Firing a warning shot at a thriving corner of Wall Street, federal authorities charged Thursday with criminal and civil securities fraud. Nikola’s founder is a startup car manufacturer that went public last year through a merger with an investment company.
In an indictment from the US Attorney’s Office in Manhattan, the company’s founder, Trevor Milton, was charged with misleading investors, particularly individual investors, about the technology for the battery and hydrogen-powered cars the company hoped to produce. In a separate civil case filed Thursday, the Securities and Exchange Commission also charged Mr. Milton with securities fraud.
Dual legal filing is the biggest lightning bolt prosecutors and securities regulators have put into the supercharged market for investment vehicles known as special purpose acquisition companies, which regulators and some investors have argued are rife with potential problems. More such cases may be filed in the coming months; regulators are investigating several other companies and executives in similar circumstances.
The investment vehicles, called SPACs, raised nearly $ 200 billion in an initial public offering with the specific purpose of finding and buying a going concern. If SPAC doesn’t buy the company within two years, their sponsors, often professional investors or Wall Street bankers, must return the money they raised – a position that critics say prompts them to buy shaky or untested businesses.
The SPAC boom has coincided and has been fueled by retail investors who share tips and trading strategies on social media, often choosing to buy in droves in companies they believe are undervalued or doomed to greatness. These individual traders, often backed by professional investors or company executives, have helped drive the stock prices of various companies including GameStop, AMC, and Tesla.
Prosecutors and the SEC said that for nearly a year, Mr. Milton has used social media, television and podcasts to spread “false and misleading statements regarding Nikola’s product and technology.”
One such misleading statement, according to the prosecution’s indictment, concerned the company’s Nikola One prototype long-haul truck. The prototype didn’t work, despite Mr. Milton’s enthusiastic claims about it.
Switching to electric vehicles
Federal prosecutors and securities regulators launched an investigation into Nikola last fall, around the time the investment company released a report that questioned its products and some of Mr. Milton’s claims. The firm, Hindenburg Research, said it released a promotional video to suggest it had a working prototype, but never reported that the truck was only moving forward because it was rolling down a hill in neutral. Mr. Milton resigned a few weeks later.
The SEC also noted in its complaint that a Bloomberg News article published in June 2020 said Mr. Milton had “exaggerated” the capabilities of his truck.
However, Nikola went public in June 2020 as a result of a $ 700 million merger with SPAC called VectorIQ, which was founded by Steve Girsky, a former CEO of General Motors and a board member who also worked at Morgan Stanley. Mr Girski put Mr Milton and Nika in touch with GM CEO Mary T. Barr and the two companies agreed to work together on heavy trucks and pickup trucks; this deal was decreased significantly in November…
Some young, unverified companies have chosen to merge with SPAC because it usually happens faster, requires less disclosure, and attracts less investor and regulatory attention than a conventional IPO. Nicola, for example, managed to go public just five years after Mr. Milton founded it.
“In carrying out his fraudulent scheme, Milton exploited the structure of the SPAC,” said US Attorney in Manhattan Audrey Strauss on Thursday.
Federal prosecutors say the sharp drop in stocks that began last summer hurt retail investors, but not early investors in the company, including Mr. Milton. Nikola’s stock traded at less than $ 13 Thursday afternoon, down about 10 percent on the day after falling from more than $ 65 in the middle of last year when the company’s valuation topped Ford Motor’s.
The SEC complaint said that Mr. Milton owned approximately 25 percent of Nikola’s shares following the SPAC deal and “ended up receiving tens of millions of dollars in personal gain as a result of his misconduct.” Securities regulators noted that Mr. Milton “embarked on an ongoing public relations campaign targeting a class of investors whom he called“ robinsider investors ”” – a reference to a popular retail brokerage firm that just raised $ 2.1 billion in its own initial public offering…
Mr. Milton’s lawyers said in a statement that the government is trying to “criminalize the legitimate conduct of business.” The team added: “Mr. Milton was wrongly indicted as a result of a flawed and incomplete investigation in which the government ignored important evidence and did not question important witnesses. ”
Mr. Milton was taken into custody in Manhattan Thursday morning and released on a $ 100 million bond signed by two other people and secured by two $ 40 million real estate properties.
Nicola said in a statement that Mr. Milton has not been associated with the company since he stepped down in September 2020. “Today’s government action is directed against Mr. Milton individually, not against the company,” the company said in a statement. “Nicola worked with the government throughout the investigation.”
The authorities did not charge anyone, including other executives, or the company itself with any wrongdoing. The SEC complaint seemed to justify its focus solely on Mr Milton, noting that even after becoming the executive chairman of Nikola following the merger with VectorIQ, he had firm control over the company and remained its primary spokesperson and gave away orders to others. In the complaint, he described him as a hands-on leader who “dived into the details of Nikola’s technology and product development process.”
A high school and college dropout Mr. Milton founded Nikola with the goal of becoming a Tesla trucking company. Like Elon Musk, CEO of Tesla, Mr. Milton has built a reputation as a charismatic showman with an ambitious vision of revolutionizing the industry. “We’re going to have complete control over the shipping in America,” he said. told Automotive World last year…
Mr. Milton even named his company after the inventor whose last name Mr. Musk’s business uses. Nikola Tesla…
Tempted by the prospect of finding the next Tesla, in recent years, large and small investors have poured money into startups like Nikola. They concluded that the world would quickly move from fossil-fueled cars and trucks to electric cars and hydrogen cars, and that startups would be ahead, rather than big-name automakers like GM and Daimler. But unlike Tesla, which has produced and sold hundreds of thousands of electric vehicles over the years, many of the new entrants struggled to make even a few thousand.
The SEC has been warning investors, starting this year, of the dangers of SPAC and the businesses they are acquiring, especially not to lull people into overly optimistic statements. Several companies that have completed mergers have disclosed investigations by the SEC, federal prosecutors, or both.
Stanford Law School Clearing House found that at least 30 companies shareholders have sued shareholders since 2019.
Eric Gordon, professor of business and law at the University of Michigan, said the authorities “are sending a message that they think SPAC sets the stage for more serious things than just careless disclosures.” He added: “They think this is a breeding ground for fraud and misleading.”
Just two weeks ago the SEC reached a settlement with several parties involved in the planned merger of Momentus, the company that said it has developed unique propulsion technology, and Stable Road Acquisition, SPAC. Regulators said investors were misled into believing that the propulsion system was successfully tested in space, when in fact it failed.
Federal prosecutors and securities regulators are also investigating Lordstown Motors, a company hoping to make electric pickups and merging with SPAC last year.
Lordstown, Ohio stated that raised some much needed money this week, but its commercial production has not yet begun. Federal authorities are investigating whether the company and founder Steve Burns, who stepped down as CEO in June, were not exaggerating about customer interest in its truck, which is intended for use by businesses such as contractors and utilities.
Federal prosecutors are also investigating the merger of Lordstown with DiamondPeak, a SPAC created by David Hamamoto. former Goldman Sachs partner and a Wall Street real estate investor.
But SPAC supporters said the allegations against Mr. Milton and other investigations should not be used to tarnish the reputation of these investment vehicles, which some people on Wall Street consider innovative. Douglas Ellenoff, a New York-based lawyer whose firm specializes in representing the SPAC founders, said some regulators “are making statements that stigmatize the industry as a whole.”