On July 29, 2021, the Department of Justice (“DOJ”) announced the unsealing of a criminal indictment against Trevor Milton, the founder, former CEO, and former Chairman of Nikola Corporation, a company that went public in March 2020 through a merger with a special purpose acquisition company (“SPAC”), for allegedly knowingly misleading investors about the company’s ability to build electric and hydrogen-powered vehicles and other green technology. The SEC filed a parallel civil action against Milton based on the same facts.
In March 2020, Nikola announced that it would be listed on the Nasdaq through a $3.3 billion merger with a SPAC, and the merger was consummated in May of that year. In September 2020, a short-seller research firm issued a report calling Nikola an “intricate fraud” and accusing the company of grossly exaggerating its ability to develop hydrogen-electric trucks and passing off third-party products as its own. Ten days later Nikola announced that Milton had agreed to step down from his role as Executive Chairman. A number of investors then filed civil suits against Nikola, and in a November 10, 2020 filing, Nikola disclosed that the SEC and DOJ had opened investigations into the fraud allegations the short-seller research firm had leveled against the company.
The indictment unsealed last week alleges that Milton engaged in a scheme to defraud investors, particularly retail investors, by inducing them to purchase shares of Nikola through false and misleading statements regarding Nikola’s products using social media, television, print, and podcast interviews. Specifically, the DOJ alleges 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. The DOJ charged Milton with two counts of securities fraud and one count of wire fraud and seeks forfeiture of all proceeds traceable to the commission of the fraud.
The SEC’s allegations largely mirror those of the DOJ, except that the SEC complaint includes additional allegations that Milton falsely claimed that the total cost of ownership of Nikola’s trucks was 20-30 percent below that of diesel vehicles. The SEC complaint against Milton includes claims under Section 17(a) of the 1933 Securities Act and Section 10(b) of the 1934 Securities Exchange Act. The complaint seeks a permanent injunction, a conduct-based injunction, an officer and director bar, disgorgement with prejudgment interest, and civil penalties.
The DOJ and SEC allegations are, in many ways, classic securities fraud allegations, and do not appear to rely on the fact that Nikola became a public company as the result of a merger with a SPAC. At the same time, the DOJ and SEC actions claim as a factual matter that Milton took advantage of the fact that Nikola went public through a de-SPAC process, rather than a traditional IPO, by making false and misleading statements during what would have been the quiet period if Nikola had gone public through a traditional IPO.
Thus, while these actions may be read to be no different from other traditional securities fraud actions, they are an important reminder that regulators are closely focused on the SPAC market. As we have previously reported
, last month the SEC brought a case against a SPAC, its sponsor, and its merger target and we expect further actions still to come.