By Tessa Patterson.

Phoenix-based startup Nikola Motor Company (“Nikola”) has risen to the top. Nikola was once valued at more than Ford Motor Company buthas since endured bumpy roads, including a patent lawsuit with fellow electric car competitor, Tesla. The most recent roadblocks comes in the form of fraud allegations from short-seller Hidenburg Research, and subpoenas from the Department of Justice and the Securities and Exchange Commission. Subpoenas do not necessarily mean any action will be brought against Nikola. Though if the government uncovers the necessary elements of fraud, it may get the green light to bring suit.

What is Nikola?

Founded by Trevor Milton in 2014, Nikola specializes in battery-electric and hydrogen fuel-cell vehicles, with a focus on semitrucks. Since going public in June through a special-purpose acquisition company, Nikola’s stock price has soared, though the company has never actually generated a product or produced a single truck. Nevertheless, Nikola has aligned itself with powerful companies, such as General Motors (“GM”), who recently announced a strategic partnership with the young company. The deal involves GM providing the batteries, fuel cells, engineering, and manufacturing capacity to Nikola in exchange for $2 billion worth of Nikola shares. The partnership’s first GM vehicle will be the highly anticipated Badger, a hydrogen-electric pickup truck. This deal’s closing date has been pushed back to December 3, 2020 from September 2020, and the deal appears to be on unsteady ground due to fraud allegations.

"File:NikolaTwo.jpg" by Raquel Baranow is licensed under CC BY-SA 4.0

Nikola and the Downhill Slide

Just two days after the company’s announcement of its deal with GM, Hindenburg Research issued a scathing report entitled “Nikola: How to Parlay an Ocean of Lies into a Partnership with the Largest Auto OEM in America” (“the Report”). The Report accused Nikola of making multiple fraudulent statements, and most notably claiming that the company staged a video called “Nikola One Electric Semi Truck in Motion.” The short promotional video shows a Nikola semitruck cruising effortlessly across a scenic highway carrying a heavy delivery. However, as the Report alleges and Nikola has since confirmed, the truck was only rolling down a hill.

Nikola repeatedly claims in a statement responding to fraud allegations that Hindenburg Research’s allegations are designed to “manipulate the market to profit from a manufactured decline in Nikola’s stock price.” Nikola also defends the validity of its technology, and, regarding the promotional video, states that the company never claimed the truck in the video was “under its own propulsion.”

Trevor Milton quickly stepped down as CEO from the company only ten days after the allegations were made, stating that the “focus should be on the Company and its world-changing mission, not me.” Milton was later replaced by current CEO, Mark Russell. Since resigning, Nikola and Milton have received subpoenas from both the Department of Justice and the Securities and Exchange Commission in connection with the Hindenburg allegations. These subpoenas are just the beginning as the government decides whether to bring a case against Nikola.

Making a Claim Under Section 17(a) and Rule 10b-5

When the government plans to brings a fraud case, the claim is typically brought under Section 17(a) of the 1933 Securities ActandRule 10b-5 of the Securities Exchange Act of 1934. While these claims are typically analyzed together due to their similar structures, there are a few key differences.

First,Section 17(a)  andRule 10b-5 render it unlawful for a person to employ a scheme, make an untrue statement or omission of fact, and engage in any fraud in the course of business in connection with the purchase or sale of a security.

Second, these laws share almost exact language and require similar pleading standards despite stemming from two different acts. In order to establish liability under either claim, a plaintiff must show that the defendant made a material misstatement or omission that was in connection to the plaintiff’s purchase or sale of the security. The plaintiff must also show that they relied on that statement or omission, suffered an economic loss, and that the misstatement or omission proximately caused the plaintiff’s loss.

A key difference between Section 17(a) and Rule 10b-5 is the type of intent the plaintiff must prove regarding the misstatement or omission. On the one hand, Rule 10b-5 requires the plaintiff to prove the defendant’s misstatement was made with an intent to deceive. On the other hand, Section 17(a)(2)–(3), the relevant subsections governing misstatements, omissions, and business operations, does not have this requirement. Instead, the plaintiff only needs to prove the defendant acted negligently.

What Do you Need To Prove Fraud?

Given the many necessary components of a Section 17(a) and Rule 10b-5 claim, the plaintiff must plead their complaint with a high degree of specificity. For example, in a pleading, a plaintiff cannot merely assert that a company made a misstatement. Rather, the plaintiff must specifically identify each fraudulent material misstatement, meaning the statement must have a substantial likelihood of having importance to the reasonable shareholder. Furthermore, due to the daily fluctuation of the stock market, it can be challenging for the plaintiff to demonstrate that the damages sought for the devaluation in their security were actually caused by the defendant’s misstatement or omission. While a plaintiff typically proves this by pointing to the downward effects of the defendant’s later disclosure or correction on the stock price, the defendant can easily cite to current events as the actual cause for this price fluctuation. This leads to costly litigation involving immense discovery and expert witnesses to determine whether the defendant’s misstatement damaged the plaintiff. 

What is next for Nikola?

As the government begins to sift through the subpoenaed documents from Nikola, it is unlikely the company has seen the last questioning of its legitimacy. It has not been revealed what documents the government requested from Nikola, but if the government decides to pursue a case, Nikola’s communications will likely be subpoenaed. Within those documents, the government might be able to find the necessary facts to prove its Section 17(a) case, and even the necessary intent for Rule 10b-5.

Nikola asserts that its Nikola Tre semitruck will be available by the end of 2021 despite these legal impediments. With an order of 2,500 electric garbage trucks due to trash company Republic Services, it will be interesting to see if the rubber actually hits the road.