DOJ Indicts Founder of Nikola for Allegedly Defrauding Retail SPAC Investors

On July 29, 2021, the U.S. Attorney’s Situation of enterprise for the Southern District of New York unsealed a securities and wire fraud indictment in opposition to Trevor Milton, the founder and one-time chairman of Nikola Corporation (“Nikola”), a pre-earnings electrical- and hydrogen-powered car firm which went public by a merger with a determined-reason acquisition firm (“SPAC”). [1] The Indictment alleges that Milton made wrong, unsuitable, and deceptive claims regarding Nikola’s products and technology, which had been directed at retail merchants by social media and tv, print, and podcast interviews. The SEC also filed a parallel civil action in opposition to Milton, alleging violations of Fraction 17(a) of the Securities Act and Fraction 10(b) of the Replace Act, and which contends that Milton engaged in a “relentless public family blitz” on social media and the current press directed at “Robinhood merchants” in uncover to inflate Nikola’s stock sign.

These actions further verify the heightened legislation enforcement and regulatory scrutiny of SPACs, to boot to persevering with curiosity by authorities authorities in conserving retail merchants in so-called meme stocks. [2]

The Allegations

The Indictment alleges that from on the least November 2019 by September 2020, Milton made unsuitable and deceptive claims regarding the improvement of Nikola’s products and technology, which “addressed on the subject of all strategies of the enterprise.” These alleged misstatements integrated: (1) claiming that the firm had early success in making a “totally functioning” semi-truck prototype, when Milton allegedly knew the prototype was once inoperable; (2) falsely affirming that Nikola had engineered and constructed an electrical- and hydrogen-powered pickup truck; (3) declaring that the firm was once producing hydrogen at a reduced price, when Milton allegedly knew “no hydrogen was once being produced at all by Nikola”; (4) claiming Nikola had developed batteries and other components in-residence, when Milton knew they had been being obtained from third events; and (5) declaring that the firm had binding orders representing billions in future earnings, while shiny that “the vast majority of these orders might possibly well moreover be cancelled at any time and had been for a truck Nikola had no intent to manufacture within the shut to-term.”

The Indictment further alleges that these unsuitable and deceptive statements, which had been made by social media and other current press, had been particularly made “to induce retail merchants to select Nikola stock,” along side “merchants who had no prior skills within the stock market and had begun Trading within the future of the COVID-19 pandemic to substitute or complement lost earnings or to settle on their time while in lockdown.” Particularly, the Indictment contrasts the retail merchants who suffered losses in Nikola with “early strategic merchants, [sponsor] shareholders, and PIPE merchants”—who allegedly “had get entry to to more total and apt data at some stage of their due diligence sessions,” along side by reviewing Nikola’s books and data, touring its companies and products, and interviewing its engineers and administration. These early merchants “had been ready to promote their Nikola stock for a profit at a time when retail and other merchants had been purchasing stock” per Milton’s alleged misstatements. The press liberate accompanying the Indictment also claims that Milton “took profit of the truth that Nikola went public by merging with a [SPAC], relatively than by a extinct IPO, by making many of his unsuitable and deceptive claims within the future of a length where he put no longer need been allowed to accept as true with public statements under rules that govern IPOs.”

The SEC’s companion civil complaint cites a more than just a few of interior Nikola communications in further enhance of these claims. To illustrate, the SEC complaint alleges that Milton urged firm executives to “assassinate one thing” or to position out “accurate news” as a formula to counteract stock sign declines. The complaint further cited correspondence between Milton and one other senior executive highlighting the vast more than just a few of on-line retail merchants (so-called “Robinhood merchants”) who purchased Nikola stock, by which the opposite executive remarked that the merchants “get no clue about Nikola, other than their pals educated them to select,” and that there might possibly be “[a] lot of hype on the market with retail merchants,” to which Milton answered “That’s how you accept as true with a foundation. Esteem it.”

Takeaways

These actions in opposition to Milton are but one other instance of increasing governmental scrutiny of firms taken public by de-SPAC transactions, along side potentially signaling a explicit curiosity in pre-earnings firms that overstate the utter of their applied sciences and set a question to for their products. Moreover they think that prosecutors and regulators will most likely be acutely taking into consideration the diversities between SPACs and extinct IPOs, along side that SPACs (unlike extinct IPOs) are no longer subject to a “serene length” that usually prevents executives from providing data no longer previously disclosed within the registration statement and prospectus unless forty days after the fresh stock begins Trading, and the extent to which these variations might possibly well moreover facilitate wrongdoing.

Moreover, to boot to highlighting the possible of alleged fraud by SPAC targets, the actions also enjoy a cautionary declare for early merchants in SPACs, along side sponsors and PIPE merchants. Though the actions assassinate no longer bring any claims in opposition to these entities, the Indictment particularly notes that such merchants, who had get entry to to interior data by the due diligence direction of, had been ready to promote their shares for a profit to much less sophisticated retail merchants, who had been simplest ready to depend upon the firm’s allegedly untrue statements, raising the specter of possible insider Trading investigations.

At closing, the actions might possibly well moreover further think heightened regulatory curiosity in conserving “individual, non-skilled” merchants who trade on-line in so-called meme stocks, which are stocks which get experienced sudden will increase in worth largely per retail investor Trading after being touted on social media and other on-line forums. Particularly, the actions apply statements made in June by SEC chairman Gary Gensler that the SEC was once pondering changes to market rules per the meme-stock phenomenon, to boot to reports that the SEC has launched investigations into the Trading exercise of sure meme stocks.

Endnotes

1Investigate cross-take a look at our prior discussion of civil litigation filed in opposition to Nikola, https://www.clearygottlieb.com/consultants/~/hyperlink.aspx?_id=4470E461157C42C7B8DF59BD02C476E4&_z=z.(return)

2Investigate cross-take a look at our prior posts overlaying enforcement actions related to de-SPAC transactions, https://www.clearygottlieb.com/news-and-insights/publication-list/performing-director-of-secs-corp-fin-considerations-statement-on-disclosure-dangers and https://www.clearygottlieb.com/news-and-insights/publication-list/sec-brings-spac-enforcement-action-and-signals-more-to-reach.(return)

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