EV startup founder could face jail time in fraud case

EV startup founder could face jail time in fraud case

The founder of an electric truck company faces a lengthy prison sentence when he is sentenced Monday in a fraud case that highlights the financial carnage left behind by a series of electric vehicle start-ups and their promoters.

A Manhattan federal judge will sentence Trevor Milton, founder and former chief executive of the Nikola truck company, after a jury convicted him last year of one count of securities fraud and two counts of wire fraud. Mr. Milton was accused of inflating the value of Nikola’s stock by making extravagant claims about the company.

Mr. Milton told investors that Nikola had working prototypes of emissions-free long-haul trucks, had firm orders worth billions of dollars and was producing low-cost hydrogen. All of those statements were false, said the prosecutor, who asked the judge to impose an 11-year prison sentence and a $5 million fine. Mr. Milton’s lawyers, who have denied the accusations, asked that he be sentenced to probation.

Few electric vehicle executives have been convicted of crimes, but Nikola wasn’t the only new automaker to attract billions of dollars in investment without turning a profit or producing many cars or trucks, leaving shareholders with d huge losses.

Inspired by Tesla’s success, investors have invested in start-ups 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 parts than gasoline cars, electric vehicles theoretically should have been easier to manufacture. But building thousands of cars, establishing brands and meeting safety standards has proven much more difficult and expensive than many start-up executives and their backers hoped. Some companies have proven to be better at generating lawsuits than cars.

Many electric vehicle startups have gone public by merging with special purpose acquisition companies, which has allowed companies to avoid much of the disclosure and regulatory scrutiny that comes with IPOs conventional shares.

Investors who bought these stocks suffered huge losses. Shares of 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.

One group of investors has benefited: short sellers, who make money by betting that a stock’s price will fall. 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, which accused the company of marketing electric vehicles imported from China as its own and claimed it was close to offering advanced solid-state batteries, technology that much larger companies like Toyota are still far from perfected. Mullen stock, which peaked at more than $3,600 in 2020, recently traded at 13 cents.

A spokesperson for Mullen said “many of Hindenburg’s points were inaccurate at the time, and now dated, making them completely inaccurate today.” In recent press releases, Mullen said it began manufacturing electric trucks at a factory in Mississippi.

Another Hindenburg target was Lordstown, an upcoming electric truck maker that took over a former GM plant in Ohio with help from the Trump administration. President Donald J. Trump welcomed Lordstown CEO Steve Burns to 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 van. The company filed for bankruptcy protection in June. (In October, an investment vehicle that Mr. Burns controls purchased machinery and other assets from Lordstown.) Lordstown declined to comment.

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

“Under the LandX brand, we intend to build several exciting vehicles and we look forward to announcing our full lineup soon,” Mr. 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 decline in activity.

After J Capital Research, another short seller, published a report on Faraday in 2021, the company admitted to misleading investors by claiming to hold 14,000 reservations that, in fact, were unpaid expressions of interest.

In September, Faraday said in a regulatory filing that its “corporate culture had not sufficiently prioritized compliance.” The company also revealed that it was 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 substantial 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 achievements and prospects, producing vehicles has proven incredibly difficult.

Canoo announced orders worth $750 million from Walmart and other customers for its electric vans. The company is increasing production at a plant in Oklahoma, a spokesman said, but he declined to say when it would begin delivering vehicles in large numbers.

Canoo told investors in November that there were “substantial doubts” about its survival. Although accounting rules required a warning, Canoo raised $380 million to fund its expansion, said Chris Nguyen, the spokesman.

Investors have become skeptical even 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 said it will produce at least 8 000 luxury electric sedans this year, are down 93%. Shares of Rivian, the maker of electric pickup trucks and sport utility vehicles that many analysts consider the startup most likely to survive, are down 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 unprofessional individual investors.” This included posting a video on YouTube of a prototype rolling down a hill, creating a false impression that the company had a working vehicle.

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

After selling some of his Nikola shares for $100 million in mid-2020, Mr. Milton spent $83.5 million on luxuries like a plane and property 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 who said the losses that could be attributed to Mr. Milton were much less, if any. zero.

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David B.Otero

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