Is it Groundhog Day again?  Haven’t we heard about this before? An electric vehicle manufacturer that went public through a SPAC transaction is charged by the SEC with fraudulently misrepresenting the status of its products, even posting a misleading video of a truck purportedly operating on hydrogen fuel when it did not.  But no, it’s not Nikola Corporation (see this PubCo post).  Just this past week, in the rush to beat the shutdown and fortify the SEC’s fiscal year-end statistics, Enforcement announced two settled actions against two manufacturers of electric vehicles for misleading investors. In the first case, Hyzon Motors Inc., a maker of hydrogen fuel cell electric vehicles (FCEVs), was charged with misleading investors about the status of Hyzon’s products, business relationships and vehicle sales, agreeing to pay a civil penalty of $25 million. Two executive officers, also charged, agreed to pay civil penalties of  $100,000, and $200,000. Not to mention a restatement to reverse revenue improperly recognized. According to a Regional Director, “[t]ransparency in the form of full, fair, and accurate disclosure is fundamental to the federal securities laws….The defendants allegedly violated this principle by misleading investors about virtually every aspect of Hyzon’s business.” [Emphasis added.] In the second case, the predecessor to Spruce Power Holding Corporation, XL Fleet, which provided fleet hybrid electrical vehicles, was alleged to have misled investors about its sales pipeline and revenue projections.  As the successor, Spruce agreed to pay a civil penalty of $11 million. According to the Associate Director of Enforcement, “[i]t goes without saying that investors commonly rely on revenue projections when deciding how and where to invest, and that’s perhaps especially true for investment decisions involving early-stage companies in the SPAC market….By linking its bold revenue projections to misleading claims about the company’s historical performance, XL Fleet misled investors by inhibiting their ability to differentiate between credible facts and mere aspiration.” It’s worth noting here that, in March last year, the SEC proposed new rules regarding SPACs, including rules related to the use of projections in SEC filings “to address concerns about their reliability.” (See this PubCo post.)


Background. In the complaint, the SEC alleged that Hyzon made “false and misleading statements to investors about its customer and supplier relationships and overstated the number of FCEVs it had completed, delivered, and sold.”  For example, the SEC alleged, Hyzon falsely stated in investor presentations (included in an SEC filing) that it was “finalizing” a $2 million purchase order for five FCEVs to a specific company, even though the purported purchaser never expressed an intent to purchase and had informed Hyzon that it had no budget for those purchases.  Similarly, the SEC alleged, Hyzon falsely told investors in presentations that it was in  “advanced discussions” to deliver FCEVs to another company and projected to deliver “500+” FCEVs to that company and earn “$200mm+” in revenue over the next five years, although the purported purchaser never indicated an intent to purchase  FCEVs from Hyzon.  The investor presentations also included false statements about the status of Hyzon’s relationships with certain suppliers, including a false statement that “key relationships have already been formed” with two suppliers of FCEV chassis. According to the SEC, the “false and misleading statements communicated to investors that Hyzon was capable of generating revenue, despite lacking significant sales history.” The SEC also charged that the former CEO was responsible for these false statements because he provided some of the information, edited, reviewed and approved the misleading statements, and should have known that the statements were false and misleading.

As another example, the complaint alleged that Hyzon issued a press release announcing that it had delivered its first FCEV to a transportation provider for a European dairy company, posting to social media a video of the FCEV operating with the statement that the “milk truck” was powered by hydrogen. But, the SEC charged, the milk truck did not run on hydrogen, and, in the video, the truck was powered solely by an electric battery that allowed it to travel only a limited distance. The complaint charged that the former managing director of Hyzon Europe was responsible for the false and misleading press release and social media postings, having helped draft the press release and having managed the video recording of the FCEV, even posting it on his personal social media.  In addition, the SEC charged, he knew, or was reckless in not knowing, and should have known that the press release and social media postings were false and misleading. He also allegedly misled other company executives when they asked about rumors that the truck did not run on hydrogen. The SEC imputed his alleged scienter to Hyzon.

In addition, the SEC alleged, both before and after its SPAC merger, Hyzon publicly forecast in SEC filings and elsewhere that it would deliver 85 FCEVs before the end of 2021. Although Hyzon did not meet that forecast, it falsely reported that it sold 87 FCEVs during the year when it did not sell any vehicles that year.  In particular, Hyzon recognized revenue in its financial statements from the sale of five vehicles in Europe, but, it turned out, it did not even own the five vehicles—they were vehicles owned by customers of Hyzon Europe that were being retrofitted with fuel cell technology.  Hyzon had to restate its financials, reversing the revenue previously recognized on those sales. According to the SEC, these “purported sales represented Hyzon’s first completed sales of FCEVs and caused Hyzon to overstate its revenue by approximately 91% in the third quarter of 2021 and 35% for the full year 2021.”  The complaint charged a failure of internal controls “necessary to ensure that Hyzon Europe owned the FCEVs it purported to sell.” In addition, the SEC alleged, Hyzon Europe did not employ accounting personnel with knowledge of U.S. accounting and financial reporting standards.

Nor did Hyzon sell 82 FCEVs in China. According to the SEC, “many of the FCEVs were not operational on hydrogen power at the time of delivery and, therefore, Hyzon could not recognize these purported sales. A Hyzon China employee arranged to deliver FCEVs shortly before the end of 2021 in order to meet Hyzon’s public guidance. However, the customers agreed to return the vehicles to Hyzon China’s manufacturer after year-end to complete necessary work on the vehicles so that they could run on hydrogen power.” As a result, Hyzon had to file restated financial statements reversing revenue recognized on the 82 FCEV sales in 2021 to Chinese customers.  According to the complaint, Hyzon’s improper recognition of sales of the 82 FCEVs inflated Hyzon’s full-year 2021 revenue by approximately 65%.

After revelation of these frauds, the SEC alleged, Hyzon’s stock price and market value declined by approximately 85% from the SPAC merger valuation.

Violations. Hyzon, its former CEO and its former managing director of Hyzon Europe, the SEC charged, obtained money and property from investors by means of these false statements. In addition, the SEC charged, they employed a scheme to defraud, and engaged in a course of business operating as a fraud.  The complaint charged Hyzon and the managing director of Hyzon Europe with violation of Section 10(b) and Rule 10b-5 (untrue statements of material fact) and Securities Act Section 17(a)(1) (knowingly or recklessly employing a device, scheme, or artifice to defraud).  All defendants were charged with violation of Securities Act Sections 17(a)(2) and 17(a)(3) (knowingly, recklessly or negligently obtaining money or property by means of untrue statements of material fact and knowingly, recklessly or negligently engaged in a transaction, practice or course of business that operated or would operate as a fraud or deceit on the purchaser), violations of Exchange Act Section 13(a) and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder (false SEC filings) and Exchange Act Section 13(b)(2)(A) (false books and records).   Hyzon was also charged with violation of Exchange Act Section 13(b)(2)(B) (internal accounting controls), and Exchange Act Rule 13a-15(a) (disclosure controls and internal control over financial reporting).  Hyzon and the former CEO were charged with violations of Exchange Act Section 14(a) and Rule 14a-9 thereunder (related to a failure to disclose a stock pledge by the CEO in a proxy statement). The former managing director was also charged with falsifying books, records, or accounts in violation of Exchange Act Section 13(b)(5).

Subject to court approval, Hyzon will pay a civil penalty of $25 million, the former CEO $100,00 and the former managing director of Hyzon Europe, $200,000. The former CEO and former CFO, who was not charged, each reimbursed Hyzon for bonuses they received during the twelve-month period after Hyzon misstated its financial statements. As a result, the SEC did not pursue a clawback action under SOX 304.


Background. In another case about an electric vehicle company, the SEC charged Spruce Power Holding Corporation for conduct by its predecessor, XL Fleet Corp., in misleading investors about revenue projections that topped $1 billion within three years of going public. XL Fleet provided hybrid electric vehicle systems for commercial fleet vehicles and went public through a SPAC merger.  Currently, Spruce has ceased its business operations under XL Fleet and is an owner and operator of distributed solar energy assets.

According to the SEC Order, beginning with the announcement of the proposed SPAC merger, XL Fleet made public statements highlighting that XL Fleet had a sales pipeline of over $220 million, which purportedly supported XL Fleet’s revenue growth projections from $21 million in 2020 to $75 million for 2021 up to $1.4 billion by 2024.  These statements appeared in press releases, investor presentations, media interviews, webinars, were furnished on Forms 8-K and filed as written communications in connection with a business combination under Rule 425.

As alleged by the SEC, these statements were materially misleading because the sales pipeline did not really “support” these revenue forecasts or indicate “strong demand momentum.”  The Order alleges that XL Fleet developed its sales pipeline based on a customer relationship management database (“CRM”), “which XL Fleet used as a tool to organize and motivate its sales function, and was not designed to make revenue projections.”   Salespeople used the CRM to enter sales opportunities, weighted by the probability of a sale ranging from 5% to 95%.  However, of the projected $220 million sales pipeline, salespeople categorized $194 million (or 97%) with a 5% ($133 million) or 25% ($61 million) probability of resulting in actual sales.  The opportunities with a 5% probability “included potential customers who had not been contacted by XL Fleet’s salespeople, or who had been contacted for an indication of interest in XL Fleet’s products but had not responded.” As a result, the Order alleges, this “pipeline” did not really support the projections.

In addition, the Order alleged, the California Air Resources Board had suspended consideration of XL Fleet’s applications for sales of future XL Fleet products in California because XL Fleet had not submitted the required testing and use data under Executive Orders for existing products.  And once it had submitted the data, XL Fleet had little visibility as to when it would be allowed to sell newer vehicles in the state, causing some California customers in the sales pipeline to cancel or defer purchase orders.  The Form S-4 stated that “XL has obtained a number of [Executive Orders for the sale of XL’s systems] for prior model years [of vehicles with XL’s systems] and is in the process of conducting testing against CARB issued test orders for future products to be introduced into the Californian market.”  The SEC viewed this statement to be “materially misleading because it omitted to state that XL Fleet was not in compliance with CARB regulations for [the newer] models because XL Fleet, as described above, had failed to submit the testing and use data required under the existing Executive Orders.”

In an S-4 amendment, XL Fleet explained the use of the CRM in creating projections, stating that “XL management reviews its sales opportunity pipeline data and applies its historic[al] conversion rates of sales pipeline and historical experience with respect to lead time to create revenue projections.  XL management believes that its revenue estimates and committed backlog are important indicators of expected future performance.” However, the SEC charged, the statement was materially misleading because XL Fleet did not use a historical conversion rate to estimate revenue projections; rather, the CRM was designed to organize and motivate sales.   According to the SEC, the false claims that a historical conversion rate of one-third was applied to the pipeline created the misleading impression that the projection was based on historical experience and that one-third of the sales opportunities in the pipeline were more likely than not to result in sales.  In fact, the SEC alleged, “the vast majority of the sales opportunities at the time merely were speculative opportunities with as little as a 5% probability of resulting in a sale.”

Violations. The SEC charged that Spruce, XL Fleet’s successor, violated Securities Act Sections 17(a)(2) and 17(a)(3) (misleading statements of material fact in the sale of securities); Exchange Act Section 14(a) and Rule 14a-9 thereunder (misleading proxy statements); and Exchange Act Section 13(a) and Rules 13a-11 and 12b-20 thereunder (misleading current reports). In the settlement, Spruce was ordered to pay a civil penalty of $11 million.

For more information about securities litigation, see the Cooley Securities Litigation + Enforcement blog.

Posted by Cydney Posner