Buying Your Own BS

How companies move cash from their left pocket to the right pocket and call it "revenue."

Let’s say you are the CEO of a public company. Your job is to run the company for the benefit of the shareholders. There are rules about how you can do this. There are committees. There are policies. There is probably a PDF somewhere called Related Party Transactions Policy_Final_v7_REALFINAL.pdf.

But you are also a human being with a family, and families contain nephews.

Your nephew needs money. So he starts a consulting firm.

This is convenient because your company has recently discovered that it needs consulting. Not accounting consulting, or legal consulting, or cybersecurity consulting. Something obscure..er. “Strategic advisory” consulting, maybe.

And look, who can say whether your nephew is qualified to strategically advise? He has a website. He has used the word “ecosystem” in a sentence.

Anyways, you decide your company should use your nephew’s consulting services. So, you award him a contract.

Is this allowed? If you ask a normal person, they will say “no, that’s basically stealing from the shareholders to enrich your family.” And in theory, the SEC agrees. This is called a “related-party transaction,” and it is generally considered capital b Bad.

But in practice? If you control the board of directors, your lawyers finagle the disclosure, and you put a cute little footnote in your annual report that says, “By the way, we paid the CEO’s nephew $1 million for consulting,” you can maybe kind of just do it? Will the FBI raid your offices? Probably not. Will the SEC care? Maybe? But that’s likely a risk worth taking in the current environment.

Anyway, Elon Musk does not have a 23-year-old nephew with a consulting firm. But he does have a car company, and a rocket company, and an AI company.

A Slightly More Real Example

Let’s say you are a car company and you build a weird, stainless-steel pickup truck. But the new truck isn’t selling. Maybe you lower the price? Or run ads?

Or, if you are Elon Musk, you just make your rocket company buy the unsold trucks.

Bloomberg recently reported that Tesla made $573 million in revenue by selling things to Musk’s other companies. A big chunk of that is because SpaceX bought more than $100 million worth of Cybertrucks. Why does a space company need Cybertrucks? No one knows.

Regardless, this is the equivalent of hiring your nephew.

When you read that Tesla had a certain amount of “sales,” you naturally assume that regular people chose to buy a Cybertruck over a Ford or a Toyota. You assume it reflects real market demand.

But that is not what happened here.

If you are a regular investor with a life, and you read a headline like “Tesla sold another $100 million worth of Cybertrucks,” you probably think: great, people want the truck.

That is the problem with related-party transactions. They take numbers that are supposed to mean one thing and make them mean something else.

Revenue is supposed to mean: customers bought the product.

And maybe it is all fine. Maybe SpaceX has a perfectly reasonable need for $100 million of Cybertrucks. Maybe astronauts have been quietly begging for angular stainless-steel pickups!

That is the magic trick. Nothing illegal has to happen. No one has to stuff cash into a duffel bag.

You just move money between companies, disclose it in language only a securities lawyer could love, and let investors keep believing the number means what they think it means.

The trucks were sold.

The question is whether the market bought them.