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Nikola CEO Goes in Trial for Fraud Even as the Company Delivers Revolutionary Electric Trucks



Nikola CEO Goes in Trial for Fraud Even as the Company Delivers Revolutionary Electric Trucks 

 In 2021, the US Attorney’s Office for the Southern District of New York brought securities fraud charges against Founder and former CEO of Nikola Corporation, Trevor Milton.[1]

 Milton founded Nikola with the goal of manufacturing trucks that run on alternative fuels with low or zero emissions and building an alternative fuel station infrastructure to support them. With promises to deliver trucks that that run entirely on electric power and eventually on hydrogen fuel cell technology, Nikola raised more than $1 billion in private offerings and eventually brought its company public.[2] In April of 2022, Nikola delivered its first electric trucks, stating that it would be able to deliver 300-500 electric trucks per year.[3]

 Nevertheless, federal prosecutors have charged that Nikola and its CEO, Milton, “engaged in a scheme to defraud investors by inducing them to purchase shares of Nikola Corporation… through false and misleading statements regarding Nikola’s product and technology development… directly to the investing public through social media and television, print and podcast interviews.”[4]

 On September 13, Assistant U.S. Attorney Nicolas Roos presented the government’s opening statements at the trial. He stated that Milton “lied to dupe innocent investors into buying his company’s stock” and that he became a billionaire virtually overnight “on the backs of those innocent investors taken in by his lies.”[5] The government claims that Milton’s statement that Nikola’s electric pickup truck was “fully functional” and that Nikola had developed hydrogen gas electric-vehicle battery technology were untrue, and that Milton knowingly spread these false statements to induce retail investors to buy shares of Nikola.[6]

 Although Milton has maintained his innocence, Nikola previously conducted its own internal investigation, and conceded in February that Milton had made “several inaccurate statements from 2016 through the company’s IPO that misled investors in June 2020.”[7]

 The Indictment[8] charged Milton with two counts of securities fraud and one count of wire fraud. Rule 10-b-5 of the Securities and Exchange Act makes it a crime to “employ and device, scheme or artifice to defraud” or to make any false, or even misleading, statement of material fact in connection with the purchase or sale of any security. Section 1348 makes it a federal crime to “defraud any person in connection with” the issuance of a security or to obtain money by means of false or fraudulent pretenses in connection with the sale of a security. Securities fraud carries a statutory penalty of up to 25 years in prison.[9] Milton is also charged with failing to maintain disclosure controls and procedures required by the Securities Exchange Act.[10]

 The prosecution must convince the jury that Milton misled investors through a public relations campaign aimed at inflating and maintaining Nikola’s stock price by misleading investors about Nikola’s technological advancements, in-house production capabilities, reservation book and financial outlook. It also must be proven that the fraud actually induced retail investors to purchase stock in Nikola.

 Because Nikola has a record of some success, including the delivery of electric trucks, it will be more difficult for the prosecution to show intentional falsity. That claims or predictions for the future are delayed or eventually unfilled is not inherently grounds for a securities fraud prosecution.

 Let’s look at some other cases in which similar claims of securities fraud were brought.

 In 2000, a civil securities fraud case brought against Turbodyne technologies for alleged false statements relating to its “Turbopac” technology, was dismissed because the plaintiffs failed to prove reliance on the false statements by any purchasers.[11] Although the plaintiffs argued that the stock was traded in an “efficient” market (creating a presumption that any relevant information will influence buyers), the court held this insufficient. Allegations of securities fraud require specific instances of alleged reliance on the false statements by buyers.

 That court also looked at the important “scienter” requirement of securities fraud, which means the requirement of intentional falsity rather than just questionable statements that turn out to be false. The defendants had stated that the effectiveness of its Turbopac technology was “already proven,” when in fact it was beset with design and operational problems that made it unable to perform the basic functions represented, unmarketable and potentially dangerous." The plaintiffs alleged that the defendant knew that the company could not make good on its promises to deliver a working product when it made the statements. These allegations were ruled sufficient. The court observed that all that must be alleged are facts that can “give rise to a strong inference of deliberate recklessness or conscious misconduct.”

 In a Second Circuit Court of Appeals case in 2016, a civil securities fraud finding was upheld because a claim by a media company regarding its available funding was “substantive information not accompanied by meaningful cautionary language.”[12] The defendant’s buying spree of media outlets in different countries rendered it virtually insolvent by early 2002. Yet, several months later, it was still suggesting to shareholders an optimistic picture of stability.

 While the court conceded that a company has no legal duty to disclose a general risk presented by low liquidity, and failing to point out this risk does not constitute securities fraud, affirmatively false statements do. The plaintiffs had asked the jury to consider the disparity between the “inside reality” faced by the company and the “outside message” painted by the defendant’s public statements. The court also observed that although “statements expressing opinions” are not grounds for securities fraud liability, omitting material facts or knowledge concerning statements of opinion in a way that would fool a reasonable investor, can constitute securities fraud. “Forward-looking” statements can also be actionable if they contain present representations, such as that the defendant company “enters the year of operations with strong growth prospects and a very strong balance sheet” when, in fact, that was an unreasonable assertion given the defendant’s knowledge of the time.

 In 2021, a securities fraud civil action brought against Volkswagen based on a series of alleged misrepresentations was dismissed. In its promotional statements, the German carmaker had touted its “compliance with international rules” and “fair treatment of its business partners and competitors.” It also bragged about its following of ethical principles and “pursuing the goal of offering all customers the mobility and innovation they need.”[13]

 The plaintiffs alleged that Volkswagen had engaged in various forms of anticompetitive behavior, making these statements false. However, the court called these general statements about reputation, integrity and compliance “quintessential examples of non-actionable puffery that a reasonable investor would not rely on to inform their investment decisions.” The court also shot down the idea that Volkswagen would be required to disclose its alleged unlawful actions (for which it had not been charged) even if it did turn out later that they were committed.

 The common thread that runs through these cases is that the government must allege intentionally made false statements of facts for securities fraud charges to stand. Some of the actions alleged in the Milton indictment straddle this line. In the hydrogen production section of the indictment, the government alleges that Nikola claimed “standardization of hydrogen station” though these had not yet been produced and that the company was considering abandoning the attempt at the time. The indictment also alleges that Nikola claimed that it had contracts “signed on the dotted line,” but that these were nonbinding and cancelable. Both statements may be misleading, but it’s hard to call them outright falsehoods.

 In all, it seems that many of the statements Milton is alleged to have made her in the gray area between optimistic puffery and outright falsity. Whether a jury concludes that these constitute securities fraud and if so, whether an appellate court agrees, will be an interesting new chapter in the evolving definition of “fraud” under federal law.



[6] Id.