Company Acquired By SPAC Agrees To Pay $125 Million To Settle SEC Probe Months After CEO Was Charged With Fraud
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  • Company Acquired By SPAC Agrees To Pay $125 Million To Settle SEC Probe Months After CEO Was Charged With Fraud

    On December 21, 2021, the Securities and Exchange Commission (SEC) announced that Nikola Corporation—a publicly traded company that develops, manufactures, and sells electric trucks—had agreed to a $125 million settlement agreement to end the SEC’s investigation into claims that the company, both directly and through its former CEO, Trevor Milton, had deceived investors about the company’s ability to build hydrogen-powered vehicles and other issues.  As part of the settlement, Nikola neither admitted nor denied the claims against it, and agreed to continue cooperating with the SEC in its separate investigation into Milton himself.  The SEC previously brought a suit against Milton, who was also charged by the Department of Justice (“DOJ”), and that case remains pending.

    Nikola became a public company in June 2020 through a $3.3 billion business combination with VectoIQ Acquisition Corp. (“VectoIQ”), a special purpose acquisition company (“SPAC”) with its shares listed on NASDAQ.  In September 2020, only months after being acquired by the SPAC, Nikola’s then-CEO resigned after a short-seller’s report alleged that while Nikola said it designed key components in-house—such as the batteries powering its cars—it appeared to simply be buying or licensing components from third parties.  The report also alleged that the company also had not produced hydrogen at the reduced prices it had previously touted.  Investors sued the company soon after the short-seller’s report, while the DOJ and SEC launched investigations into the report’s allegations.

    As we have previously reported, on July 29, 2021, the DOJ announced the unsealing of a criminal indictment against Milton for allegedly knowingly misleading investors about Nikola’s ability to build electric and hydrogen-powered vehicles and other green technology, and the SEC filed a parallel civil action against Milton based on the same facts.  In particular, they alleged that Milton made false and misleading statements that:  (1) the company had early success in creating a “fully functioning” semi-truck prototype known as the “Nikola One,” when Milton knew the prototype was inoperable; (2) Nikola had engineered and built an electric- and hydrogen-powered pickup truck known as “the Badger” from the “ground up” using Nikola’s parts and technology, when Milton knew that was not true; (3) Nikola was producing hydrogen and was doing so at a reduced cost when he knew that no hydrogen was being produced at all by Nikola, at any cost; (4) Nikola had developed batteries and other important components in-house when Milton knew that Nikola was acquiring those parts from third parties; and (5) reservations made for the future delivery of Nikola’s semi-trucks were binding orders representing billions in revenue when the vast majority of those orders could be canceled at any time or were for a truck Nikola had no intent to produce in the near term.

    In its December 21 Order announcing its claims against Nikola, the SEC repeated the same allegations regarding false and misleading statements by Milton, which the SEC alleged were made in his capacity as Nikola’s CEO, but also added certain allegations regarding Nikola specifically.  In particular, the SEC alleged that Nikola did not have adequate disclosure controls or procedures regarding Milton’s social media use and media appearances, and also alleged that Nikola’s registration statements included misrepresentations regarding (1) its hydrogen refueling capabilities, (2) the working state of a hydrogen refueling station it used for demonstrations, (3) the cost and sources of electricity for its on-site hydrogen production, and (4) the potential economic impact of a strategic partnership between Nikola and General Motors.

    The SEC alleges that these misrepresentations and omissions violated Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated thereunder, Section 17(a) of the Securities Act of 1933, and Rule 13a-15(a) under the Exchange Act.  As noted above, Nikola settled these claims by agreeing to pay a civil money penalty of $125 million, which the SEC agreed could be spaced out in 5 equal installment payments of $25 million, with the final payment not due until 724 days after the issuance of the SEC’s order.