In a warning shot to a thriving corner of Wall Street, federal authorities on Thursday filed criminal and civil securities fraud charges against the founder of Nikola — a start-up automaker that went public by merging with an investment vehicle last year.
An indictment by the U.S. attorney’s office in Manhattan charged the founder, Trevor Milton, with misleading investors — in particular individual investors — about the technology for battery- and hydrogen-powered vehicles it had hoped to manufacture. In a separate civil case filed on Thursday, the Securities and Exchange Commission also accused Mr. Milton of securities fraud.
The twin legal filings are the biggest lightning bolts prosecutors and securities regulators have delivered to the supercharged market for the investment vehicles known as special-purpose acquisition companies that regulators and some investors have argued are rife with potential problems. More such cases could be filed in the coming months; regulators are investigating several other companies and executives in similar circumstances.
The investment vehicles, called SPACs, have raised nearly $200 billion in initial public offerings for the express purpose of finding and buying an operating business. If SPACs don’t buy a company within two years, their sponsors, often professional investors or Wall Street bankers, have to return the cash they raised — a provision that critics argue encourages them to buy shaky or unproven businesses.
The boom in SPACs has coincided with and been spurred on by retail investors who share trading tips and strategies on social media, often deciding en masse to buy the shares of companies they believe are undervalued or are destined for greatness. These individual traders, often with the encouragement of professional investors or corporate executives, have helped drive up the stock prices of various companies, including GameStop, AMC and Tesla.
Prosecutors and the S.E.C. said that for nearly a year, Mr. Milton used social media, television and podcasts to spread “false and misleading statements regarding Nikola’s product and technology.”
One such misleading statement, the charging document filed by prosecutors said, concerned the company’s Nikola One long-distance truck prototype. The prototype did not work, contrary to the glowing statements Mr. Milton made about it.
The Transition to Electric Cars
Federal prosecutors and securities regulators started investigating Nikola last fall around the time an investment firm published a report questioning its products and some of Mr. Milton’s claims. That firm, Hindenburg Research, said the company had put out a promotional video to suggest it had a working prototype — but never disclosed that the truck was moving forward only because it was rolling down a hill in neutral gear. Mr. Milton resigned a few weeks later.
The S.E.C. also noted in its complaint that a Bloomberg News article, published in June 2020, said that Mr. Milton had “exaggerated” the capabilities of its truck.
Yet Nikola went public in June 2020 in a $700 million merger with a SPAC called VectorIQ, which was founded by Steve Girsky, a former General Motors executive and board member who has also worked at Morgan Stanley. Mr. Girsky put Mr. Milton and Nikola in touch with G.M.’s chief executive, Mary T. Barra, and the two companies agreed to work together on heavy-duty and pickup trucks; that deal was greatly scaled back in November.
Some young, untested businesses have opted to merge with SPACs because doing so is usually faster, requires fewer disclosures and attracts less scrutiny from investors and regulators than a conventional initial public offering. Nikola, for example, managed to go public just five years after Mr. Milton founded it.
“In carrying out his fraudulent scheme, Milton exploited features of the SPAC structure,” Audrey Strauss, the U.S. attorney in Manhattan, said Thursday.
Federal prosecutors contend that retail investors were hurt by the stock’s sharp drop, which started last summer, but not early investors in the company, including Mr. Milton. Nikola’s shares were trading at less than $13 Thursday afternoon, down about 10 percent for the day, after falling from more than $65 in the middle of last year, a point at which the company had a valuation in excess of Ford Motor’s.
The S.E.C.’s complaint said that Mr. Milton held approximately 25 percent of Nikola’s stock after the SPAC deal and “ultimately reaped tens of millions of dollars in personal benefits as a result of his misconduct.” Securities regulators noted that Mr. Milton “embarked on a relentless public relations blitz aimed at a class of investors he called ‘Robinhood investors’” — a reference to the popular retail brokerage firm that just raised $2.1 billion in its own initial public offering.
Mr. Milton’s legal team said in a statement that the government was seeking to “criminalize lawful business conduct.” The team added, “Mr. Milton has been wrongfully accused following a faulty and incomplete investigation in which the government ignored critical evidence and failed to interview important witnesses.”
Mr. Milton was taken into custody in Manhattan on Thursday morning and was released on a $100 million bond co-signed by two other people and secured by two properties worth $40 million.
Nikola said in a statement that Mr. Milton had not been involved with the company since resigning in September 2020. “Today’s government actions are against Mr. Milton individually, and not against the company,” the company said. “Nikola has cooperated with the government throughout the course of its inquiry.”
Authorities did not charge other individuals, including other executives, or the company itself with wrongdoing. The S.E.C.’s complaint appeared to justify its sole focus on Mr. Milton by noting that even after he had became executive chairman of Nikola following the merger with VectorIQ, he had firm control over the company and remained its primary spokesman and giving orders to others. The complaint called him a hands-on executive who “engrossed himself in the details of Nikola’s technology and product development process.”
Mr. Milton, who dropped out of high school and college, started Nikola with the aim of becoming the Tesla of trucking. Like Elon Musk, the Tesla chief executive, Mr. Milton cultivated a reputation as a charismatic showman with a grand vision for revolutionizing an industry. “We’re going to completely control trucking in America,” he told Automotive World last year.
Mr. Milton even named his company after the inventor whose last name Mr. Musk’s business uses, Nikola Tesla.
Enticed by the prospects of finding the next Tesla, big and small investors poured money into start-ups like Nikola in recent years. They came to believe that the world would rapidly switch from fossil fuel cars and trucks to electric and hydrogen vehicles, and that start-ups, not established automakers like G.M. and Daimler, would lead the way. But unlike Tesla, which has produced and sold hundreds of thousands of electric vehicles over several years, many of the newer entrants have struggled to make even a few thousand.
The S.E.C. has been warning investors beginning this year about the dangers of SPACs and the businesses they acquire, specifically that people should not be lulled by overly optimistic claims. A handful of companies that completed mergers have disclosed investigations by the S.E.C., federal prosecutors or both.
The Stanford Law School Securities Clearinghouse found that at least 30 companies that went public through a merger with a SPAC have been sued by shareholders since 2019.
Erik Gordon, a business and law professor at the University of Michigan, said authorities “are sending a message they think SPACs are breeding ground for things more serious than just sloppy disclosure.” He added, “They think it is breeding ground for fraud and misrepresentation.”
Just two weeks ago, the S.E.C. reached a settlement with several parties involved in the planned merger of Momentus, a company that said it had developed a unique propulsion technology, and Stable Road Acquisition, a SPAC. The regulators said investors were misled into believing the propulsion system had been successfully tested in space when it had in fact failed.
Federal prosecutors and securities regulators are also investigating Lordstown Motors, a company that hopes to make electric pickup trucks and merged with a SPAC last year.
Lordstown, based in Ohio, said it had raised much-needed cash this week, but it has yet to begin commercial production. Federal authorities are investigating whether the company and its founder, Steve Burns, who resigned as chief executive in June, exaggerated claims about customer interest in its truck, which is meant to be used by businesses like contractors and utilities.
Federal prosecutors are also investigating Lordstown’s merger with DiamondPeak, a SPAC put together by David Hamamoto, a former Goldman Sachs partner and a Wall Street real estate investor.
But proponents of SPACs said the charges against Mr. Milton and other investigations should not be used to tar the reputation of these investment vehicles, which some people on Wall Street assert are innovative. Douglas Ellenoff, a New York lawyer whose firm has specialized in representing the founder of SPACs, said some regulators have been “putting out statements that are stigmatizing the industry at large.”