Is there anything topical missing from this case? There’s a SPAC. There’s social media. There’s an unorthodox, charismatic CEO. There are electric vehicles. There are hydrogen trucks with drinking fountains using water produced by the trucks as a by-product of their hydrogen fuel cells—or not. And, there’s a DOJ criminal indictment and an SEC complaint. Yes, I’m talking about the case against Trevor Milton, the founder, former CEO and former executive chairman of Nikola Corporation, who was charged last week with “repeatedly disseminating false and misleading information—typically by speaking directly to investors through social media—about Nikola’s products and technological accomplishments,” according to the SEC press release. What’s more, the DOJ charged, Milton exploited the SPAC structure with a “self-proclaimed media blitz” of false and misleading public statements during a period of time that, in an IPO setting, would have been considered a “quiet period.” In addition to civil SEC charges, Milton faces two counts of criminal securities fraud and one count of wire fraud, with maximum 20- and 25-year prison terms if convicted. He pleaded not guilty. As described by the U.S. Attorney for the SDNY (with an appropriate vehicular metaphor), “[a]s alleged, Trevor Milton brazenly and repeatedly used social media, and appearances and interviews on television, podcasts, and in print, to make false and misleading claims about the status of Nikola’s trucks and technology. But today’s criminal charges against Milton are where the rubber meets the road, and he now will be held accountable for his allegedly false and misleading statements to investors.” The case reinforces the point that fraudulent or misleading statements don’t have to be in a prospectus or 10-K to be actionable—social media will do just fine. According to the Regional Director of the SEC’s Fort Worth Regional Office, “[p]ublic company officials cannot say whatever they want on social media without regard for the federal securities laws. The same rules apply, and the SEC will hold those who make materially false and misleading statements accountable regardless of the communication channel they use.” Notably, this is the second recent case involving SEC charges of misleading claims in connection with a SPAC. (See this PubCo post.)
Background. According to the SEC’s complaint, Milton founded Nikola in 2015, serving as CEO and then as Executive Chairman until his resignation in September 2020. Nikola’s mission was to manufacture low- or zero-emission semi-trucks that operated on alternative fuels and to build a supporting infrastructure of alternative fuel stations. To that end, he needed to raise billions of dollars, which he did in several private offerings with institutional investors, followed by a de-SPAC merger, after which Nikola traded on the Nasdaq Global Select Market. The indictment alleged that investors in the SPAC and related transactions “had access to more complete and accurate information during their prior due diligence periods,” and were “able to sell their Nikola stock for a profit at a time when retail and other investors were purchasing stock based, at least in part, on the false and misleading information provided by Milton.” In addition, immediately following the announcement of Nikola’s proposed de-SPAC merger, Milton was alleged to have a engaged in a publicity blitz on social media and elsewhere, which he “was able to do…because Nikola went public by means of a SPAC combination, rather than an IPO, and Milton was therefore not subject to the restrictions of a quiet period.” On the day that Nikola commenced public trading in June 2020, Milton’s shares were valued at $3,086,096,108.
The complaint alleged that, “[b]efore Nikola had produced a single commercial product or had any revenues from truck or fuel sales, Milton embarked on a relentless public relations blitz aimed at a class of investors he called ‘Robinhood investors.’ Through frequent nationally televised media appearances and a ubiquitous presence on social media (where he garnered over 100,000 followers on Twitter alone), Milton built a significant following for himself and Nikola.” Milton depicted himself as different kind of CEO who was trustworthy because he “‘cared’ and was ‘transparent’ with the average investor. As part of his publicity campaign, Milton encouraged prospective investors to follow him on social media to get ‘accurate information’ about the company ‘faster than anywhere else.’ In reality, however, Milton used his platform to mislead investors, which helped inflate and maintain Nikola’s stock price.” When a senior executive commented to Milton that there was a “lot of hype out there with retail investors,” Milton’s response was “That’s how you build a foundation. Love it.” In 2019 and 2020, Nikola’s Chief Legal Officer and other senior executives, concerned about “Milton’s relentless social media activity, and his associated fixation on Nikola’s stock price and efforts to affect it,” had “repeated conversations with Milton about his misuse of social media,” but to no avail. Milton responded that they “did not understand current capital market dynamics or what he was trying to accomplish with retail investors, and that he needed to be on social media to put out good news about Nikola to support its stock price.”
One reason for Milton’s “fixation” on the stock price, according to the complaint, was that his compensation was almost entirely in equity that was earned as the stock price climbed. According to the complaint, under his employment agreement, as share-price milestones were achieved, he earned incrementally more restricted stock units. In August 2020, he received the maximum award of 4,859,000 RSUs based on reaching stock price milestones.
Alleged misrepresentations. Although Nikola was alleged to be an early stage company with a new unproven product idea and no product revenue, Milton, who had no ”formal background in engineering,” presented it as “a trail-blazing company that had already achieved many groundbreaking and game-changing milestones.” For example, the DOJ indictment alleged, Milton “promoted a false and exaggerated narrative that Nikola was a first mover in the zero-emissions-trucking business,” claiming that “the prototype Nikola One was a fully functioning truck, and emphasiz[ing] that early purported success as a defining event for Nikola.” As alleged, however, when the Nikola One prototype was unveiled at the end of 2016, it “was not completed, let alone tested and validated, by the time of the unveiling event. Indeed, the prototype was wholly missing significant parts, including gears and motors, and the control system (i.e., the system that communicates the driver’s directions to the vehicle) was incomplete.” Although when the vehicle was unveiled, Milton described it as a “fully functioning vehicle,” Milton subsequently “determined not to complete the prototype, and no further substantial engineering was undertaken. The truck was never completed and has never been operable.” The SEC complaint cites a Nikola engineer who, in December 2016, stated that, at the unveiling, the truck was “not even remotely ready to operate.”
In 2017, the indictment alleged, a large multinational corporation asked
“to use the Nikola One in a commercial celebrating innovation. The concept for the video included a shot of the Nikola One coming to a stop in front of a stop sign. In order to accomplish this feat with a vehicle that could not drive, the Nikola One was towed to the top of hill, at which point the ‘driver’ released the brakes, and the truck rolled down the hill until being brought to a stop in front of the stop sign. For additional takes, the truck was towed to the top of the hill and rolled down the hill twice more. Additionally, the Nikola One’s door, which had been constructed using minivan parts, had to be taped up during the shoot to prevent it from falling off. Moreover, because the Nikola One had not been tested and was not safe (and indeed could not operate), certain precautions were taken before towing the vehicle to the commercial shoot. In particular, the turbine, which was designed to run on natural gas, and batteries were entirely removed from the vehicle to mitigate risk of fire, explosion, or damage.”
The indictment alleged that Milton then directed that raw footage from the commercial video of the Nikola One truck moving be uploaded to Nikola’s social media and embedded in a tweet and introduced as “Behold the Nikola One in motion.” The pre-production units were described as hitting fleets for testing in 2019. In the video, as described in the indictment, “the Nikola One appears to be driving down a road with no incline. In other words, the Nikola One appears to be driving on its own power, notwithstanding that the Nikola One could not do so and has never done so.” The SEC alleged that Milton ultimately approved a final version of the video that had been sped up two to three times to make it appear that the truck was moving even faster. The DOJ alleged that some of the retail purchasers of Nikola stock saw that video. When an article later reported that the truck was not functioning at the unveiling event, Milton “conceded that the truck did not drive under its own power, but claimed that this was because the motors and gears were removed from the truck for safety reasons and that he ‘never deceived anyone.’” Milton published several tweets threatening legal action against the author, after which, the company’s share price rose. The SEC alleged that the video remained up on Nikola’s website and social media until September 2020 and was taken down only after the SEC initiated its investigation.
There was also the “Badger” pick-up truck, which was supposed to offer both a battery-electric and a hydrogen fuel cell version, but since neither of the prototypes was designed to operate on hydrogen fuel, the indictment alleged, Milton “directed that they be fitted with hydrogen fueling ports to make it appear as though they were.” Although the prototypes were not completed until the end of 2020, after the announcement in March of Nikola’s plan to go public via a SPAC, Milton was alleged to have “made false and misleading public statements describing the Badger as ‘real’ and ‘fully functioning,’ despite the fact that Nikola had not yet built anything.” In one example, Milton tweeted a podcast interview in April 2020, during which “Milton stated, ‘we built this thing to be a true vehicle,’ it is based on a ‘billion dollars of knowledge’ from Nikola’s semi-truck program, the ‘truck can go 700 miles in a real environment,’ and it can ‘whoop a Ford F-150 . . . whoop a Silverado . . . whoop a Dodge Ram.’” The number of Milton’s public comments about the Badger even increased once the company’s shares were publicly traded. In June, Milton announced that he was taking reservations for the Badger, and when asked when a prototype would be ready, he responded “already,” when in fact “Nikola only had renderings of the vehicles and concept sketches.” After the announcement, the share price rose by $7 and more than doubled in the next day or so.
Later in June, the indictment alleged, Milton started to tweet claims
“about how the Badger would use the water created as a by-product of the hydrogen fuel cell. In particular, Milton tweeted that the Badger uses ‘most all of it for our windshield washer fluid and . . . a little bit for clean, pure, drinking water.’ Approximately several minutes later, Milton tweeted, ‘Yes you heard that right, we will have a drinking fountain in our truck using the hydrogen bi product water for the drivers to have nice cold, clean, pure drinking water.’ In fact, at that point, Milton had not discussed with Nikola’s engineers the idea of using fuel cell by-product as washer fluid or drinking water, and several days later attempted to determine if it was even possible by searching on the internet, ‘can you drink water from a fuel cell?’ Nonetheless, Milton instructed that the Badger prototypes be built with drinking fountains, even though neither prototype was actually a fuel cell truck. Milton continued to promote the Badger’s drinking water system on television and social media in or about June and July 2020.”
And then there were the claims about hydrogen production. The indictment alleged that Nikola “planned to construct a network of hundreds of hydrogen fueling stations along trucking routes and to include the cost of hydrogen as part of a bundled lease for its trucks.” According to the SEC, Nikola represented to investors that it intended to “produce hydrogen via electrolysis, a process that uses electricity to split water into hydrogen and oxygen.” However, the DOJ alleged, Nikola’s business model depended on its “ability to acquire electricity at a price that would permit Nikola to produce hydrogen cheaply enough to make its leases economically viable for customers.” But, “Nikola had never obtained a permit for, let alone constructed, a hydrogen production station, nor had it produced any hydrogen,” or “purchased land for any hydrogen production stations, nor had it reached any pricing agreements with utilities for electricity to power its electrolyzers.” Nevertheless, just a few days before Nikola commenced public trading, Milton asked the board for authority to buy five electrolyzers for $95 million so that he could show progress on the hydrogen stations during his upcoming media blitz, notwithstanding “the fact that Nikola had not procured any land for hydrogen stations, had nowhere to install the electrolyzers, and was still in the process of designing and troubleshooting its plans for hydrogen production facilities.”
The indictment alleged that Milton “made false and misleading claims regarding the status of Nikola’s production of hydrogen; the current cost of producing hydrogen; the cost of electricity needed to produce hydrogen; Nikola’s ability to produce hydrogen using clean energy; and the status of permits related to hydrogen production.” For example, in a social media post in June 2020, Milton wrote: “‘Most hydrogen that Nikola makes is on the freeway. This is near the main federal transmission lines where the voltage is incredibly high allowing for continuous output. . . . Nikola uses energy transmitted on the federal transmission lines before we enter the utility. We buy this clean energy directly from Wind, Solar and Hydro facilities directly. This allows us to get sub $.04 per kWh 20-year agreements on the freeways.’” However, the indictment charged, “Nikola had not produced hydrogen anywhere, including on freeways or near main federal transmission lines; nor had Nikola purchased any energy for producing hydrogen, let alone energy transmitted on the federal transmission lines, clean energy from wind, solar, and hydroelectric facilities directly, or energy at less than $.04 per kWh.” In July 2020, he said on a podcast that Nikola was “gobbling up” station locations; however, according to the SEC, the statement was “flatly false, as Nikola had not secured any locations and had not built any stations, other than installing a demonstration dispensing station at its headquarters.”
There’s much, much more for your reading pleasure. According to the indictment, Milton was also alleged to have made “false and misleading statements that Nikola had developed batteries and other important components in-house,” claiming that “Nikola has intellectual property rights over important components of its semi-truck line,” when “Milton knew that Nikola was acquiring those parts from third parties.” He also was alleged to have made “false and misleading claims that 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 cancelled at any time and were for a truck Nikola had no intent to produce in the near-term.”
Many of the retail investors targeted by Milton, the indictment alleged, “had no prior experience in the stock market and had begun trading during the COVID-19 pandemic to replace or supplement lost income or to occupy their time while in lockdown.” On September 10, 2020, according to the complaint, a financial research firm that had shorted Nikola stock “published a report asserting, among other things, that Milton made misrepresentations about Nikola’s business. Nikola’s stock price fell approximately 24 percent on news of the report.” Right after Milton’s resignation was announced later in September 2020, the DOJ alleged, the NYT revealed that his resignation was “related to claims that he had deceived investors about Nikola’s technology, including by producing the video of the Nikola One” discussed above. Nikola’s stock price plummeted. “As a result,” the indictment claimed, “some of the retail investors that Milton’s fraudulent scheme targeted suffered tens and even hundreds of thousands of dollars in losses, including, in certain cases, the loss of their retirement savings or funds that they had borrowed to invest in Nikola.” In its 10-K for 2020, Nikola admitted a number of misstatements.
Charges. The DOJ charged Milton with two counts of engaging “in a scheme to defraud investors in Nikola through false and misleading statements regarding the company’s product and technology development” in violation of Rule 10b-5 as well as one count of wire fraud. According to the DOJ press release, he faces maximum penalties of 20 and 25 years in prison under the securities fraud counts and a maximum penalty of 20 years in prison for wire fraud.
According to the SEC complaint, Milton “engaged in a fraudulent scheme to deceive retail investors about Nikola’s products, technical advancements, and commercial prospects for his own personal benefit in violation of the federal securities laws. Milton did so primarily by leveraging his social media presence and frequent appearances on television and podcasts to flood the market with false and misleading information about Nikola.” The SEC alleged that Milton knew or was reckless in not knowing that his statements were false and misleading, and he “made these statements with the intent to influence investors, prospective investors, and Nikola’s stock price,” and otherwise demonstrated scienter. In addition, many of the false statements were made when securities were being offered and sold under registration statements filed with the SEC. The SEC charged Milton with fraud in the offer and sale of securities under Section 17(a) of the Securities Act, violations of Section 10(b) and Rule 10b-5 under the Exchange Act, and requested disgorgement, civil penalties, an officer and director bar and an injunction against participating in the issuance, purchase, offer or sale of any securities.