Trevor Milton, the founder, former Chairman, and largest shareholder of electric vehicle company Nikola Corporation, has been indicted by a federal grand jury in Manhattan. The indictment, which alleges that Milton “engaged in a scheme to defraud investors” by making “deceptive, false, and misleading claims” about “nearly all aspects” of the company’s business, presents criminal charges against Milton for two counts of securities fraud and one count of wire fraud. Milton has also been named as a defendant by the SEC in a separate civil enforcement action accusing Milton of securities fraud. A copy of the indictment can be found here. The S.D.N.Y. U.S. Attorney’s office July 29, 2021 press release about the indictment can be found here. The SEC’s Jcomplaint against Milton can be found here. The SEC’s July 21, 2021 press release about the complaint can be found here.
The indictment alleges that Milton engaged in his fraudulent scheme from November 2019 through September 2020. A critical development during this period was Nikola’s merger with VectorIQ Acquisition Corp., a special purpose acquisition company (SPAC). VectorIQ completed an IPO on May 18, 2018. On March 3, 3030, VectorIQ and Nikola announced their plans to merge, with Nikola to be the surviving company. The merger was completed on June 3, 2020.
The indictment alleges that after the merger was announced but before the business combination was completed that Milton made numerous public statements about Nikola and its products. Milton made these statements on television, in interviews, and through extensive use of social media. The indictment says that Milton felt free to make these statements prior to the completion of the merger because the company was going public through its merger with a SPAC, rather than through an IPO, which would have required the company and Milton to maintain a quiet period before the completion of the transaction.
The indictment alleges that Milton made these statements “to induce retail investors to purchase Nikola stock.” Milton was, according to the indictment, “motivated to engage in the fraudulent scheme in order to enrich himself and elevate his stature as an entrepreneur.” The indictment alleges, among other things, to be listed among Forbes’s 100 richest people. The indictment alleges that Milton’s various statements did indeed drive Nikola’s share price; at its highest point, after Milton had made a number of statements about the supposed readiness of the company’s Badger vehicle, the market value of Milton’s stock was approximately $8.5 billion.
As part of his fraudulent scheme, the indictment alleges, Milton made:
(a) False and misleading statements that the company had early success in creating a “fully functioning” semi-truck prototype known as the “Nikola One,” when MILTON knew that the prototype was inoperable; (b) false and misleading statements that 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; (c) false and misleading statements that Nikola was producing hydrogen and was doing so at a reduced cost, when MILTON knew that in fact no hydrogen was being produced at all by Nikola, at any cost; (d) false and misleading statements that Nikola had developed batteries and other important components in-house, when MILTON knew that Nikola was acquiring those parts from third parties; and (e) false and misleading claims that reservations made for 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 not intent to produce in the near-term.
The indictment alleges that Milton’s scheme began to fall apart when reports appeared in the press questioning many of Milton’s statements. For example, in September 2020, short seller HIndenberg Research published a report challenging many of Milton’s statements about Nikola’s products. The company’s share price declined on these reports and, according to the indictment, many of retail investors whom Milton had induced to purchase Nikola’s stock, lost money. As a result of these developments, Nikola and certain of its investors previously have been named as defendants in private securities class action litigation. In September 2020, Milton resigned from Nikola.
The allegations in the SEC enforcement action largely mirror the allegations in the indictment, although the SEC complaint is somewhat more detailed.
The sole defendant named both in the indictment and in the enforcement action is Milton; Nikola itself has not been charged. On July 29, 2021, Nikola issued a statement in which the company said, among other things, that Milton “has not been involved in the company’s operations or communications” since his resignation. The press release emphasized that the government’s actions “are against Mr. Milton individually, and not against the company.” The company also said that it had “cooperated with the government throughout the course of its inquiry.” The company also said that “remain[s] committed to our previously announced milestones and timelines.”
Milton’s indictment and the SEC enforcement action are noteworthy for a number of reasons, not least because Milton and Nikola itself are high-profile and because Nikola has been the source a great deal of attention and investor interest.
The indictment and the enforcement action are also interesting because of the extent to which they refer to and rely upon numerous statements Milton made using social media. Indeed, the press release about the enforcement action contains statements from SEC officials about this aspect of the action. For example, the press release quotes one SEC official as saying “Having chosen to promote Nikola through social media, Milton was obligated under the securities laws to communicate completely, accurately and truthfully.” Another SEC official is quoted as saying “Public 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.”
Another reason Milton’s indictment is interesting is because Nikola so recently merged with a publicly traded SPAC. The indictment itself contains extensive reference to the SPAC merger. The indictment also expressly refers to Milton’s belief that prior to the merger he was free to make public predictive statements and other claims about the company because it was going public through the SPAC merger rather than through an IPO. The SPAC transaction is a highly relevant part of the indictment and the enforcement action.
The indictment and the enforcement action are the latest in a series of government actions targeting problems emerging from the recent SPAC frenzy in the financial markets in late 2020 and early 2021. This series of events includes public statements of concern about SPACs and SPAC accounting from the SEC staff earlier this spring and the SEC’s filing just days ago of an enforcement action against Stable Road Acquisition Corp. and its merger target Momentus.
These developments have significant implications for the more than 400 publicly traded SPACs that are currently in the search phase of their existence as they seek to identify a merger target. The recent government and regulatory actions, including the Milton indictment and enforcement actions, send a strong signal that the regulators and prosecutors are on duty and watching what has been happening. Nor are regulators and prosecutors finished yet. There are public reports that other recent SPAC merger targets are also subject of ongoing government investigation.
These developments inevitably will have an impact in the financial marketplace as SPACs and prospective SPAC merger targets consider their options and alternatives. At a minimum, these developments have introduced a substantial note of caution into the approach of prospective transaction participants. The indictment also sounds a note of caution about the use of pre-merger statements to try to drive interest in the merger and in the post-merger company’s shares. It also seems that these developments will not help calm the current disrupted D&O insurance marketplace for SPACs and de-SPAC companies.