It’s almost as if someone put a hex on electric vehicle manufacturers that went public through de-SPACs. In 2022, SEC Enforcement charged Nikola Corporation, an aspiring manufacturer of low- or zero-emission semi-trucks, alleging that Nikola “defrauded investors by misleading them about its products, technical advancements, and commercial prospects,” leading to a $125 million settlement. (See this PubCo post.) Then we had a twofer—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, 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. Then, 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. (See this PubCo post.) But that’s not the end of it. Now we have charges against Lordstown Motors Corp., a manufacturer of electric vehicles focused on the commercial fleet market, for “misleading investors about the sales prospects of Lordstown’s flagship electric pickup truck, the Endurance.” Lordstown went public through a de-SPAC transaction in 2020 and filed for bankruptcy in 2023. As a result of this action, Lordstown agreed to a cease-and-desist order and disgorgement of $25.5 million.
According to the Order, the charges relate to misrepresentations by Lordstown (and its former Chairman and CEO) about the company’s plans to develop the first full-size electric pickup truck called the Endurance. During and after the Company’s de-SPAC merger, the SEC alleged, Lordstown and its CEO made materially false and misleading statements in SEC filings and other public communications, including that “Lordstown would be first-to-market with a viable electric pickup truck targeted for the commercial fleet market, [that] Lordstown already had an established base of customer demand evidenced by tens of thousands of ‘pre-orders’ from commercial fleet customers [and that] Lordstown had access to the key parts it needed to make the truck, and when the company would be able to deliver the truck to customers.” Approximately $675 million was raised from investors in the de-SPAC transaction and related PIPE.
In a related matter, the SEC also instituted a settled administrative proceeding against Lordstown’s former auditor, Clark Schaefer Hackett and Co., for violating the auditor independence standards by providing non-audit services, including bookkeeping and financial statement services, to Lordstown during CSH’s audit of Lordstown’s financial statements.
Background. Lordstown was founded in 2019 and went public through a de-SPAC in 2020. In investor presentation materials, the SEC charged, Lordstown touted that it would benefit from a “first mover” advantage as the “first to produce and deliver the Endurance to commercial fleet markets.” Among other claims, the Company said that it “had secured 27,000 ‘pre-orders’ for the Endurance from fleet customers representing $1.4 billion in potential revenue. Lordstown also highlighted that its relationship with GM, including Lordstown’s acquisition of its near-production-ready plant from GM and Lordstown’s agreements with GM that provided Lordstown access to certain GM parts, would enable Lordstown to develop the Endurance with only a modest incremental investment compared to other companies.” In the proxy statements, the Company “estimated approximately $120 million of capital expenditures for retooling its plant and other investments to complete the Endurance and its supply chain.” As a result of these benefits, Lordstown claimed that it was positioned to be first in the market with an electric pickup truck in the second half of 2021, estimating sales and delivery of “2,200 Endurance trucks in 2021, 31,600 trucks in 2022, and 65,000 trucks in 2023, generating $5.3 billion in cumulative revenue.”
But, the SEC alleged, many of the statements by Lordstown and its CEO regarding pre-orders were materially false or misleading. In particular, the SEC charged, Lordstown’s estimate of “pre-orders” was based on non-binding letters of intent from potential customers with no obligation to purchase vehicles. Notably, in SEC filings, including the Form S-1 and other public statements, Lordstown included risk-factor language indicating that “there is no assurance nonbinding pre-orders will be converted into binding orders or sales”; the company had “no binding contracts with customers. The non-binding pre-orders that [it had] signed did not require customer deposits and may not be converted into binding orders or sales.”
But, as it turned out, that risk language was not enough to immunize Lordstown against charges that it misrepresented the nature and extent of the demand for Endurance. The SEC alleged that Lordstown continued to announce an increasing number of “pre-orders” from commercial fleets, heavily promoting these pre-orders with the objective of creating further demand among potential fleet customers. But Lordstown allegedly had no policies or procedures to evaluate pre-order counterparties, to determine if a customer was a commercial fleet customer or to record, track or maintain pre-order data. According to the Order, Lordstown and the CEO “used the terms LOIs, reservations, pre-orders, and ‘pre-sales’ interchangeably as having the same meaning.” In November 2020, the CEO told a TV audience that “Lordstown had received ‘50,000 pre-orders,’ sold to ‘fleets,’ and described the pre-orders as ‘very serious orders.’” In January 2021, the Company announced that it had “received 100,000 pre-orders from commercial fleets,” which the CEO described as “sticky” and “unprecedented in automotive history.”
However, in March, a research firm that had shorted the stock published a report alleging that these orders “were largely fictitious and nonbinding, and from customers that generally did not even have fleets of vehicles.” In response, Lordstown’s Board of Directors formed a Special Committee to investigate these allegations. The Special Committee found that there were inaccuracies in some of the statements: instead of pre-orders being primarily with commercial fleets, as stated in Lordstown’s SEC filings, many pre-orders were with other types of end users and some were with intermediaries or “influencers” that did not intend to purchase for their own use or with entities that did not have adequate resources to purchase. The percentages of these types of non-fleet counterparties ranged from 40% to 71% of the pre-orders at different points. In particular, the SEC alleged, “71% of the 100,000 amount was from intermediaries or influencers.”
The SEC charged that these statements regarding pre-orders were false or misleading; Lordstown and the CEO, “who knew or should have known that certain pre-orders were not from or primarily from fleets, misrepresented the true nature of the demand for the Endurance, which was substantially less than what they had described to investors.”
The SEC also charged that Lordstown and its CEO made false and misleading statements about Lordstown’s access to certain critical parts from GM necessary to develop the Endurance. Lordstown claimed that it had entered into an agreement with GM for access to parts that would benefit Lordstown’s supply chain and that GM had “opened up their parts bin” to Lordstown. Partly because of this access to GM parts, Lordstown claimed it expected “to substantially complete sourcing [parts] for the Endurance by the end of 2020.” However, the SEC alleged, Lordstown’s access was actually more limited, as many of the parts were not made by GM, but rather by suppliers, and the process to obtain the parts was “complex [and] time-consuming… with no certainty as to whether GM would ultimately authorize Lordstown to use the parts.” Nevertheless, the SEC charged, Lordstown “continued to state falsely in SEC filings in fourth-quarter 2020 that Lordstown had access to the GM parts.” As alleged, these statements by Lordstown and the CEO “were false and misleading because Lordstown did not have access to the GM parts as stated in SEC filings, and GM had not ‘opened up its parts bin’ in any sense. In fact, GM specifically informed Lordstown that its requests for GM parts would constrain GM’s own supply chain, and that Lordstown should find backup plans for the vast majority of its requested parts. As a result, Lordstown had to source from other suppliers the necessary parts it could not access from GM, thereby increasing Lordstown’s capital expenditure by at least an additional $150 million, on top of the $120 million estimate at the time of the merger announcement in August 2020.”
According to the SEC, as these supply problems delayed the production timeline, Lordstown’s plan to produce and deliver the Endurance by the second half of 2021 was allegedly “in serious jeopardy.” Still, Lordstown and the CEO allegedly continued to make “false and misleading public statements that Lordstown would deliver (not just start production for) the Endurance to customers by September 2021.”
As noted above, Lordstown was also alleged to have failed to file financial statements that were audited by independent public accountants. As a private company, Lordstown had engaged CSH not only to audit Lordstown’s 2019 financial statements under GAAS applicable to private companies, but also to provide financial statement preparation services, including preparation of notes to the financial statements. Then, in anticipation of Lordstown’s de-SPAC merger, CSH conducted an audit of Lordstown’s 2019 financial statements under PCAOB standards applicable to audits of public companies. Under Rule 2-01(c)(4), an auditor “will not be considered independent if it provides certain bookkeeping services for its audit client or if it prepares financial statements” that are filed with the SEC. Here, the SEC alleged, when CSH audited the 2019 financial statements under PCAOB standards, it was auditing its own work and, therefore, “lacked independence.” The SEC charged that the audit report of CSH represented that it had conducted an audit in accordance with PCAOB standards, which was inaccurate.
During the relevant period, the Company offered and sold securities. Following the Board’s response to the disparaging research report, the CEO resigned, the company “failed to develop and sell a material number of the Endurance, and in June 2023, the company, and certain affiliates, each filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code.”
Violations. The SEC charged that Lordstown violated Sections 17(a)(2) and 17(a)(3), which prohibit the sales of securities based on material misrepresentations or fraud but do not require scienter; Section 13(a) and Rule 13a-1, 13a-11 and 12b-20 under the Exchange Act in connection with misrepresentations and failures to include financial statements audited by independent auditors required in current and periodic reports; and Section 14(a) and Rules 14a-3 and 14a-9 under the Exchange Act in connection with misleading statements in proxy statements. Lordstown agreed to a cease-and-desist order and disgorgement of $25.5 million, which was deemed satisfied by payments of the same to resolve pending class actions.
In the Order against CSH, the SEC charged that CSH had violated Rule 2-02(b) of Reg S-X by falsely certifying that an audit report was conducted in accordance with PCAOB standards, PCAOB Rule 3520 for failure to comply with the auditor independence requirements, Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the SEC’s Rules of Practice for improper professional conduct, as well as Section 13(a) and Rule 13a-1 and Section 14(a) and Rules 14a-3 in connection with the financial statements and causing Lordstown’s violations of those rules. CSH agreed to a “censure, a cease-and-desist order, the payment of more than $80,000 in civil penalties, disgorgement, and interest, and certain undertakings to improve its policies and procedures.”
