Tesla shares popped on Wednesday after Goldman Sachs analysts upgraded them to Buy, but the firm is coming under fire now for that upgrade. It came a matter of hours before it was revealed that it is one of the lead book runners on Tesla’s $2 billion secondary share offering.

Goldman Upgrade Of Tesla Motors Inc Sticks Out Like A Sore Thumb

Tesla announces capital raise to fund Model 3 ramp

Tesla has been very public with the success of its mass market Model 3, which isn’t even set to go into production until next year. The automaker took hundreds of thousands of preorders for the car starting even before actually unveiling it. Then in the last earnings report, Tesla management stunned Wall Street by announcing that they have moved up the timeline for their target of producing 500,000 cars annually by two years to 2018, triggering a multitude of analyst reports stating that the already-ambitious target has moved into the realm of impossibility.

At the time of the earnings report, Tesla management said they might have to raise more capital to fund the earlier timeline, and then they announced last night that they’re holding a $2 billion capital raise. The automaker will sell $1.4 billion in stock, and CEO Elon Musk will sell an additional $600 million for tax purposes related to his exercise of over 5.5 million stock options.

What about that Chinese wall?

Goldman Sachs is the lead underwriter of this new stock offering, and not long after it was announced, Twitter started filling up with snide tweets from people who noted that the news came out just hours after the firm upgraded Tesla stock. MarketWatch notes that legally, firms that are running a secondary stock offering don’t have a blackout period like those that are required during an initial public offering. Firms that are leading an IPO are barred from publishing investment research on the company for a period around the IPO.

[drizzle]However, it’s easy to see why the timing of Goldman’s upgrade is raising some eyebrows, to say the least. After all, when a firm like Goldman upgrades a stock, headlines about it will fly and investors will buy just because of the upgrade. Analyst Patrick Archambault didn’t even increase his price target for Tesla with his upgrade.

Investment banks that publish research and also serve as book runners for offerings are supposed to keep up what’s called a “Chinese wall” between their research and investment banking businesses to avoid conflicts of interest.

In an email, a spokesperson for Goldman Sachs told MarketWatch, “We followed all of our standard policies and procedures with respect to our research publication on Wednesday.”

A lawyer the media outlet spoke with opined that the timing of the upgrade and the offering announcement is probably a coincidence, although he agreed that it looks suspicious.

A common practice on Wall Street?

Zero Hedge noted that Morgan Stanley did something similar more than two years ago. The firm upgraded Tesla shares and set a price target that was more than 100% higher than the share price at that time and then shortly thereafter announcing that it was underwriting the automaker’s $1.6 billion convertible bonds offering.

The website doesn’t pull any punches on Goldman’s upgrade of Tesla either, describing the firm’s reasoning as “absolutely idiotic ‘rationale.'” Indeed, Archambault states that he sees “fewer visible catalysts than before,” which is a head-scratcher when considering why he thought the automaker deserved an upgrade.

However, he also seemed to think that the recent pullback in Tesla shares was enough to warrant the upgrade, which might be deemed somewhat plausible since he didn’t raise his price target. The problem is the timing of the upgrade around the news about the secondary offering.

After initially pulling back on Thursday, Tesla shares edged higher by as much as 0.98% to $213.24 in afternoon trading.

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