How Nikola’s Fraudulent History was Overlooked

It was announced on November 30th that General Motors (GM) was suspending its investment within electric vehicle manufacturer Nikola Corporation meaning plans to build the new electric pick-up truck in return for a stake in Nikola look increasingly unlikely. Over the past few months, accusations of fraud against Nikola and its founder, Trevor Milton, have compounded the difficulties the company is facing. It raises questions as to the future of the firm and also highlights the regulatory oversight that listing via a special purpose acquisition company (SPAC) can potentially entail.


Since 2014, Trevor Milton has led Nikola to develop a new range of truck concept vehicles that are powered by a combination of electricity and a hydrogen fuel cell. Ongoing construction of an Arizonan factory is expected to manufacture between 35,000 and 50,000 trucks per year by 2023. However, the firm has not yet produced a working product to date. An announcement on September 7th that GM would partner with Nikola involved the provision of GM’s hydrogen fuel cell technology and the use of their production facilities in return for an 11% stake in Nikola, which was worth 2 billion USD at the time. Investors responded positively with NKLA stock rising 50% following the announcement. The suspension of GM’s agreement means that Nikola has lost demonstrated manufacturing expertise and a large capital investment – although GM will continue to provide hydrogen fuel cell technology. The change represents a “good supply partnership but nothing to write home about” versus a “game-chang[ing] deal”, according to Wedbush analyst, Daniel Ives. GM’s reasoning for the scaling-back was not stated; it is unknown whether the following factors were a consideration.


Traditionally, initial public offerings (IPOs) have been the standard way to list on a stock exchange. This process requires a thorough investigation involving due diligence on the company’s financials, management team and track record in order to be meet the requirements of the Security and Exchanges Commission (SEC). However, in March 2020, Nikola announced that, in order to list on the NASDAQ exchange, it would merge with another public company, VectoIQ Acquisition Corporation – a SPAC listing. This method bypasses a number of key stages in the due diligence process and allowed many to invest money in a stock that had not gone through the formal due diligence process that an IPO entails. The listing was well-received regardless, with NKLA stock doubling in 5 days of trading.


In late September, Hindenburg Research, a short seller, accused the Executive Chairman and founder, Trevor Milton, of fraud at both Nikola and previous companies, as well as of exaggerating the performance of Nikola’s electric trucks. Allegations ranged from tampering with emissions results to claiming that bought-in parts were manufactured in-house – such allegations were initially denied by Nikola, however the company later admitted some were true. The report led to the resignation of Trevor Milton, who still remains the largest shareholder, as well as a 20% fall in NKLA stock. A US Department of Justice investigation, in conjunction with the SEC, will now follow. Nikola aptly highlights the risks that SPAC listings, and their associated due diligence requirements, can entail.


The turbulence observed in Nikola’s stock price since listing is emblematic of the difficulties it has faced. The firm once had a higher market capitalisation than Ford, despite having never produced a working product. That market capitalisation has subsequently halved since the announcement of the scaled-back GM deal. This example stresses the importance of thorough due diligence – many investors lost money as a result of the effective short-selling campaign. The results of the inquiry by the SEC and US Department of Justice are yet to be made public and will be closely watched by investors and regulators alike. Increased regulatory oversight of SPACs may be a possibility, although making assumptions about any changes would be unwise until the conclusions are known.


By Andrew Hopkins

Sector Head: James Float

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