Thursday, July 25

The founder of the EV startup could end up in prison in a fraud case

The founder of electric truck company Nikola was sentenced Monday to four years in prison in a fraud case that highlights the financial carnage left by a string of electric vehicle startups and their promoters.

A federal judge in Manhattan, Edgardo Ramos, sentenced Trevor Milton, Nikola’s founder and former CEO, after a jury found him guilty last year of one count of securities fraud and two counts of wire fraud. Mr. Milton has been accused of driving up the value of Nikola shares by making outlandish claims about the company.

Milton told investors that Nikola had working prototypes of emissions-free long-haul trucks, had binding orders worth billions of dollars and was producing low-cost hydrogen fuel. All of these statements were false, said prosecutors, who had asked Judge Ramos to impose an 11-year prison sentence and a $5 million fine. Mr Milton’s lawyers, who denied the charges, had asked for probation.

Judge Ramos also fined Mr. Milton $1 million and said he will be required to pay restitution, which will be determined later. Mr Milton will remain free on bail while he pursues his appeal.

Fighting back tears and quoting Scripture during a lengthy plea for mercy, Mr Milton told the judge he felt “terrible for everyone involved”. But, he insisted, “I did not commit these crimes.”

Judge Ramos said Mr Milton was not as bad as some people convicted of fraud he himself sentenced, but told him “there were still real people hurt by your actions”. He added: “The amount of loss was immense.”

Few electric vehicle executives have been convicted of crimes, but Nikola was hardly the only new auto company to attract billions of dollars in investment without generating profits or producing many cars or trucks, leaving shareholders with huge losses.

Inspired by Tesla’s success, investors have poured money into startups like Canoo, Lordstown Motors and Lucid Motors in recent years. Their backers and executives saw electric vehicles as an opportunity to challenge established automakers like Ford Motor and General Motors — and get rich in the process.

With far fewer components than gasoline cars, electric vehicles should theoretically have been easier to produce. But building thousands of cars, establishing brands and meeting safety standards has proven far more difficult and expensive than many start-up executives and their backers expected. Some companies have proven more adept at generating lawsuits than cars.

Many of the electric vehicle startups have gone public by merging with special purpose acquisition companies, which has allowed the companies to avoid much of the disclosure and regulatory scrutiny that accompanies traditional initial public stock offerings.

Investors who purchased these stocks suffered huge losses. Shares in Nikola, which is still in business but warned investors in November that it could run out of money in the next 12 months, have lost 99% of their value since 2020.

Nikola’s stock was trading at about 90 cents a share Monday afternoon; it traded for more than $65 in June 2020.

One group of investors has profited: short sellers, who make money by betting that stock prices will decline. Firms that specialize in exposing overvalued stocks have feasted on Nikola and other electric vehicle startups.

Mr. Milton’s false claims about Nikola were first reported by Hindenburg Research, an investment firm that specializes in uncovering corporate wrongdoing.

Hindenburg also published a report on Mullen Automotive last year accusing the company of marketing electric vehicles imported from China as its own and claiming it was close to offering advanced solid-state batteries, a technology that much larger companies like Toyota they are still years away from perfecting. . Mullen shares, which peaked at more than $3,600 in 2020, recently traded for 13 cents.

A spokesperson for Mullen said that “many of Hindenburg’s points were inaccurate at the time, and now dated, which now makes everything completely inaccurate.” In recent press releases, Mullen said it has started making electric trucks at a factory in Mississippi.

Another target of Hindenburg was Lordstown, a potential electric truck maker that took over a former GM plant in Ohio with the help of the Trump administration. President Donald J. Trump hosted Lordstown CEO Steve Burns at the White House in 2020, calling the company’s vehicle “an incredible concept.”

Mr Burns resigned after Hindenburg accused him of exaggerating the number of orders for the Lordstown pickup truck. The company filed for bankruptcy protection in June. (In October, an investment vehicle controlled by Mr. Burns bought Lordstown’s machinery and other assets.) Lordstown declined to comment.

Mr. Burns said in an email that he had never inflated the orders and noted that a study by an outside law firm had found inaccuracies in the Hindenburg report. He bought the Lordstown operations and hired some of the company’s engineers, Burns said, because he believes the company has unique technology.

“Under the LandX brand, we plan to build several exciting vehicles and look forward to announcing our full lineup soon,” Burns said.

Short sellers have also targeted Faraday Future, a Los Angeles-based company that has so far delivered nine of its “ultra-luxury” electric vehicles after a decade in operation.

After J Capital Research, another short seller, released a report on Faraday in 2021, the company admitted that it misled investors when it claimed to have 14,000 reservations that, in reality, were unpaid expressions of interest.

In September, Faraday said in a regulatory filing that its “company culture failed to sufficiently prioritize compliance.” The company also disclosed that it is under investigation by the Securities and Exchange Commission and the Department of Justice.

Faraday is cooperating with authorities, a spokesperson said in an email, adding that the company has “made material changes and improvements to processes and procedures to strengthen our governance and internal controls.”

Even for companies that short sellers have not publicly accused of exaggerating their results and prospects, vehicle production has proven incredibly challenging.

Canoo announced $750 million worth of orders from Walmart and other customers for its electric vans. The company is ramping up production at a factory in Oklahoma, a spokeswoman said, but declined to say when it will start delivering vehicles in large quantities.

Canoo told investors in November that there was “substantial doubt” about its survival. Although accounting rules required the caveat, Canoo raised $380 million to finance its expansion, said Chris Nguyen, the spokesman.

Investors have also become skeptical of companies that have managed to produce thousands of cars. Shares of Fisker, which delivered about 3,000 vehicles through early November, are down 95% from their 2021 high. Shares of Lucid, which has said it will make at least 8,000 luxury electric sedans this year, they dropped by 93%. Shares of Rivian, a maker of electric pickups and sport utility vehicles that many analysts consider the start-up most likely to survive, fell 80%.

Less sophisticated investors often bore the brunt of the losses. Mr. Milton, prosecutors said in a sentencing memo, “engaged in a sustained scheme to take advantage of individual and non-professional investors.” This included posting a video on YouTube of a prototype rolling down a hill, creating the false impression that the company had a working vehicle.

Mr. Milton also lied about his personal history, prosecutors said. He said he dropped out of college to pursue his entrepreneurial dreams, even though he was expelled for paying someone to do his academic work.

After selling some of his Nikola shares for $100 million in mid-2020, Milton spent $83.5 million on luxury assets such as a plane and an estate in the Turks and Caicos Islands.

Nikola investors lost more than $660 million, prosecutors said in the memo, rejecting claims by an expert hired by the defense that losses that could be blamed on Milton were much smaller and perhaps as low as zero.