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SEC Checking Under Tesla’s Hood

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  • Posted on: Aug 10 2016

Did Tesla violate securities laws by not disclosing a fatal accident?

In May, the driver of a Tesla Model S was killed after colliding with a truck while the Autopilot feature, which is designed to assist drivers in steering, braking and avoiding collisions, was engaged. Since October 2014, Tesla Motor Co. has installed autopilot software in all of its cars, even though the feature is still being tested in a public beta.

Now, the Securities and Exchange Commission (“SEC”) is said to be probing the matter to determine if Tesla violated the federal securities laws by failing to disclose the fatal accident. Tesla claims it immediately reported the crash to the National Highway Traffic Safety Administration (“NHTSA”), however. The overarching issue is whether the company should have also disclosed the crash to the SEC. Some observers argue that the accident was a material event, and the electric car maker breached its corporate duty by not informing the agency, and its investors.

While the SEC has not confirmed that an investigation is underway, the NHTSA and the National Transportation Safety Board are looking into the crash. For its part, Tesla said it has not received any communication from the SEC, and also noted that this is the first fatality in 130 million miles of travel with the Autopilot mode activated. While the company acknowledges the system has not been perfected, the system is designed to reduce drive workload and improve safety. However, there have recently been other non-fatal accidents in Montana and Pennsylvania in which Tesla drivers were in the self-driving mode.

The accidents come at an inopportune time for Tesla, and its founder, Elon Musk, who until this time has been the darling of investors. The company recently announced shipments of Tesla models missed second quarter projections after previously announcing a first quarter miss and has been forced to revise its projected shipments downward for the year.

On the other hand, it remains to be seen whether the accident was material to Tesla’s future. Shares of the company’s stock rose after news of the crash first became public on July 1. Investors in the electric car maker are said to view this as developing technology and that errors are inevitable.

Questions have also been raised as to whether the driver was using the Autopilot feature as intended. Drivers are required to maintain control of the vehicle, keeping both hands on the wheel at all times. The system alerts the driver if hands are not detected and the car is designed to slow down until the driver responds. Whether the SEC will find that this accident was a material event that should have been disclosed is uncertain, but any company being probed by the agency needs to engage the services of an experienced attorney.

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