Happy New Year!
In July of last year, as discussed in this PubCo post, the SEC and DOJ charged Trevor Milton, the founder, former CEO and executive chair of Nikola Corporation, with securities fraud for disseminating, primarily through social media, false and misleading information about Nikola's technological achievements. In addition to civil SEC charges, Milton faced 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. But, interestingly, there was no word about the company. Was the company completely off the hook for the CEO's alleged misrepresentations? Now we know that the answer is-far from it. In December, the SEC announced that Nikola had "agreed to pay $125 million to settle charges that it defrauded investors by misleading them about its products, technical advancements, and commercial prospects." According to Gurbir Grewal, the SEC's Director of Enforcement, "Nikola Corporation is responsible both for Milton's allegedly misleading statements and for other alleged deceptions, all of which falsely portrayed the true state of the company's business and technology." And in this case, Milton's alleged misstatements were attributed to the company even though many of the statements were communicated through Milton's personal account, not the company's corporate account. Although, according to the SEC, there were plenty of material misrepresentations in Nikola's registration statements and other standard communications (i.e., not only alleged misstatements through Milton), 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. The case also highlights the need for companies to take social media into consideration in the context of disclosure controls and procedures, potentially including communications, to the extent that they relate to the company, that are made through personal accounts.
Nikola's alleged misrepresentations through Milton. As described in the SEC's order, Milton founded Nikola in 2015, serving as CEO and Chair until the company entered into a de-SPAC transaction in June 2020, after which he served as Executive Chair of Nikola as a public company until his resignation in September 2020.
Nikola's objective 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, Nikola needed to raise billions of dollars, which it did in several private offerings with institutional investors, followed by a PIPE and de-SPAC merger. The SEC alleged that "before Nikola had produced a single commercial product, Milton embarked on a public relations campaign aimed at inflating and maintaining Nikola's stock price," and that many of the false and misleading statements described in the order occurred when securities were being offered and sold pursuant to several registration statements filed by the company and declared effective in July 2020. In the weeks around the de-SPAC transaction, the SEC alleged, "Milton significantly increased his media presence, appearing on dozens of nationally televised programs and podcasts and tweeting hundreds of times." (In the DOJ indictment of Milton, the DOJ charged that 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.")
Nikola's primary public spokesperson, the SEC alleged, was Milton, who communicated extensively on social media. According to the order, when he was "tweeting or posting material information about Nikola from his personal accounts, Milton did so in his capacity as CEO or Executive Chairman of Nikola." When he used Nikola corporate social media accounts, Milton "repeatedly urged television viewers and podcast listeners to follow his social media accounts, claiming he used them to communicate 'accurate data' about Nikola in a way that would enable followers to receive information 'way faster than you get it anywhere else.'" Milton also told Nikola executives that he had conducted a "media blitz" on social media that was "designed to generate investor interest in Nikola," and that he hoped "would increase and maintain the company's stock price."
The order alleged that "Milton made materially false and misleading statements on numerous critical topics related to Nikola's capabilities, technology, reservations, products, and commercial prospects." Many of these are discussed at greater length in this PubCo post, but Milton's false and misleading statements about Nikola's first semi-truck prototype, the Nikola One, might be illustrative. As alleged in the SEC order, the Nikola One "could not run under its own power when Nikola unveiled it in December 2016 or at any time thereafter." Nevertheless, in early 2018, Milton had a video clip posted on social media "showing the Nikola One truck moving on a road, seemingly at a high rate of speed. The video had no narration or text. The text of the tweet in which the video was embedded stated: 'Behold, the Nikola One in motion. Pre-production units to hit fleets in 2019 for testing. The Nikola Hydrogen Electric trucks will take on any semi-truck and outperform them in every category: weight, acceleration, stopping, safety and features - all with 500-1,000 mile range!' The video remained posted on Nikola's corporate social media accounts, as well as on its website, and "was available for viewing by investors and prospective investors until at least September 2020."
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As colorfully described in the DOJ criminal indictment against Milton, 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 cited a Nikola engineer who, in December 2016, stated that, at the unveiling, the truck was "not even remotely ready to operate."
In 2017, the DOJ 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."
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." 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.
Nikola's disclosure controls. Given the nature and profusion of Milton's social media posts, it should come as no surprise that the SEC found Nikola's disclosure controls and procedures for monitoring Milton's interviews and social media activity wanting. However, since Nikola was privately held until the de-SPAC transaction in June, the SEC's charges regarding disclosure controls are limited to the period after June 3, 2020. According to the order, "Milton did not routinely consult with anyone at Nikola before publishing Nikola-related information on his or Nikola's social media accounts, or before being interviewed about Nikola on television programs and podcasts. Likewise, no one at Nikola routinely reviewed Milton's social media posts prior to their publication, and executives and employees alike frequently learned of Milton's interviews after they aired. Further, Nikola did not correct these statements." What's more, there was no process, the SEC alleged, for assessing whether any of the information included in social media and or TV appearances was required to be timely disclosed in Nikola's Exchange Act reports or to "ensure that information published by Milton was communicated to management to allow timely decisions regarding required disclosure."
Nikola's other misrepresentations. But Milton was not the only vehicle-sorry-for Nikola's alleged misrepresentations, according to the order. The SEC charged that Nikola made a number of other material misrepresentations to investors, including misrepresentations regarding hydrogen refueling time, the hydrogen demonstration station, the current and future costs and sources of electricity for the company's planned hydrogen production, and the economic risks and benefits associated with its contemplated partnership with a big automaker. For example, in an April 2020 investor presentation, the SEC alleged, Nikola told investors, without qualification, that the fill time for its hydrogen fuel cell electric vehicles-an important factor in achieving market adoption of FCEV technology-was 10 to 15 minutes, but failed to disclose that the fill time was actually 45 to 80 minutes. And many of these allegedly misleading statements were included in S-1 registration statements. For instance, the SEC alleged that, in a 2020 S-1, Nikola misled investors by touting a demonstration hydrogen station installed at its headquarters "as a model for future hydrogen stations." The SEC charged that this statement was "misleading because Nikola failed to disclose that this station was beset by significant operational and repair challenges. Nikola's analysis showed that the station operated only 21% of the time during 2020."
The SEC charged Nikola with securities fraud under Section 17(a) of the Securities Act and under Section 10(b) and Rule 10b-5 under the Exchange Act, as well as violation of Rule 13a-15(a) under the Exchange Act, for failure to maintain adequate disclosure controls and procedures. In addition to paying the $125 million civil penalty, Nikola undertook to continue to cooperate fully with the SEC, including by producing documents and cooperative personnel.
According to Bloomberg, Nikola said that it "was 'pleased' with the SEC settlement and 'the company has now resolved all government investigations'" The company said it would pay the fine in five installments over the next two years and reiterated its intention to seek reimbursement from Milton for the costs and damages in connection to the investigation and other government probes."
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