Gordon Johnson: With 90-95% Conviction Rate, The DoJ's Tesla Investigation Is 'Concerning For All Those Long The Stock'

The simultaneous civil and criminal investigations of Tesla, Inc. TSLA are far more serious than Street chatter indicates, according to Gordon Johnson. 

The Analyst

The Vertical Group managing director discussed the Securities and Exchange Commission and Department of Justice's Tesla investigations in a Wednesday note. 

The Thesis

The investigation is more concerning than what others in the industry are portraying for a few key reasons, Johnson said. (See his track record here.)

They are: 

• A recent New York Times piece said the SEC investigation is now considered “wide-ranging.” The investigation now covers a wider range of topics like Musk’s tweets and personal trading, Johnson said.
• Bloomberg reported a criminal investigation by the Department of Justice into public statements made by the company and its CEO. “We see this as substantial; in fact, based on discussions with securities lawyers this AM, we believe this is very substantial; further, given TSLA’s statement yesterday, where they did not deny the Bloomberg story, they have effectively confirmed the Bloomberg article," Johnson said. 
• The Justice Department generally only steps into the most serious securities fraud cases, Johnson said. “Typically, in our view, when the DOJ gets involved alongside the SEC, there is strong evidence of egregious activity.”
• Tesla's top shareholders remain loyal, Johnson said, but he remains skeptical of investor confidence in light of the criminal investigation. “It would seem to reason that their bosses/risk committees are going to begin questioning why they are undertaking so much risk in a CEO under criminal investigation for securities fraud, as well as a board that seems to be somewhat oblivious to the risks.”
• The civil and criminal inquiries provide an easy out for those who long the stock, as they can still believe in Tesla’s potential while selling on the basis of the headline risk from the SEC and Justice Department, Johnson said. 

“The DOJ, with all the resources of the Treasury Department, best lawyers in the world and U.S. government behind it, has a conviction rate of 90-95 percent; thus, them looking into TSLA should be concerning for all those long the stock.”

Price Action

Tesla shares were up 2.84 percent at $293.04 at the time of publication Wednesday. 

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