSION’S REPLY MEMORANDUM TO DEFENDANT ELON MUSK’S RESPONSE TO ORDER TO SHOW CAUSE Case 1:18-cv-08865-AJN Document 30 Filed 03/18/19 Page 2 of 18 TABLE OF CONTENTS TABLE OF CONTENTS...................................................................................................................ii TABLE OF AUTHORITIES .............................................................................................................iii I. Musk Violated this Court’s Order by Failing to Seek Pre-Approval of a Tweet Containing Information Material to Tesla and its Shareholders. ...........................................3 A. The Order Contains a Broad Pre-Approval Standard. .....................................4 B. Tesla’s Production Forecasts Are Material to Tesla and its Shareholders.........................................................................................6 C. Musk’s 7:15 Tweet Was Materially Different from Prior Public Disclosures. ..........................................................................................7 II. Musk Has Not Diligently Attempted to Comply with the Court’s Order. .............................9 III. The Court Has Authority to Enforce its Order and Compel Musk’s Compliance. ................11 A. Musk Waived His Challenge to the Constitutionality of the Order by Consenting to its Entry. ...................................................................................11 B. The Pre-Approval Requirement Does Not Implicate the First Amendment. ............................................................................................12 C. Authority to Enforce its Order Is Vested with the Court, Not the SEC. ....................................................................................................13 CONCLUSION ..................................................................................................................................14 ii Case 1:18-cv-08865-AJN Document 30 Filed 03/18/19 Page 3 of 18 TABLE OF AUTHORITIES CASES Cent. Hardware Co. v. N.L.R.B., 407 U.S. 539 (1972) .........................................................................................................................12 City of Pontiac Policemen’s & Firemen’s Ret. Sys. v. UBS AG, 752 F.3d 173 (2d Cir. 2014) ............................................................................................................5 Democratic Nat’l Comm. v. Republican Nat’l Comm., 673 F.3d 192 (3d Cir. 2012).............................................................................................................11 IBEW Local Union No. 58 Pension Tr. Fund & Annuity Fund v. Royal Bank of Scotland Grp., PLC, 783 F.3d 383 (2d Cir. 2015) ...................................................5 In re IBM Corp. Sec. Litig., 163 F.3d 102 (2d Cir. 1998).............................................................................................................5 In re Refco Inc., 505 F.3d 109 (2d Cir. 2007).............................................................................................................12 Loce v. Time Warner Ent. Advance/Newhouse P’ship, 191 F.3d 256 (2d Cir. 1999).............................................................................................................12 New York State Nat’l Org. for Women v. Terry, 886 F.2d 1339 (2d Cir. 1989)...........................................................................................................13 Paramedics Electromedicina Comercial, Ltda v. GE Med. Sys. Info. Techs., Inc., 369 F.3d 645 (2d Cir. 2004).............................................................................................................13 Romeo & Juliette Laser Hair Removal, Inc. v. Assara I LLC, 679 F. App’x 33 (2d Cir. 2017) .......................................................................................................12 Shillitani v. United States, 384 U.S. 364 (1966) .........................................................................................................................13 iii Case 1:18-cv-08865-AJN Document 30 Filed 03/18/19 Page 4 of 18 On September 27, 2018, the Commission charged Defendant Elon Musk with fraud for recklessly making a series of false and misleading statements about Tesla that resulted in significant market confusion and disruption. Two days later, Musk agreed to settle the case. This Court ordered him to comply with a series of conditions, including that Musk submit certain of his written communications about Tesla for pre-approval before publishing them. Dkt. No. 14, at 13-14.1 The Court-ordered pre-approval requirement for Musk’s written communications lies at the heart of the settlement. Musk’s unchecked and misleading tweets about Tesla are what precipitated the SEC’s charges, and the pre-approval requirement was designed to protect against reckless conduct by Musk going forward. It is therefore stunning to learn that, at the time of filing of the instant motion, Musk had not sought pre-approval for a single one of the numerous tweets about Tesla he published in the months since the Court-ordered pre-approval policy went into effect. Many of these tweets were about the topics specifically identified by Tesla in its own policies as potentially material to shareholders. Musk reads this Court’s order as not requiring pre-approval unless Musk himself unilaterally decides his planned tweets are material. His interpretation is inconsistent with the plain terms of this Court’s order and renders its pre- approval requirement meaningless. Musk’s tweet at 7:15 PM ET on February 19, 2019 (the “7:15 tweet”) was a blatant violation of this Court’s order. The statement that Tesla “will make around 500k” cars in 2019 plainly “contain[ed], or reasonably could [have] contain[ed], information material to the Company or its shareholders.” See Dkt. No. 14, at 13-14. This is apparent from the immediate response of Tesla’s Designated Securities Counsel, the person who was supposed to have 1 Page numbers in citations to docketed court filings are to the page numbers assigned by the Court’s ECF system. 1 Case 1:18-cv-08865-AJN Document 30 Filed 03/18/19 Page 5 of 18 reviewed this tweet before Musk published it. After seeing the published 7:15 tweet, the Designated Securities Counsel “immediately arranged to meet with Musk” to draft a corrective tweet (the “11:41 tweet”). Ex. 4, at 3. Had Musk simply complied with the Court’s order and Tesla’s Court-ordered Senior Executives Communications Policy (“the Tesla Policy”), the Designated Securities Counsel presumably would have caught his misstatement on the front end, and Musk would not have again disseminated inaccurate information about Tesla to 25 million people. Musk’s explanation for his failure to seek pre-approval of the 7:15 tweet has changed even in the short time since he published it. Initially, Musk explained that, while his 7:15 tweet had not been “individually pre-approved,” he “believed that the substance had already been appropriately vetted, pre-approved, and publicly disseminated.” Ex. 4, at 3. Neither Musk nor Tesla claimed at that time that Musk was not required to seek pre-approval because his tweet could not have reasonably contained material information. See id. After the SEC filed its motion, however, Musk pivoted to a different explanation. He now claims he did not seek pre- approval because he determined prior to publication that his tweet could not have reasonably contained material information. Dkt. No. 27, at 9-16. Musk’s contention—that the potential size of a car company’s production for the year could not reasonably be material—borders on the ridiculous. Musk’s shifting justifications suggest that there was never any good faith effort to comply with the Court’s order and the Tesla Policy. Rather, Musk has simply elected to ignore them. As Musk observes, requests by the SEC to hold a party in contempt are relatively rare. Here, the SEC acted only after—following discussions with counsel—Musk admitted that he had not sought pre-approval of the 7:15 tweet, which contained demonstrably material and inaccurate 2 Case 1:18-cv-08865-AJN Document 30 Filed 03/18/19 Page 6 of 18 information about Tesla’s 2019 vehicle production, and then offered a purported justification that ignored the plain language of the Court’s order and the Tesla Policy. Such brazen disregard of this Court’s order is unacceptable and unworkable going forward. For the reasons set forth below and in the SEC’s initial motion, the SEC requests that this Court hold Musk in contempt and impose an appropriate remedy to ensure future compliance. I. Musk Violated this Court’s Order by Failing to Seek Pre-Approval of a Tweet Containing Information Material to Tesla and its Shareholders. The language of the Court’s order is clear: Musk must comply with Tesla’s mandatory procedures requiring pre-approval before publishing tweets that contain or reasonably could contain information material to Tesla and its shareholders. As of the filing of the SEC’s motion, for a period of more than two months, Musk tweeted repeatedly about Tesla’s business but never once sought pre-approval prior to publication.2 Musk’s disregard of the pre-approval process culminated in the publication of the inaccurate 7:15 tweet to more than 25 million Twitter users. Confronted with these facts, Musk urges the Court to re-write the terms of its order and evaluate whether his communications must be pre-approved based on a hindsight analysis of whether they moved the market. This proposed standard is inconsistent with the Court’s order and plainly unworkable because Musk will never know if the market is going to move until it actually reacts to his statements. Musk’s proposed approach also incorrectly applies the 2 The SEC requested additional information after filing the instant motion because it was also concerned about Tesla’s compliance with its final judgment, which ordered Tesla to “implement mandatory procedures and controls to oversee all of Elon Musk’s communications regarding the Company . . . and to pre-approve any such written communications that contain, or reasonably could contain, information material to the Company or its shareholders.” SEC v. Tesla, Inc., 1:18-cv-8865-AJN-GWG, Dkt. No. 14, at 15. To that end, on February 24, 2019, the SEC asked Musk and Tesla the straightforward question of whether Musk had sought or received pre-approval for any tweets since the Policy was adopted. See Dkt. No. 27-6, at 2. The answer, as it turns out, was simply “no,” but it took more than two weeks for Musk and Tesla to concede as much. See Dkt. No. 27-8, at 6. 3 Case 1:18-cv-08865-AJN Document 30 Filed 03/18/19 Page 7 of 18 materiality standard applicable in private securities fraud actions in lieu of the much broader pre- approval standard contained in the Court’s order. See Dkt. No. 27, at 12. Had Musk sought to comply with the Court’s order, he would have sought pre-approval of the 7:15 tweet, which contained new information about a key metric that has long been important to Tesla’s business. Indeed, Musk offers no explanation of how he arrived at the counterintuitive conclusion that pre-approval was not required. Conspicuously absent from Musk’s submission is any citation to a prior public disclosure that Tesla would make around 500,000 cars in 2019. This is because no such disclosure had ever been made prior to the 7:15 tweet. This fact is alone sufficient to show that the 7:15 tweet reasonably could have contained material information and required pre-approval before Musk published it. At bottom, Musk’s tortured, post hoc explanation of why he should not be held in contempt is inconsistent with the terms of this Court’s order and the Tesla Policy. A. The Order Contains a Broad Pre-Approval Standard. The SEC asked this Court to approve its settlement with Musk because it included terms, including the pre-approval requirement, that were tailored to prevent future violations of the type alleged by the SEC against Musk in its original complaint, i.e., publicly disseminating misleading or inaccurate information. See Dkt. No. 13, at 5-7. In keeping with this prophylactic purpose, the plain language of this Court’s order and the Tesla Policy state that Musk is required to seek pre-approval of any written communications that “contain or reasonably could contain” information material to Tesla or its shareholders. See Dkt. No. 14, at 13-14; Ex. 1, at 1 (emphasis added). The standard for pre-approval of Musk’s communications is not the same as the materiality standard that applies in SEC civil fraud actions, let alone the stringent requirements applicable in private securities actions, as Musk’s argument implies. The SEC insisted on the 4 Case 1:18-cv-08865-AJN Document 30 Filed 03/18/19 Page 8 of 18 pre-approval requirement that applies to all statements that contain or reasonably could contain information material to Tesla or its shareholders so that Tesla would implement meaningful controls on Musk’s communications to prevent any potentially fraudulent or erroneous statements from being published in the first place. Musk’s citations to fraud actions brought by private securities plaintiffs are inapposite. Unlike the statements at issue in those cases, Musk’s 7:15 tweet, “Tesla made 0 cars in 2011, but will make around 500k in 2019,” was neither non-specific nor aspirational on its face. It stated, without any qualifying language, that Tesla would produce a specific number of cars (“around 500k”) in a specific timeframe (the current year, 2019).3 Moreover, Musk’s claim that statements about future performance are immaterial as a matter of law, and therefore need not be pre-approved (Dkt. No. 27, at 12), is inconsistent with the plain language of the Tesla Policy, which unambiguously includes “projections, forecasts, or estimates regarding Tesla’s business” on its non-exhaustive list of subjects that may be material to Tesla or its shareholders. See Ex. 1, at 1. Contrary to Musk’s suggestion, there is no carve-out from materiality for “celebratory” statements that contain key numerical forecasts about a company’s business. Dkt. No. 27, at 11. When Musk publishes a tweet with new information about an important Tesla metric, it must 3 By contrast, the statements found to be immaterial in the cases cited by Musk were clearly aspirational in nature. See, e.g., IBEW Local Union No. 58 Pension Tr. Fund & Annuity Fund v. Royal Bank of Scotland Grp., PLC, 783 F.3d 383, 392 (2d Cir. 2015) (statement that integration of another bank acquired by RBS was “off to a promising start” and that RBS’s “positive view . . . has been confirmed” were immaterial statements of “general corporate optimism”); City of Pontiac Policemen’s & Firemen’s Ret. Sys. v. UBS AG, 752 F.3d 173, 183 (2d Cir. 2014) (general statements about UBS’s “compliance, reputation, and integrity” that included qualifiers such as “aims to,” “wants to,” and “should” were immaterial); In re IBM Corp. Sec. Litig., 163 F.3d 102, 107 (2d Cir. 1998) (statement that IBM was not “concerned” about covering its dividend payment to investors was too indefinite to be material for purposes of private fraud action). 5 Case 1:18-cv-08865-AJN Document 30 Filed 03/18/19 Page 9 of 18 first be submitted for pre-approval under the terms of the Court’s order and the Tesla Policy, regardless of whether it was subjectively intended as a statement of “pride and optimism.” Id. at 12. B. Tesla’s Production Forecasts Are Material to Tesla and its Shareholders. In addition to being specifically identified in the Tesla Policy as a potentially material topic (Ex. 1, at 1), Tesla’s production forecasts have long been significant to market participants who follow the company. See, e.g., Ex. 6, “1Q18 a Bit Better, but Model 3 Ramp Remains the Story” (Deutsche Bank, May 3, 2018), at 1 (observing that “[i]nvestors’ main questions related to the trajectory of Model 3 production,” along with two other focus areas). The forecasts are important because research analysts incorporate their expectations of future production and deliveries into revenue and profit forecasts and corresponding valuation models and price targets for Tesla’s stock. See, e.g., Ex. 7, “Rollercoaster Ride with Model 3 Production Turning the Corner; Initiating at OP” (Wedbush Securities, Dec. 13, 2018), at 1 (“Tesla Model 3 production analysis we have built is the linchpin to our broader bull thesis and valuation on the company” and emphasizing that “More Model 3 Production = Key to Cash Flow and Profitability Ramp”). Musk’s recognition of the significance of Tesla’s vehicle production forecasts to investors is evidenced by the frequency with which he and Tesla highlight such forecasts in their public statements. For years and continuing through the company’s most recent earnings release, Tesla and Musk have prominently featured vehicle production forecasts in their public communications, including Tesla’s investor letters, Musk’s tweets, and the company’s filings with the SEC. While some companies emphasize forward-looking guidance on financial metrics such as revenue and earnings per share, Tesla often highlights guidance regarding expected production rates and deliveries. See, e.g., Ex. 5, at 5 (lead paragraph of “Outlook” section highlights production forecasts). Given this focus on Tesla’s production capabilities, Musk 6 Case 1:18-cv-08865-AJN Document 30 Filed 03/18/19 Page 10 of 18 cannot credibly argue that his statement, as Tesla’s CEO, that the company “will make around 500k” cars in 2019 could not have reasonably contained information material to Tesla and its investors. C. Musk’s 7:15 Tweet Was Materially Different from Prior Public Disclosures. Disputing the logical conclusion that new information about a critical company metric reasonably could be material to Tesla’s shareholders, Musk claims that the 7:15 tweet “simply was not ‘news.’” It is frankly difficult to follow Musk’s tortured analysis, which attempts to cobble together information from various public statements by Tesla in January 2019 to arrive at the post hoc conclusion that his 7:15 tweet was “within previously disclosed ranges.” Dkt. No. 27, at 10. Regardless, Musk’s arguments do not change the fact that, before the 7:15 tweet, Tesla had never disclosed that it planned to make around 500,000 cars in 2019. Therefore, Musk was required to obtain pre-approval before he published this statement. Prior to the 7:15 tweet, Tesla had not publicly disclosed any forecast of the total number of vehicles it expected to produce in 2019. This should end the Court’s inquiry as to whether Musk’s failure to seek pre-approval constituted a violation of the Court’s order. In the absence of an affirmative forecast on this important topic, Musk’s tweet contained new information that could reasonably have been material to Tesla and its shareholders. Tesla had, however, previously provided a clear forecast of total vehicle deliveries in 2019. Specifically, Tesla’s January 30, 2019 Fourth Quarter & Full Year Update (“Update Letter”) stated, “In total, we are expecting to deliver 360,000 to 400,000 vehicles in 2019 . . . .” Ex. 5, at 5 (emphasis added). Tesla included the same delivery forecast in the pre-approved talking points for its January 30 earnings call. See Ex. 8 (internal Tesla email dated Jan. 30, 2019, produced in response to SEC’s request for pre-approved talking points); see also Dkt. No. 7 Case 1:18-cv-08865-AJN Document 30 Filed 03/18/19 Page 11 of 18 27-8, at 7 (Tesla representing that these talking points were pre-approved in accordance with the Tesla Policy). Evidently at a loss as to how to explain the material difference between the company’s repeated deliveries guidance and his 7:15 tweet,4 Musk’s brief does not even mention the deliveries guidance. Instead, Musk argues that his tweet could not reasonably have been material because Tesla previously stated that it was “targeting” an annualized production rate in excess of 500,000 Model 3 vehicles sometime between Q4 of 2019 and Q2 of 2020. Ex. 5, at 5. This guidance was also given in Tesla’s 2018 Form 10-K and during Tesla’s January 30 earnings call. Dkt. No 27- 3, at 5; Dkt. No. 27-4, at 3. But this was a qualified forecast (“targeting”) of Tesla’s expected achievement of a production run rate (not of aggregate production) for a particular vehicle line5 at some future point in time (somewhere between late 2019 and the middle of 2020). On its face, the 7:15 tweet—which stated that Tesla will make around 500,000 cars in 2019—was materially different from Tesla’s production rate forecasts for Model 3.6 4 While deliveries and production could differ somewhat, in recent periods, Tesla’s annual deliveries have closely tracked annual production. In 2018, for example, according to the company’s public statements, Tesla produced 254,530 vehicles and delivered 245,506 vehicles. See Ex. 9 (excerpts of Tesla, Inc. Form 10-K filed with the SEC on Feb. 23, 2018, and Feb. 19, 2019), at 42. Similarly, in 2017, Tesla produced 101,027 vehicles and delivered approximately 103,184 vehicles. See id. at 39; Ex. 10 (compilation of Tesla’s quarterly vehicle and production deliveries reports for 2017). 5 Musk also obliquely references a public statement about Tesla’s Q4 2018 production achievement and “long term run rate” for its Model S and Model X vehicles as somehow supportive of his claim that the 7:15 tweet was immaterial. See Dkt. No. 27, at 10. The purported significance of this backward-looking statement is difficult to discern from Musk’s brief. Regardless, it does not change the fact that Tesla had not issued any guidance for total 2019 production as of the 7:15 tweet. 6 Musk also claims he made a statement during the January 30 earnings call projecting 2019 Model 3 production “on the order of ‘350,000 to 500,000’ vehicles.” Dkt. No. 27, at 10. In reality, Musk made no such production forecast during the earnings call. Instead, in remarks that were not a part of Tesla’s pre-approved earnings call script, he made a cryptic reference to 8 Case 1:18-cv-08865-AJN Document 30 Filed 03/18/19 Page 12 of 18 The divergence between Musk’s 7:15 tweet and Tesla’s previous public statements is evidenced by the swift reaction of Tesla’s Designated Securities Counsel to correct Musk’s 7:15 tweet. According to Musk and Tesla’s original version of the events of February 19: [u]pon seeing the 7:15 PM EST tweet, the Designated Securities Counsel immediately arranged to meet with Musk at the Fremont factory. Musk and the Designated Securities Counsel together drafted a clarifying tweet. See Ex. 4, at 3. The subsequent 11:41 tweet indicated that the 7:15 had been inaccurate (“meant to say”) and reiterated that both the deliveries forecast and Model 3 production rate forecasts remained in effect. Decl. of Elon R. Musk (Dkt. No. 27-9), at ¶ 12 (“Meant to say annualized production rate at end of 2019 probably around 500k, ie 10k cars/week. Deliveries for year still estimated to be about 400k.”) None of the prior statements Musk points to contains a forecast of 2019 vehicle production at all, much less a forecast of around 500,000 cars. As a result, Musk’s 7:15 tweet— which stated that Tesla “will make 500k” cars in 2019—was reasonably likely to add to the total mix of information available to investors at the time about a metric important to Tesla investors, and Musk’s failure to submit the tweet for pre-approval before publishing it violated the Court’s order. II. Musk Has Not Diligently Attempted to Comply with the Court’s Order. Musk made no diligent or good faith effort to comply with the pre-approval provision of the Court’s order. Musk failed to seek pre-approval of any of his Tesla-related tweets, from the “350,000 to 500,000 Model 3s” after Tesla’s CFO made a comment about potential market size for North America, Europe and Asia, following a question from an analyst relating to geographic dispersion of Model 3 sales. See Dkt. No. 27-3, at 8. In the wake of the earnings call, multiple research analysts observed that Musk’s murky remark was inconsistent with Tesla’s official guidance. See, e.g., Ex. 11, “Leaving Intensive Care . . . Waiting for Revenues to Ramp” (Evercore ISI, Jan. 31, 2019), at 2 (observing that Musk had made an “off-the-cuff” statement about “‘350-500k Model 3s, something like that this year’ when the official total delivery guidance is only 360-400k”). 9 Case 1:18-cv-08865-AJN Document 30 Filed 03/18/19 Page 13 of 18 time Tesla implemented its Court-ordered Policy until the SEC filed this motion. Since Tesla adopted the Policy on December 11, 2018, Musk has regularly published substantive information about Tesla and its business in tweets and replies to other Twitter users’ tweets. In addition to his February 19 tweet about 2019 production, Musk has tweeted about the following:  Tesla vehicle tax credits and pricing,  Tesla vehicle maintenance costs,  Tesla’s plans for expansion of charging stations internationally,  the EPA rating of Tesla vehicles,  Tesla’s construction and production plans for a new Shanghai factory,  Tesla’s refund policies,  Whether Tesla plans to phase out its Model S and Model X vehicles in the future,  The status of regulatory approvals for Tesla’s assisted driving features,  The results of government safety testing of Tesla vehicles, and  A response refuting a published report that Tesla had reached agreement with a Chinese company to supply batteries. See Ex. 12 (screenshots of examples of Musk’s tweets). Musk has chosen to disregard the pre-approval requirement altogether by claiming that the Court’s order and the Tesla Policy vested in him the exclusive authority to determine whether a tweet could have reasonably contained information material to Tesla or its shareholders. See Dkt. No. 27-9, at ¶ 6. Musk, however, does not identify any language in the order or the Tesla Policy that grants him such discretion. Nor does he articulate any particular methodology or process that he employs to determine that a tweet does not require pre-approval before 10 Case 1:18-cv-08865-AJN Document 30 Filed 03/18/19 Page 14 of 18 publishing it. This is particularly troublesome given that it was Musk’s lack of judgment with respect to public statements about Tesla that led to entry of the Court’s order in the first place. Instead of submitting his tweets for pre-approval, Musk stated that he relies on Tesla counsel’s review of his tweets “upon publication” to ensure that he is compliant with the order and the Policy. Id. at ¶ 7. It strains credulity that Musk could believe in good faith that he is allowed to substitute post hoc review for the pre-approval requirement clearly set forth in the Court’s order. While Musk professes to take seriously his obligations to comply with the Court’s order and the Tesla Policy, his actions speak much more loudly: he has not diligently sought to comply with either. III. The Court Has Authority to Enforce its Order and Compel Musk’s Compliance. Musk argues that unless he is granted complete discretion to determine whether his written communications about Tesla require pre-approval, the Court’s order is unconstitutional and exceeds the scope of the SEC’s authority. Dkt. No. 27, at 20-25. This frivolous argument rests on a misapprehension of governing case law and on the false premise that the Court-ordered pre-approval requirement prohibits his speech. A. Musk Waived His Challenge to the Constitutionality of the Order by Consenting to its Entry. Musk admits that he consented to the order (id. at 23) in which he waived any First Amendment rights that may be implicated by the pre-approval provision. See Democratic Nat’l Comm. v. Republican Nat’l Comm., 673 F.3d 192, 205 (3d Cir. 2012) (even if court enforcement of a consent judgment constitutes state action, “constitutional rights . . . may be contractually waived where the facts and circumstances surrounding the waiver make it clear that the party foregoing its rights has done so of its own volition, with full understanding of the consequences of its waiver”). Further, “it is well-established that a party to a consent judgment is thereby 11 Case 1:18-cv-08865-AJN Document 30 Filed 03/18/19 Page 15 of 18 deemed to waive any objections it has to matters within the scope of the judgment.” In re Refco Inc., 505 F.3d 109, 120 (2d Cir. 2007) (internal quotation omitted). Musk’s argument that he consented to the terms of the Court’s order only because he believed he had sole discretion to determine when the pre-approval requirement applied (Dkt. No. 27-9, at ¶ 6) is inconsistent with the plain language of the Court’s order. The Court’s order clearly mandates that Musk obtain pre-approval of written communications that contain or reasonably could contain material information and states nowhere that this requirement is subject to his discretion. Musk voluntarily waived the constitutional arguments he now advances. Dkt. No. 6-1, at 4 (“Defendant enters into this Consent voluntarily”). B. The Pre-Approval Requirement Does Not Implicate the First Amendment. Musk’s First Amendment argument also fails because it rests on the false premise that the pre-approval requirement imposes a prior restraint on his speech. Dkt. No. 27, at 20-22. Submitting his written statements for pre-approval does not, as Musk baldly asserts, mean that he is prohibited from speaking. Dkt. No. 27, at 23. As long as a statement submitted for pre- approval is not false or misleading, Tesla would presumably approve its publication without any restraint on Musk. And if the proposed statement is false or misleading, then any restraint on Musk’s speech would be constitutional even if it involved state action. See Romeo & Juliette Laser Hair Removal, Inc. v. Assara I LLC, 679 F. App’x 33, 36-37 (2d Cir. 2017) (prohibition of speech that is false, deceptive, or misleading does not violate First Amendment) (citing Safelite Grp., Inc. v. Jepsen, 764 F.3d 258, 261 (2d Cir. 2014); Democratic Nat’l Comm., 673 F.3d at 204-05). Moreover, the First Amendment limits only state action, not private action. Cent. Hardware Co. v. N.L.R.B., 407 U.S. 539, 547 (1972); Loce v. Time Warner Ent. 12 Case 1:18-cv-08865-AJN Document 30 Filed 03/18/19 Page 16 of 18 Advance/Newhouse P’ship, 191 F.3d 256, 266 (2d Cir. 1999). No First Amendment concern exists given that Musk’s speech is to be reviewed by Tesla, a private actor, and not the government. Finally, Musk’s argument that any restraint on his speech is already served by less- restrictive means—i.e., Musk’s discretion and potential future SEC enforcement actions (Dkt. No. 27, at 21)—is belied by Musk’s demonstrated inability to discern potential materiality and is inconsistent with the prophylactic purpose of the parties’ negotiated relief. Thus, the supposedly less-restrictive means put forth by Musk are demonstrably ineffective and would be inconsistent with the parties’ negotiated resolution embodied in the terms of the Court’s order. C. Authority to Enforce Its Order Is Vested with the Court, Not the SEC. Musk’s argument that enforcement of the terms of the Court’s order exceeds the SEC’s authority is equally flawed. Enforcement of the provisions of the Court’s order does not depend on the SEC’s statutory authority to bring injunctive action or on any authority of the SEC at all. Rather, this Court has broad equitable powers to enforce the terms of its order against Musk through civil contempt. See, e.g., Shillitani v. United States, 384 U.S. 364, 370 (1966) (“There can be no question that courts have inherent power to enforce compliance with their lawful orders through civil contempt.”); Paramedics Electromedicina Comercial, Ltda v. GE Med. Sys. Info. Techs., Inc., 369 F.3d 645, 657 (2d Cir. 2004) (“To the extent that a contempt sanction is coercive, the court has ‘broad discretion to design a remedy that will bring about compliance.’”) (quoting Perfect Fit Indus. v. Acme Quilting Co., 673 F.2d 53, 57 (2d Cir. 1982)); New York State Nat’l Org. for Women v. Terry, 886 F.2d 1339, 1352 (2d Cir. 1989) (affirming civil contempt sanctions issued “to coerce the contemnor into future compliance with the Court’s order” despite First Amendment implications); see also Dkt. No. 14, at 14 (“this Court shall retain jurisdiction of this matter for the purposes of enforcing the terms of this Final Judgment”). 13 Case 1:18-cv-08865-AJN Document 30 Filed 03/18/19 Page 17 of 18 CONCLUSION For all the reasons stated, the SEC respectfully requests that the Court find Defendant Elon Musk in contempt of the Court’s October 16, 2018 Final Judgment and order all necessary and appropriate relief to enforce its terms. In response to the Court’s March 12, 2019 order (Dkt. No. 29), the SEC respectfully submits that, because there appear to be no disputed issues of material fact, an evidentiary hearing is unnecessary. Dated: March 18, 2019 s/ Cheryl L. Crumpton Cheryl L. Crumpton* E. Barrett Atwood* *Admitted pro hac vice U.S. Securities and Exchange Commission 100 F Street, N.E. Washington, D.C. 20549 (202) 551-4459 (Crumpton) crumptonc@sec.gov 44 Montgomery Street, Suite 2800 San Francisco, CA 94104 (415) 705-2467 (Atwood) atwoode@sec.gov Of counsel: Erin E. Schneider Steven Buchholz Walker S. Newell 14 Case 1:18-cv-08865-AJN Document 30 Filed 03/18/19 Page 18 of 18 CERTIFICATE OF SERVICE I certify that on March 18, 2019, a copy of the foregoing was filed through the Court’s CM/ECF system, which will send copies to all counsel of record. s/ Cheryl L. Crumpton Counsel for the SEC Tesla Inc. Case 1:18-cv-08865-AJN Document 30-1 Filed 03/18/19 Page 1 of 10 Deutsche Bank Markets Research Rating Company Date Hold Tesla Inc. 3 May 2018 Forecast Change North America United States Reuters Bloomberg Exchange Ticker Price at 2 May 2018 (USD) 301.15 Consumer TSLA.OQ TSLA UN NMS TSLA Price target 365.00 Autos & Auto Parts 52-week range 385.00 - 252.48 1Q18 a Bit Better, but Model 3 Ramp Remains the Story Valuation & Risks Rod Lache Tesla’s Q1 was a bit better than we expected w/r/t gross proﬁt, improving 500 Research Analyst bps sequentially to 18.8% (we expected 200 bps), largely on improved proﬁtability +1-212-250-5551 of Model S/X (improved to >25% vs.~20% in 4Q17). As expected, Model 3 experienced a signiﬁcant negative gross margin. Free cash burn in the qtr was Shreyas Patil roughly $900 MM, weaker than our ($500 MM) estimated, entirely due to working Research Associate capital variances (e.g. higher number of in-transit S/X had a $120 MM negative +1-212-250-3916 impact, while the sharp ramp-up in Model 3 deliveries late in the qtr negatively impacted Receivables by $169 MM; both items were cash inﬂows at the start of Andrew Richard Q2). Research Associate +1-212-250-6559 Investors’ main questions related to the trajectory of Model 3 production, the trajectory of proﬁtability, and the trajectory of free cash ﬂow/burn. In addressing Key changes these questions Tesla reiterated its near-term production target of 5,000 Model 3’s EPS (USD) -0.64 to -2.38 ↓ 271.9% per week by the end of Q2, while providing some additional color on the current Revenue 23,012.6 to ↓ -1.1% (USDm) 22,759.0 state of play. Improvements at Gigifactory have ramped-up sustained battery pack Source: Deutsche Bank production to 3,000/wk, with the Body Shop at Freemont also sustaining that level of build. Tesla is still working to get Freemont Final Assembly and its Paint Shop up to the sustained 3,000 run-rate. Interestingly, the company noted it believes it will get M3 up to 5k/wk by 2Q without implementation of its new, automated battery assembly line (developed at its Groehmann facility). This line is expected to come online in 3Q18 and should both increase M3 production (we est by 2,000-2,500/ wk), while lower manufacturing costs. Perhaps most importantly, TSLA reiterated their target of achieving positive free cash ﬂow during 2H18. This is nothing new, though conﬁdence around achieving this target clearly remains the most critical (potentially positive) near term driver of Tesla’s shares. The only noteworthy new negative datapoint was Tesla also pushed out the timeline for achieving their 25% gross margin target on Model 3 to 2019 from 2H18. Mgmt. attributed this push-out to raw materials, tariﬀs, FX, and additional labor needed to circumvent automated production bottlenecks. Other key takeaways: ■ Record demand for Model S/X (though we anticipate that questions will remain about German Lux competitors entering in 2019, or even competition from Model 3 once production ramps) Deutsche Bank Securities Inc. Distributed on: 03/05/2018 04:33:07 GMT Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the ﬁrm may have a conﬂict of interest that could aﬀect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 091/04/2018. 7T2se3r0Ot6kwoPa Case 1:18-cv-08865-AJN Document 30-1 Filed 03/18/19 Page 2 of 10 3 May 2018 Autos & Auto Parts Tesla Inc. ■ There’s still a solid demand pipeline for Model 3, with 450,000 orders (and we would anticipate orders could accelerate once the vehicle wait time declines). ■ Major questions about manufacturing competitiveness (i.e. comparative labor hours per vehicle, depreciation per vehicle, etc) remain. Our high level work does not suggest that Tesla is competitive (e.g. Depreciation per Model 3 at “under $2,000” compares with other OEM’s at $1,000- $1,500). But we do not believe that a thousand dollar cost disadvantage will derail the company’s proﬁt targets… the Model 3 ASP of $55,000+ can accommodate near term weaknesses in manufacturing. Updated Estimates and Valuation: We have ﬁne-tuned our estimates following 1Q results and updated guidance. Overall, we expect Auto gross margins of 21% in 2018 (25% for Model S & X, with M3 getting to 20% by 4Q18). We estimated cash burn of $500 MM in 2Q18 (total cash position of $2.2 bn, the lowest point in the yr but still well above TSLA’s $1.0- $1.5 bn minimum cash level), with positive free cash ﬂow by 4Q18 (see Exhibit 1 for more details). Our DCF-derived TP remains unchanged at $365. Overall, while we admire the ambitiousness of Tesla’s goals, and there are clear signs strong demand remains for the company’s core products, we remain cognizant of the signiﬁcant execution risks. As such, we maintain our Hold rating. Forecasts and ratios Year End Dec 31 2017A 2018E 2019E 1Q EPS -1.74 -3.80A – 2Q EPS -1.73 -1.86 – 3Q EPS -3.23 0.76 – 4Q EPS -3.62 2.31 – FY EPS (USD) -10.35 -2.38 12.29 Source: Deutsche Bank estimates, company data Page 2 Deutsche Bank Securities Inc. 3 May 2018 Case 1:18-cv-08865-AJN Document 30-1 Filed 03/18/19 Page 3 of 10 Autos & Auto Parts Tesla Inc. Figure 1: TSLA Summary Metrics Tesla Key Metrics 1Q17 2Q17 3Q17 4Q17 1Q18E 2Q18E 3Q18E 4Q18E F2017 F2018E F2019E F2020E Deliveries Model S 13,501 12,016 14,065 15,305 10,070 10,000 20,000 13,500 54,887 53,570 53,570 53,570 Model X 11,550 10,010 11,865 13,120 11,730 11,000 12,000 12,000 46,545 46,730 46,730 46,730 Model 3 / Y - - 220 1,542 8,180 27,000 48,000 64,500 1,762 147,680 350,000 500,000 Total 25,051 22,026 26,150 29,967 29,980 48,000 80,000 90,000 103,194 247,980 450,300 600,300 Auto Revenue ($MM) 2,290 2,287 2,363 2,702 2,735 3,658 5,789 6,236 9,641 18,419 28,318 33,034 Auto Gross Profit 637 646 442 527 555 614 1,185 1,462 2,252 3,815 6,840 8,577 Gross Margin 27.8% 28.3% 18.7% 19.5% 20.3% 16.8% 20.5% 23.4% 23.4% 20.7% 24.2% 26.0% Gross Margin ex-ZEV 27.8% 25.0% 18.7% 13.8% 18.8% 16.8% 20.5% 23.4% 21.1% 20.5% 24.2% 26.0% Service/Energy/Other Revenue 193 216 304 288 263 285 395 523 1,001 1,466 1,927 2,544 Service/Other Gross Profit (21) (55) (63) (89) (118) (54) (87) (71) (228) (330) (104) (67) Gross Margin -11.0% -25.4% -20.7% -30.7% -44.6% -19.1% -22.0% -13.6% -22.8% -22.5% -5.4% -2.6% Total Revenue 2,696 2,790 2,985 3,288 3,409 4,542 6,941 7,868 11,759 22,759 34,677 41,784 Total Gross Profit 678 674 459 455 472 725 1,264 1,558 2,266 4,018 7,829 10,100 Gross Margin 25.1% 24.2% 15.4% 13.8% 13.8% 16.0% 18.2% 19.8% 19.3% 17.7% 22.6% 24.2% EBITDA 223 264 (22) 6 (39) 271 786 1,080 471 2,097 5,464 7,276 margin 8.3% 9.5% -0.7% 0.2% -1.1% 6.0% 11.3% 13.7% 4.0% 9.2% 15.8% 17.4% EBIT (154) (125) (423) (464) (455) (194) 263 547 (1,165) 161 3,196 4,755 margin -5.7% -4.5% -14.2% -14.1% -13.4% -4.3% 3.8% 7.0% -9.9% 0.7% 9.2% 11.4% Net Income (282) (285) (540) (609) (643) (321) 134 415 (1,716) (415) 2,186 3,305 EPS $ (1.74) $ (1.73) $ (3.23) $ (3.62) $ (3.80) $ (1.86) $ 0.76 $ 2.31 $ (10.35) $ (2.38) $ 12.29 $ 18.23 Basic Shares 162.1 165.2 167.3 168.3 169.1 172.5 176.0 179.5 165.7 174.3 177.8 181.3 Diluted Shares 165.1 165.2 167.3 168.3 169.1 172.5 176.0 179.5 166.5 174.3 177.8 181.3 FCF Adj for Indirect Leasing GAAP Operating Cash Flow (69.8) (200.2) (300.6) 509.9 (398.4) 364.4 679.3 1,292.9 (60.7) 1,938.2 5,182.0 5,903.0 Collateralized Lease Borrowing 241.1 149.3 80.8 211.7 86.9 110.7 101.8 81.0 682.9 380.4 357.5 719.9 Core Operating Cash Flow 171.3 (50.9) (219.8) 721.6 (311.4) 475.1 781.1 1,373.8 622.2 2,318.6 5,539.5 6,622.9 CAPEX (552.6) (959.1) (1,116.4) (786.7) (655.7) (973.5) (826.0) (494.8) (3,414.8) (2,950.0) (3,200.0) (3,300.0) Adjusted FCF (381.4) (1,009.9) (1,336.2) (65.1) (967.1) (498.4) (44.9) 879.0 (2,792.6) (631.4) 2,339.5 3,322.9 Total Change in Cash Position 613.4 (970.7) 494.1 (162.1) (745.3) (411.9) 33.7 970.2 (25.3) 334.0 3,114.7 3,967.3 Source: Company ﬁlings, Deutsche Bank estimates Deutsche Bank Securities Inc. Page 3 Case 1:18-cv-08865-AJN Document 30-1 Filed 03/18/19 Page 4 of 10 3 May 2018 Autos & Auto Parts Tesla Inc. Appendix 1 Important Disclosures *Other information available upon request Disclosure checklist Company Ticker Recent price* Disclosure Tesla Inc. TSLA.OQ 301.15 (USD) 2 May 2018 1, 2, 6, 7, 8, 9, 14, 15 *Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at https://research.db.com/ Research/Disclosures/CompanySearch. 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For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at https://research.db.com/Research/Disclosures/CompanySearch Analyst Certiﬁcation Page 4 Deutsche Bank Securities Inc. 3 May 2018 Case 1:18-cv-08865-AJN Document 30-1 Filed 03/18/19 Page 5 of 10 Autos & Auto Parts Tesla Inc. The views expressed in this report accurately reﬂect the personal views of the undersigned lead analyst(s) about the subject issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a speciﬁc recommendation or view in this report. Rod Lache Historical recommendations and target price. Tesla Inc. (TSLA.OQ) (as of 05/02/2018) 500.00 Current Recommendations Buy Hold 400.00 Sell 6 Not Rated 8 Suspended Rating 7 Security price 300.00 1 ** Analyst is no longer at 5 4 Deutsche Bank 2 3 200.00 100.00 0.00 Jul '15 Jan '16 Jul '16 Jan '17 Jul '17 Jan '18 Date 1. 07/07/2015 Hold, Target Price Change USD 280,00 Rod Lache 5. 03/20/2017 Hold, Target Price Change USD 240,00 Rod Lache 2. 05/05/2016 Hold, Target Price Change USD 290,00 Rod Lache 6. 09/05/2017 Hold, Target Price Change USD 320,00 Rod Lache 3. 12/12/2016 Hold, Target Price Change USD 215,00 Rod Lache 7. 11/02/2017 Hold, Target Price Change USD 310,00 Rod Lache 4. 03/14/2017 Hold, Target Price Change USD 220,00 Rod Lache 8. 02/08/2018 Hold, Target Price Change USD 365,00 Rod Lache §§§§$$$$$§§§§§ Equity Rating Key Equity rating dispersion and banking relationships Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ) , we recommend that investors buy the stock. 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Page 9 Case 1:18-cv-08865-AJN Document 30-1 Filed 03/18/19 Page 10 of 10 David Folkerts-Landau Group Chief Economist and Global Head of Research Raj Hindocha Michael Spencer Steve Pollard Global Chief Operating Oﬃcer Head of APAC Research Head of Americas Research Research Global Head of Economics Global Head of Equity Research Anthony Klarman Paul Reynolds Dave Clark Pam Finelli Global Head of Head of EMEA Head of APAC Global Head of Debt Research Equity Research Equity Research Equity Derivatives Research Andreas Neubauer Spyros Mesomeris Head of Research - Germany Global Head of Quantitative and QIS Research International Production Locations Deutsche Bank AG Deutsche Bank AG Deutsche Bank AG Deutsche Securities Inc. Deutsche Bank Place Mainzer Landstrasse 11-17 Filiale Hongkong 2-11-1 Nagatacho Level 16 60329 Frankfurt am Main International Commerce Centre, Sanno Park Tower Corner of Hunter & Phillip Streets Germany 1 Austin Road West,Kowloon, Chiyoda-ku, Tokyo 100-6171 Sydney, NSW 2000 Tel: (49) 69 910 00 Hong Kong Japan Australia Tel: (852) 2203 8888 Tel: (81) 3 5156 6770 Tel: (61) 2 8258 1234 Deutsche Bank AG London Deutsche Bank Securities Inc. 1 Great Winchester Street 60 Wall Street London EC2N 2EQ New York, NY 10005 United Kingdom United States of America Tel: (44) 20 7545 8000 Tel: (1) 212 250 2500 Case 1:18-cv-08865-AJN Document 30-2 Filed 03/18/19 Page 1 of 17 Company Report December 13, 2018 Tesla (TSLA) Rating: Rollercoaster Ride with Model 3 Production Turning the OUTPERFORM Corner; Initiating at OP Price: $377.03 12-Month Price Target: The Wedbush View $440.00 We are initiating coverage of Tesla with an OUTPERFORM rating and $440 price Analysts target. Tesla has evolved into one of the most dynamic technology innovators over the last 30 years and, in our opinion, has put itself into an esteemed category of Daniel Ives 212-344-2073 companies such as Apple and Amazon that have revolutionized consumer buying Dan.Ives@wedbush.com habits and behaviors over the last decade. In our opinion, the company has the Strecker Backe most impressive product roadmap out of any technology/auto vendor around and 212-833-1367 will be a “game changing” driving force for the EV transformation over the next Strecker.Backe@wedbush.com decade with Model 3 front and center. While no investor will argue the innovation that Elon Musk & Co. have built at Tesla as the success is evident for anyone that has driven on a road over the last few years, the real fundamental question around Company Information what the stock is worth is complex given the confluence of issues surrounding Shares Outst (M) 179.5 52-Week Range $244.59 - $387.46 the name heading into 2019. From a potential capital raise on the horizon, laser- Market Cap (M) $67,676.9 focused Model 3 production metrics and profitability trajectory, lingering SEC/ Enterprise Value (M) $75,927 DOJ overhang stemming from Musk’s “going private” tweetstorm, to China TAM REV (M) in $ and the investments needed to get there, are just a few of the main debatable FYE Dec 2017A 2018E 2019E investor topics around Tesla over the next 12 to 18 months. While in this initiation Q1 Mar 2,696.3A 3,408.8A 7,381.3E report we will dig into each of these key topics in more detail, overall seeing the Q2 Jun 2,789.6A 4,002.2A 7,532.4E forest through the trees we believe Tesla has the most innovative product roadmap Q3 Sep 2,984.7A 6,824.4A 7,733.4E Q4 Dec 3,288.2A 7,188.5E 7,497.5E in the technology space over the next 5 to 10 years. With its flagship Model Year* 11,758.8A 21,423.9E 30,144.7E 3 poised to catalyze a broader move to electronic vehicles, renewable energy, EPS in $ and eventually broader ambitions for Musk and Tesla that will lead to further FYE Dec 2017A 2018E 2019E innovations around battery production and self-driving cars looking out into 2020 Q1 Mar (1.33)A (3.36)A 1.25E and beyond that should further transform Tesla into a technology titan over the Q2 Jun (1.33)A (3.06)A 1.22E coming years despite the near-term turbulence around the name. In a nutshell, Q3 Sep (2.92)A 2.90A 1.57E Q4 Dec (3.05)A 1.98E 1.43E the Tesla Model 3 production analysis we have built is the linchpin to our broader Year* (8.67)A (1.25)E 5.47E bull thesis and valuation on the company as we look out on the potential of this P/E NM NM 68.9x disruptive consumer technology play over the next decade. While this will be a bumpy road and never a smooth straight line with Musk & Co. at the helm, we Pricing data provided by Thomson Reuters. *Numbers may not add up due to rounding. believe Tesla has a golden opportunity to ramp Model 3 unit sales in 2019 and beyond and thus translate into massive FCF and profitability as we look out into 2022-2030 based on this detailed auto unit analysis. Wedbush Securities does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Please see pages 13–17 of this report for analyst certification and important disclosure information. www.wedbush.com Page 1 Case 1:18-cv-08865-AJN Document 30-2 Filed 03/18/19 Page 2 of 17 Investment Overview Tesla has evolved into one of the most dynamic technology innovators and, in our opinion, has put itself into an esteemed category of companies such as Apple and Amazon that have revolutionized consumer buying habits and behaviors over the last decade. In our opinion Tesla has the most impressive product roadmap out of any technology/ auto vendor around and will be a “game changing” driving force for the EV transformation over the next decade with Model 3 front and center. While no investor will argue the innovation that Elon Musk & Co. have built at Tesla as the success is evident for anyone that has driven on a road over the last few years, the real fundamental question around what the stock is worth is complex given the confluence of issues at Tesla/Musk & Co. While there are a number of hot topic variables around China demand and the impact on the company's model over the next decade, ramping Model 3 production, the Musk dynamic, Autopilot functionality (and missteps/crashes) and a stretched balance sheet, we ultimately believe Tesla has an opportunity to morph itself into an "Apple-like consumer brand." Bear Case Base Case Bull Case Model 3 production hits a major Model 3 production and Model 3 production hits the bottleneck in Fremont, fails to meet demand targets met; 10k per week target earlier demand/GM sees pressure. Street's profitability ramp in FY19 than expected. GM exceeds FY20 projections fail to materialize and beyond meets Street target goals with success of mid- with mid-range/base models softer expectations with the mid-range range and base model exceeding demand. Capital raise. and base vehicle on time. No demand. China TAM materializes; capital raise. Giga 3 ramps. Upcoming Catalysts Primary Value Driver Earnings in late January. Model 3 production trajectory Model 3 demand trajectory over the next 2 to 3 heading into 2019. Settling of lingering DOJ investigation years coupled by production yield and ability to meet and shareholder lawsuits. EV demand at target GM's. Profitability/cash flow projections for 2020 and beyond are key. Valuation Investor Sentiment With $22 of earnings power by 2025 and our FCF Positive projections of $5 billion by 2025 we believe a valuation of $440 is fair. At $440 Telsa would trade at EV/Rev of 1.2x and EV/EBITDA of 9x. Company Description Price Performance Tesla, Inc. designs, develops, manufactures, and sells 400.00 electric vehicles, and energy generation and storage 350.00 systems. The company's core automotive segment with 300.00 Model 3 as its flagship vehicle has established itself as a 250.00 leader in the EV segment. 12/17 03/18 06/18 09/18 12/18 Tesla Created by BlueMatrix Source: EDI www.wedbush.com Page 2 Case 1:18-cv-08865-AJN Document 30-2 Filed 03/18/19 Page 3 of 17 ... sb sb sb sb sb sb sb sb sb sb sb sb sb sb www.wedbush.com Page 3 Case 1:18-cv-08865-AJN Document 30-2 Filed 03/18/19 Page 4 of 17 We are Initiating Coverage of Telsa with an OUTPERFORM rating and $440 Price Target We are initiating coverage of Tesla with an OUTPERFORM rating and $440 price target. Tesla has evolved into one of the most dynamic technology innovators over the last 30 years and, in our opinion, has put itself into an esteemed category of companies such as Apple and Amazon that have revolutionized consumer buying habits and behaviors over the last decade. In our opinion, the company has the most impressive product roadmap out of any technology/auto vendor around and will be a “game changing” driving force for the EV transformation over the next decade with Model 3 front and center. While no investor will argue the innovation that Elon Musk & Co. have built at Tesla as the success is evident for anyone that has driven on a road over the last few years, the real fundamental question around what the stock is worth is complex given the confluence of issues surrounding the name heading into 2019. From a potential capital raise on the horizon, laser-focused Model 3 production metrics and profitability trajectory, lingering SEC/DOJ overhang stemming from Musk’s “going private” tweetstorm, to China TAM and the investments needed to get there, are just a few of the main debatable investor topics around Tesla over the next 12 to 18 months. While in this initiation report we will dig into each of these key topics in more detail, overall seeing the forest through the trees we believe Tesla has the most innovative product roadmap in the technology space over the next 5 to 10 years. With its flagship Model 3 poised to catalyze a broader move to electronic vehicles, renewable energy, and eventually broader ambitions for Musk and Tesla that will lead to further innovations around battery production and self-driving cars looking out into 2020 and beyond that should further transform Tesla into a technology titan despite the near-term turbulence around the name. The company’s efficiency in the EV space is in a league of its own from a battery cost perspective and unparalleled Supercharger network that continues to be major competitive advantages as established automakers look to go after market share vs. Tesla in 2019 and beyond. Tesla in the driver's seat on the EV secular shift. With the overall EV market representing between 1.5% and 2% of new vehicles sold worldwide today with industry forecasts indicating overall EV sales could reach 8% of all new vehicles by 2025, it is clear that Tesla is in the driver's seat on the EV market and is poised to see demand accelerate over the coming years especially with mid-range and lower price points on the horizon, which will be a major catalyst for growth. Gross margins ramping by 350 bps to 400 bps or more over the next three years will be key to the model transformation of Tesla, with battery technology efficiencies over the coming years being driven by Fremont and Gigafactory 1 and 3. On the gross margin front the big conundrum is that Tesla needs to ramp production of its lower priced $46k mid-range and eventually $35k base models to drive broader consumer demand, while importantly increasing GM's toward the mid 20% range over time. Herein lies a major challenge for Musk & Co. during the course of 2019/2020, as the company has navigated many production and cash flow challenges over the past year with another hurdle and balancing act ahead, as Telsa drives mass production on Model 3 and must maintain an optimal financial profile during this transition. While there are a number of hot topic variables around China demand and the impact on the company's model over the next decade, ramping Model 3 production, the Musk dynamic, Autopilot functionality (and missteps/crashes) and a stretched balance sheet, we ultimately believe Tesla has an opportunity to morph itself into an "Apple-like consumer brand" with the next 12 to 18 months, a pivotal window for the company to further separate itself from traditional US/German auto players now looking to double down on the EV market over the next decade that have been late to the game. www.wedbush.com Page 4 Case 1:18-cv-08865-AJN Document 30-2 Filed 03/18/19 Page 5 of 17 Balancing act for Musk & Co. in the near term with debt payments ahead. With profitability targets moved up ahead of Street expectations based on the company's impressive 3Q performance, which surprised even the most bullish investors and Model 3 production now past the Nightmare on Elm Street bottlenecks and issues seen over the last year, it all comes down to gauging consumer demand and the product roadmap for the mid-range and base versions ($35k) heading into next year. Will there be enough production and profitability to halt a capital raise, which remains a lingering overhang on the name, herein lies a major debate around Tesla. To this point, while we believe the company’s model is self-funding from a cash flow perspective going forward and could now pay down debt tranches over the next year, we do believe a capital raise of between $2 billion to $2.5 billion could be still on the docket (30%-35% chance, in our opinion) over the next 12 to 18 months as Musk & Co. aggressively invest into core Tesla production as well as a host of related initiatives (Gigafactory 3, Tesla Energy, Semi, solar, ride sharing) over the coming years and thus give themselves more flexibility on the balance sheet/cap ex if they (and the board) decide to head down this path. In a nutshell, Tesla has turned the corner on Model 3 production, demand looks strong into 2019/2020 and beyond based on underlying drivers for the EV market, and the financial model now is poised to generate improved profitability and cash flow that puts the risk of a capital raise in the background for now. However, there is no room for major production errors or another distraction from Musk over the coming year given its cash flow balancing act needed, coupled with the company still caught in the midst of ongoing shareholder lawsuits/DOJ investigation relating to the "going private saga" from a few months ago. Looking out over the next decade, we believe Tesla and Model 3 have the opportunity to transform consumer auto buying behavior and capitalize on this unprecedented market opportunity and its leadership position in the EV market with the Street now focusing on the demand opportunity rather than the production issues, which had been clouding the company's future over the last year. From a capex perspective we believe levels between $2.2 billion to $2.3 billion appear fair for FY2019 with a ramp to $2.7 billion in FY20 based on our analysis with more resources around Gigafactory 3 in China front and center as a driver for potentially higher levels of investments looking ahead. sb More Model 3 Production = Key to Cash Flow and Profitability Ramp 2019 will be a crucial year to monitor the supply/demand balance around Model 3 production out of Telsa’s flagship Fremont factory while carefully monitoring the GM and profitability trajectory as demand data points on the base price version of $35k are crucial to the company’s overall capital structure. We also note with US tax credits on electronic vehicles going from $7,500 in 2018 to $3,750 in 1H19 and $1,875 in 2H19, coupled by the current price of fuel, many investors are betting that demand drivers around Model 3 production could fade on the high end of the market (coupled by heightened competition from the likes of Porsche and Jaguar) and result in a significant capital raise by Tesla over the next 3 to 6 months in light of its mounting debt pile and thus representing a major overhang on the stock. To this point, as evidenced last quarter, Tesla’s profitability ramped/ has been accelerated vs. the Street’s original expectations as the stepped-up Model 3 production out of Fremont with bottlenecks in the rear view mirror, better expense controls, and an eventual move toward more vertical production over the next 3-4 years now appears on the horizon and thus took a big step forward over the past few months. This has been a huge relief to investors, coupled by the recent settling of Musk/Tesla’s case with the SEC stemming from his going private tweets, which has resulted in a stock rebounding dramatically from the lows seen in early September. www.wedbush.com Page 5 Case 1:18-cv-08865-AJN Document 30-2 Filed 03/18/19 Page 6 of 17 Capital raise not on the horizon...but. Based on our current model and GM analysis of Model 3 production over the next three years, we believe Tesla’s profitability trajectory and cash generation should be ample to meet the company’s ~$1.5 billion of debt obligations around the corner in the coming year with two more tranches due in March 2019 ($920 million) and November 2019 ($566 million). After a rollercoaster ride around Model 3 production hitting the elusive 5k per week now in the books, we believe the next goal will be around reaching a production run rate of 10k Model 3s per week over the next 12 to 24 months and importantly, hitting target GMs in the 25% range on Model 3. We believe a production run rate trending toward 7k per week in early 2019 and annual production close to 325k-350k is a firm base to build upon as Musk & Co. aim for its target goal of 10k per week. While production yields are still not at capacity in Fremont and Gigafactory 1, we believe the company’s $35k base Model 3 ramp will be at the center of the bull/bear thesis on Tesla heading into 1H2019 as starting production in 1Q19 (target plan as of now) will be another step forward for Musk and Tesla to pour water on the lingering Tesla bear thesis. We note there are some Tesla skeptics that believe a $35k base model is a pipe dream and will never hit the market given the current production yield and cost structure around Model 3 production, which speaks to why it is so important for Musk & Co. to produce mid-range ($46k) and base model ($35k) versions during the course of 2019. As of today the delivery estimate for the mid-range vehicle is for 6 to 10 weeks from now, which we are modeling to slowly improve as production ramps during the course of 2019. We also believe pent up in demand around Model Y and Roadster (Semi still a wild card in our opinion) will be incremental demand drivers starting in 2020 which we are modeling as further catalysts for Tesla as the company expands its leadership market on the EV market over the next decade. Geographically speaking, a key incremental growth driver for Tesla over the coming years will be opening up new consumer market opportunities in Europe and particularly China front and center. In China with reduced tariffs, an untapped EV market opportunity, and Gigafactory 3 on the horizon, we believe this represents a golden market opportunity for Musk & Co. starting in 2020 and in our opinion is a key ingredient in Tesla's recipe for success over the next decade as illustrated in our Wedbush Tesla Delivery Model (pages 9-10). sb Model 3 Production Ramp Analysis-A Deeper Dive and Key to the Tesla Bull Case Based on our scenario analysis we believe Tesla’s GM profile can stay in the 20%+ range even with a mid-ish teen GM profile initially (could be lower to start) on Model 3 $35k base versions slated to hit the market during the course of 2019. While the skeptics have serious doubts around the production trajectory for the base Model 3 version slated to start in 1Q19, we ultimately believe the success of this lower end, mainstream model and mid-range version will be key to Tesla’s ability to navigate through its debt and cash flow obligations over the next 12 to 18 months without having to raise additional capital. As of now Tesla is paying off its first tranche of debt and not factoring in a capital raise to its forecast although this could change if base Model 3 production hits a major snag in 2019 and/or disruptions hitting consistent 7k production targets eventually moving to 10k manifests out of Fremont and Gigafactory. With current Revs/Unit for Model 3 in the $60k range this past quarter having driven GM to ~23%, we believe these levels can sustain through most of 2019 and 2020 although with the $46k mid-range and $35k base model on the way this could see downward pressure especially in 1H19 with a lift back towards the low 20's with the march to 25% on tap by 2025. We note the base $35k Model 3 goal is on target to go live on the factory floor in late 1Q19 and while profitability will be in the red the first 6 to 9 months and margin dilutive, we believe this model along with more affordable leasing options will open up a much broader consumer market opportunity for Tesla over the next few years. We note that Model 3 gross margin was guided to track in line with 4Q as in 3Q (~20%), while on the other hand Model S and X margins should also stay constant despite China trade tensions and a handful of other near-term pressures. With long-term gross margins targets of roughly 25% for Model 3 expected to be an aggressive high bar to hit over time, the Street will be laser focused on this balancing act over the next 12 to 18 months especially with the ramp of the $35k model on the horizon. www.wedbush.com Page 6 Case 1:18-cv-08865-AJN Document 30-2 Filed 03/18/19 Page 7 of 17 Scenario analysis around Model 3 production. While Tesla struggled for the last year to reach the elusive 5k per week threshold, now the company is producing at a run rate of roughly 6k per week (850 per day) with the next major goal to hit 10k per week in production as the next key target during 2019. The key now for Tesla and Musk is around further expansion into higher consumer volume segments with price points on the mid range and base range Model 3 appealing to the broader consumer buyer over the coming year. While the upside is increased market share in these higher volume segments the ultimate worry is that with the current cost to produce Model 3 at $28k - $34k based on industry analysis how can you sell a car at ~$35k? To this point its all about production yield, more vertical integration expansion, and further production out of Gigafactory 1 and eventually Gigafactory 3 (flagship Shanghai build out under way) set to see production in 2H19. While further efficiencies on Model 3 production and an expected ramp in R&D over the coming 12 to 18 months to fund a host of projects around Model 3, autopilot, ride sharing, and other skunk works initiatives, we believe over the next 5 to 10 years a more efficient production ramp and process will enable Tesla to see a discernible jump in profitability and margins beginning in 2020. In our model, we take a deep dive and an analysis of where we view unit volume and average price points for Tesla’s auto production going forward. There are two major focal points from the perspective of the Street on this unit volume model: 1.) Can unit volume reach over 1 million units annually by 2025 and approach 2 million units annually by 2030 and 2.) Will the EBIT and FCF ramp be quick enough that Tesla does not need a significant capital raise in the next 12 to 18 months. Ultimately while demand for Model 3 could move around over the coming quarters especially with a new range of low to mid-market models hitting in 2019, we firmly believe Tesla is the linchpin around driving the transformational move to the EV shift happening among consumers worldwide. Tesla production yields improving and moving to more vertical-like production over the coming years with more cost efficiencies from its Fremont and Gigafactories (with China a key X- factor) will be crucial to the company’s success going forward. While there will be speed bumps along the way, we believe getting worldwide production annually to between 750k and 1 mm units by 2020 is an achievable target that will further bolster the Tesla growth thesis for the coming years as this remains a key hurdle to hit over the next 2 years. With Tesla focusing more on vertically integrating battery packs, storage products, and lithium-ion cells we believe the company is poised to see much more production efficiency (and improved GM) out of Gigafactory 1 and Fremont which remains the foundation for Tesla to find a firm profitability and GM ramp on Model 3 production especially with the all-important mid-range and base models hitting the road in 2019. Summary of Wedbush Tesla Delivery Model Analysis and Thoughts We have done an in depth analysis around Model 3 deliveries (see Wedbush Tesla Delivery Model pages 9-10) and importantly trying to model out the scenario we believe is most likely at this point around the demand trajectory for Telsa’s auto units between now and 2030. There are a number of variables around production levels out of Fremont/Gigafactory with Model 3 yields, gauging demand levels/timing of Model Y,/Roadster/Pick-Up, and a host of other factors relating to overall EV sales in the consumer market worldwide that drive our bottoms up analysis. That said, the key to our Tesla auto unit analysis through 2030 is based on Model 3 demand especially with the mid-range ($46k) and base model ($35k) poised to catalyze broader volumes of adoption for the company over the next decade. In the near term we are modeling Tesla to ship 401 million auto deliveries in 2019, up 60%+ year over year with Model 3 units on a demand trajectory to exceed 300 million. We believe the mix of Model 3 vs. other units will peak at 76% and trend towards the mid to high 60% range from 2021 through 2030. Beginning in 2020 we are forecasting shipments of the Model Y to start to taking hold and ramp aggressively over the next few years along with sales of Roadster and potentially the Pick Up vehicle. With revenue per unit currently trending toward $70k, we believe the volumes driven by lower priced mid-range and base model will drive this figure downward to $55k by 2025 and eventually level out in the ~$50k range between 2025 and 2030 based on our Tesla Delivery Model. In a nutshell, this Tesla Model 3 production analysis we have built is the linchpin to our broader bull thesis and valuation on the company as we look out in the potential of this disruptive consumer technology play over the next decade. While this will a bumpy road and never a smooth straight line with Musk & Co. at the helm, we believe Tesla has a golden opportunity to ramp Model 3 unit sales in 2019 and beyond and thus translate into massive FCF and profitability as we look out into 2022-2030 based on this detailed auto unit analysis. www.wedbush.com Page 7 Case 1:18-cv-08865-AJN Document 30-2 Filed 03/18/19 Page 8 of 17 Valuation Thoughts The major bull/bear debate on Tesla centers around the valuation and how to analyze an auto/ technology company with so many production/GM variables around its EV leadership position with Model 3 front and center, unmatched brand awareness and technology around battery efficiency, and a technology roadmap that in our opinion is unparalleled over the next decade. With clean technology, luxury automakers, and other auto technology/industrial players as valuation barometers on the trifecta valuation metrics of: PE, Price/Sales, and EV/EBITDA the a valuation range of $340 to $360 for Tesla is fair even with a premium multiple to the group with a EV/ Rev of 2.0x and EV/EBITDA of 13x off FY20 numbers. However, as we view Tesla as a disruptive technology vendor along the likes of Apple, Google, and Amazon and believe a triangulated, longer term valuation approach for Tesla is more accurate to capture the intrinsic value in this innovative technology roadmap. To this point, looking out a more normalized model with $22 of earnings power by 2025 and our FCF projections of $5 billion by 2025 we believe a valuation of $440 per share is fair for Tesla. At $440 Telsa would trade at a PE of 20x our 2025 EPS estimate and trade at 17x our long-term FCF target of $5 billion, while representing an EV/Rev of 1.2x and EV/EBITDA of 9x. www.wedbush.com Page 8 Case 1:18-cv-08865-AJN Document 30-2 Filed 03/18/19 Page 9 of 17 Wedbush Tesla Delivery Model (in thousands, except for Units & Rev. Per Unit) 2018E 2019E 2020E 1Q18A 2Q18A 3Q18A 4Q18E FY18E 1Q19E 2Q19E 3Q19E 4Q19E FY19E 1Q20E 2Q20E 3Q20E 4Q20E FY20E Unit Delivery Model S & X 21,815 22,319 27,710 27,288 99,132 21,597 22,096 27,433 27,015 98,141 21,273 21,654 27,159 26,124 96,209 Model 3 8,182 18,449 56,065 63,376 146,072 66,274 75,641 80,734 80,488 303,136 79,529 92,509 97,768 100,489 370,295 Model Y, Roadster G. II, Pick-up, Semi - - - - - 12,000 15,000 18,000 45,000 Total Units 29,997 40,768 83,775 90,664 245,204 87,871 97,737 108,167 107,503 401,277 100,802 126,163 139,927 144,613 511,504 Year-over-year Growth Model S & X -12.9% 1.3% 6.9% -4.0% -2.3% -1.0% -1.0% -1.0% -1.0% -1.0% -1.5% -2.0% -1.0% -3.3% -2.0% Model 3 25154.5% 4010.0% 8180.7% 710.0% 310.0% 44.0% 27.0% 107.5% 20.0% 22.3% 21.1% 24.9% 22.2% Model Y, Roadster G. II, Pick-up, & Semi NA NA NA NA Total Units 19.7% 85.1% 220.5% 202.5% 137.6% 192.9% 139.7% 29.1% 18.6% 63.7% 14.7% 29.1% 29.4% 34.5% 27.5% Unit Delivery Mix Model S & X 73% 55% 33% 30% 40% 25% 23% 25% 25% 24% 21% 17% 19% 18% 19% Model 3 27% 45% 67% 70% 60% 75% 77% 75% 75% 76% 79% 73% 70% 69% 72% Model Y, Roadster G. II, Pick-up, Semi 10% 11% 12% 9% Total Delivery 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Reveue Per Unit $ 85,405 $ 76,478 $ 70,168 $ 68,976 $ 72,640 $ 71,996 $ 65,618 $ 59,783 $ 58,147 $ 63,440 $ 67,244 $ 61,353 $ 55,538 $ 54,019 $ 58,850 5.1% -16.4% -11.7% -14.2% -12.2% -15.7% -14.2% -14.8% -15.7% -12.7% -6.6% -6.5% -7.1% -7.1% -7.2% Revenue - Auto. Delivery $ 2,561,881 $ 3,117,865 $ 5,878,305 $ 6,253,689 $ 17,811,740 $ 6,326,369 $ 6,413,320 $ 6,466,511 $ 6,250,981 $ 25,457,182 $ 6,778,357 $ 7,740,479 $ 7,771,313 $ 7,811,778 $ 30,101,927 Sources: Company Reports and Wedbush Securities, Inc. estimates Daniel Ives (212) 344 - 2073 Dan.Ives@wedbush.com www.wedbush.com Page 9 Case 1:18-cv-08865-AJN Document 30-2 Filed 03/18/19 Page 10 of 17 Wedbush Tesla Delivery Model (in thousands, except for Units & Rev. Per Unit) 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E Total Total Total Total Total Total Total Total Total Total Unit Delivery Model S & X 98,133 99,114 100,106 98,104 95,160 91,354 87,700 84,192 80,824 77,591 Model 3 446,946 536,336 616,786 703,136 787,512 866,264 952,890 1,048,179 1,152,997 1,233,707 Model Y, Roadster G. II, Pick-up, Semi 145,350 203,490 248,258 292,944 333,956 367,352 404,087 444,496 488,946 528,061 Total Units 690,430 838,940 965,149 1,094,184 1,216,629 1,324,970 1,444,677 1,576,867 1,722,767 1,839,359 Year-over-year Growth Model S & X 2% 1% 1% -2% -3% -4% -4% -4% -4% -4% Model 3 21% 20% 15% 14% 12% 10% 10% 10% 10% 7% Model Y, Roadster G. II, Pick-up, & Semi 223% 40% 22% 18% 14% 10% 10% 10% 10% 8% Total Units 35.0% 21.5% 15.0% 13.4% 11.2% 8.9% 9.0% 9.2% 9.3% 6.8% Unit Delivery Mix Model S & X 14% 12% 10% 9% 8% 7% 6% 5% 5% 4% Model 3 65% 64% 64% 64% 65% 65% 66% 66% 67% 67% Model Y, Roadster G. II, Pick-up, Semi 21% 24% 26% 27% 27% 28% 28% 28% 28% 29% Total Delivery 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Reveue Per Unit $ 56,496 $ 57,061 $ 56,490 $ 55,643 $ 54,530 $ 53,439 $ 52,371 $ 51,323 $ 50,297 $ 49,291 -4% 1% -1% -2% -2% -2% -2% -2% -2% -2% Revenue - Auto. Delivery $ 39,006,381 $ 47,870,576 $ 54,521,454 $ 60,883,466 $ 66,342,739 $ 70,805,529 $ 75,658,564 $ 80,929,787 $ 86,649,471 $ 90,663,412 Sources: Company Reports and Wedbush Securities, Inc. estimates Daniel Ives (212) 344 - 2073 Dan.Ives@wedbush.com www.wedbush.com Page 10 Case 1:18-cv-08865-AJN Document 30-2 Filed 03/18/19 Page 11 of 17 Tesla, Inc. (TSLA) Income Statement ($ in millions, except per share) 2017A 2018E 2019E 2020E 1Q17A 2Q17A 3Q17A 4Q17A FY17A 1Q18A 2Q18A 3Q18A 4Q18E FY18E 1Q19E 2Q19E 3Q19E 4Q19E FY19E FY20E Mar-17 Jun-17 Sep-17 Dec-17 Total Mar-18 Jun-18 Sep-18 Dec-18 Total Mar-19 Jun-1