Court Denies Motion to Dismiss Claims Against Nikola Corporation
POMERANTZ MONITOR | JANUARY FEBRUARY 2024
On December 8, 2023, Judge Steven P. Logan of the District of Arizona sustained Pomerantz’s claims against Nikola Corporation and certain of its officers and directors. The action is brought on behalf of investors who purchased stock in Nikola, an electric vehicle manufacturer that went public on June 4, 2020 via a special purpose acquisition company (SPAC) transaction. The complaint alleges that Nikola, its founder and chairman, Trevor Milton, and other officers and directors violated section 10(b) of the Securities Exchange Act as well as section 20(a), the “control person” provision, by issuing false statements concerning essentially every aspect of the company’s business. In addition to allowing investors to pursue recovery relating to one of the best-known instances of securities fraud in recent years, the court's upholding of our claims of scheme liability open new avenues for future securities litigation.
During the relevant period, Nikola purported to be a producer of zero emissions vehicles, including hydrogen fuel cell electric vehicles (FCEVs) and battery electric vehicles (BEVs), as well as hydrogen fuel for FCEVs. While our complaint alleges that the defendants’ fraud spanned numerous topics touching on every aspect of Nikola’s business, in essence the fraud can be broken down into five main categories of misrepresentations.
First, Nikola claimed it had developed a fully operational “zero-emissions” tractor trailer truck powered by hydrogen fuel cell technology: the Nikola One. However, the Nikola One was neither a “zero-emissions” truck nor operational. It was nothing more than an empty shell. Nevertheless, at the instruction of Milton, Nikola staged a press event specifically to dupe investors into believing the vehicle was operational. Nikola also created a video purporting to show the Nikola One driving down a road under its own power. In reality, Nikola had towed the inoperable truck to the top of a hill and then filmed it as it rolled down to make it appear as if it were operational. Nikola secretly abandoned the Nikola One project prior to going public.
Second, Nikola claimed it had over 14,000 binding purchase orders for its trucks, which represented “billions and billions” in revenue. In truth, essentially all the orders were non-binding and were for the inoperable, and since abandoned, Nikola One.
Third, Milton repeatedly asserted that Nikola was producing hydrogen at less than a quarter of the cost industry experts believed was possible. In truth, Nikola had never produced any hydrogen at all, let alone at the low prices claimed.
Fourth, Nikola claimed it had single-handedly developed a FCEV/BEV pick-up truck, the Badger, for which pre-orders had sold out. However, Nikola never built the Badger. Months after Nikola announced the completed production of the Badger, Nikola had created nothing more than preliminary digital renderings of the vehicle.
Fifth, Nikola claimed that all of its vehicles’ key components, including inverters and batteries, were created and manufactured “in-house” by Nikola. In reality, Nikola did not develop any components in-house.
We allege that the defendants were motivated by greed. Milton – the architect of the fraud – aimed to inflate the expectations and stock price of Nikola, utilizing the resulting excitement to secure partnerships with top auto companies, which would further inflate Nikola’s share price. As Nikola’s single largest shareholder, Milton openly admitted within the company that he planned to dump his shares as soon as he was contractually permitted to do so, which was only six months after Nikola went public and before the market could discover that the company, like the Nikola One, was an empty vessel. The other defendants encouraged Milton to utilize social media to directly engage with retail investors. Despite knowing of his propensity to lie, they championed his self-described “media blitzes” of misinformation because they too were large shareholders who stood to gain millions, if not billions, from Milton’s fraud.
Investors began to learn the truth when Nikola’s stock price plummeted following a September 10, 2020 Hindenburg Research report. Having gathered “extensive evidence—including recorded phone calls, text messages, private emails and behind-the-scenes photographs,” Hindenburg identified “dozens of false statements by [Milton],” which had led Hindenburg to conclude that Nikola “is an intricate fraud built on dozens of lies over the course of . . . Milton’s career.” Thereafter, the DOJ and SEC began investigations, Nikola’s partners pulled out and Milton was forced to resign and was later indicted for (and convicted of) fraud. Nikola’s stock price plummeted 76% over the course of these disclosures.
Our claims against Nikola, Milton and certain officers and directors were sustained following two rounds of motion to dismiss briefing. While the court readily agreed following the first round that Milton intentionally misled investors, it was only after we amended the complaint to add additional facts revealed during Milton’s criminal trial that the court found that we sufficiently alleged fraudulent intent against the other officers and directors for their misstatements. On this critical issue, the other defendants argued that Milton was the actual perpetrator of the fraud and that even if certain of their statements were false and misleading, they did not intend to mislead investors the way Milton did. The court rejected the defendants’ argument based on the newly added allegations, including that they were present during meetings in which abandonment of the Nikola One was discussed.
This opinion is particularly significant because the court held that the complaint independently alleged liability against the other defendants under the less frequently utilized “scheme liability” theory. Whereas Rule 10b-5(b) imposes liability against only those who “make any untrue statement of a material fact,” subsections (a) and (c) make it unlawful “to employ any device, scheme, or artifice to defraud” or “to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.” That is, the person need not be a “maker” of a false statement to be held liable for fraud. Analyzing our scheme liability allegations, the court acknowledged that while the defendants were correct that they had no duty to correct Milton’s own false statements and there is no liability for aiding and abetting fraud under the federal securities laws, the court held that the complaint adequately alleged each defendant “engaged in conduct with the principal purpose and effect of creating a false appearance of fact in furtherance of the scheme.” For example, we adequately alleged that the CEO and CFO were told by others in the company about Milton’s false statements, said they would address the issue, but never did. The court also noted that the officers praised Milton’s performance following his misstatement-filled interviews and they participated in videos with Milton that were designed to mislead investors. The court found these allegations sufficient to allege scheme liability.
The court's ruling on scheme liability opens new avenues for future securities litigation. While a few courts previously sustained scheme liability claims, those claims usually involved market manipulation (i.e., “pump and dump” schemes) or were entirely duplicative of the Rule 10-b false statement claims. Our victory here creates a precedent for reference in future litigations where what defendants may characterize as non-actionable “aider and abettor” claims cross over into actionable scheme liability claims.