Tesla (TSLA) Tanks After News of SEC Probe

Shares for electric car maker Tesla, Inc. (TSLA) saw sharp declines on the morning of Dec. 6 upon news of a probe by the Securities and Exchange Commission (SEC). The SEC investigation was prompted by a whistleblower complaint filed by a former employee alleging improper business practices with regard to informing customers about the fire hazards from its solar panels.

Tesla shares tumbled by more than 3% in pre-market trading to reach a low of $956.92 before recovering. As of this writing, they were changing hands for $982.49, still down by roughly 2% from the day's start.

Defective Solar Panels and Installation Problems  

Steven Henkes, who is the whistleblower, was a manager at car maker Toyota Motor Corporation's (TMC) North American quality division. He joined SolarCity, which is now part of Tesla Energy, months before the company was acquired for $2.6 billion in 2016. He was fired by the company in August 2020 but sued back, alleging that the termination occurred because he raised concerns about the quality of Tesla's solar panels and its installation practices. 

In his SEC complaint, Henkes stated that Tesla did not disclose "the liability and exposure to property damage, risk of injury for users, fire etc. [from its panels] to shareholders." About 60,000 residential customers and 500 government and commercial accounts have been affected by the issue, the complaint states. The company's top executives "cautioned any communication of this issue to the public as a detriment to the Tesla reputation. For me, this is criminal," Henkes stated in the complaint.

Previously, Henkes told CNBC that there is a "real threat of fires due to serial defects in the Tesla installation." The U.S. Consumer Product Safety Commission also included Henkes' testimony as evidence in a federal safety probe back in March 2021.

Customers for Tesla's solar rooftop systems comprise a broad array and include military housing units at Fort Bliss, schools in the Los Angeles Unified School District (LAUSD), and corporate customers like Amazon.com, Inc. (AMZN) and Walmart Inc. (WMT).

The latter company sued Tesla for seven store fires in 2019. "Tesla routinely deployed individuals to inspect the solar systems who lacked basic solar training and knowledge," Walmart stated, adding that the company had also installed solar panels with defects visible to the naked eye at its stores. Tesla and Walmart settled their suit in January 2020 and did not disclose details.

A Growing Business 

Tesla purchased SolarCity, the division responsible for solar panel installations, in a controversial acquisition back in 2016. The company was started by Tesla CEO Elon Musk's cousins Lyndon and Peter Rive. SolarCity was a leader in solar panel installations, garnering a 35% market share, for almost a decade before its debt levels became unsustainable.

Solar energy constituted a very small portion of Tesla’s overall revenue mix until last year, when the company reported a 30% jump in revenues for the division. According to research firm Wood Mackenzie, Tesla was the second-biggest solar panel installer in the United States last year and had a 7.6% share of the market in the final quarter of last year. In February 2020, Alex Potter, analyst with Piper Sandler, estimated that Tesla's solar and battery business could reach $80 billion in revenue by the 2030s.