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.”
SideBar
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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