Nikola Investors Win Class Certification in Securities Fraud Litigation

By Michael J. Wernke

On January 6, 2025, Judge Steven P. Logan of the District of Arizona granted Pomerantz’s motion for certi­fication of a class in its securities fraud litigation 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.

During the relevant period, Nikola claimed that it pro­duced zero emissions vehicles, including hydrogen fuel cell electric vehicles (FCEVs) and battery electric vehicles (BEVs), as well as hydrogen fuel for FCEVs. While Pomerantz’s complaint alleges that Defendants’ fraud spanned numerous topics touching on every aspect of Nikola’s business, in essence the fraud can be broken down into three main categories of misrepresentations.

First, Nikola claimed it had developed a fully operational “zero-emissions” Nikola One tractor trailer truck as well as a FCEV/BEV pick-up truck, the Badger. In truth, the Nikola One was an empty shell that was incapable of moving under its own power and the company had long-ago abandoned production of the vehicle. Moreover, the Badger was nothing more than a preliminary digital ren­dering of a vehicle. Second, Nikola claimed it had over 14,000 binding purchase orders for its trucks, represent­ing “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.

 Plaintiffs allege that Defendants were motivated by greed. Milton – the architect of the fraud – aimed to inflate the expectations and stock price of Nikola and to benefit from 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 fraudulent scheme, 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.” There-after, the DOJ and SEC began investigations, Nikola’s partners pulled out and Milton was forced to resign. He was later indicted for, and convicted of, fraud. Nikola’s stock price plummeted 76% over the course of time that these facts were disclosed.

One requirement for class certification is that issues common to the class predominate over individualized issues. Many fraudulent misrepresentation claims do not obtain class certification because the issue of whether a class member actually relied on the alleged misrepresen­tation is an individualized inquiry. However, the United States Supreme Court has held that when federal secu­rities fraud plaintiffs establish that the securities at issue traded in an efficient market they are entitled to a “fraud-on-the-market” presumption of reliance. In other words, it is presumed that investors relied on the Defendants’ misrepresentations when purchasing the security at the market price. The presumption is founded on the theory that in an efficient market the price of a stock incorporates all available public information. Therefore, any person who purchases shares relies on the integrity of the market price and, consequently, any misrepre­sentations made by the company. This presumption, if obtained, largely eliminates an individualized inquiry of reliance that would prevent class certification.

Here, Pomerantz explained to the Court that all of the market efficiency factors traditionally analyzed by courts supported a finding that Nikola securities traded in an efficient market. For example, Nikola securities traded on the NASDAQ, a large national exchange. Moreover, factors such as the weekly trading volume, analyst coverage and the stock price’s quick response to news all indicated that the market was efficient.

Nevertheless, Defendants argued that because Nikola was a pre-revenue company that had gone public through a SPAC, the market was not efficient in the early weeks of public trading. For example, Defendants as­serted that pursuant to the company going public, large portions of Nikola stock could not be traded because of “lock-up” agreements that prohibited insiders from trad­ing their shares, which Defendants claimed placed sig­nificant constraints on short-trading and that therefore, Nikola’s stock price did not fully reflect downside pessi­mistic views. Defendants also argued that the high vola­tility of Nikola’s stock price and the lack of significance of financial results for a pre-revenue company rendered the traditional indicators of market efficiency that Plaintiffs proffered unreliable.

The Court rejected Defendants’ arguments. Notably, the Court found that Plaintiffs sufficiently addressed Defen­dants’ argument about lock-up constraints on shares. Specifically, even when taking into consideration that cer­tain shares could not be traded, the short interest trading in Nikola securities compared favorably to other securi­ties that trade in efficient markets. Moreover, the short interest in Nikola securities increased as more negative news about the company was released, which would be expected in an efficient market. Finally, not a single ana­lyst covering Nikola expressed any concern about a short sale constraint during the period. The Court thus found that Nikola securities traded in an efficient market.

The Court’s inquiry did not end there. The “fraud-on-the-market” presumption of reliance is just that – a presump­tion. It can be rebutted if the defendants demonstrate that, despite the market being efficient, the misrepresen­tations at issue were not reflected in the market price. Here, Defendants argued that the fraud-related infor­mation contained in the Hindenburg Report was already publicly known to the market prior to the publication of the Report. Because an efficient market quickly incorporates all publicly available information into the market price of the security, Defendants argued that the stock price decline following the Report must have been a result of non-fraud related information in the Report.

The Court rejected this argument as well, finding that Pomerantz had demonstrated that much of the fraud-related information contained in the Hindenburg Report had not been revealed before, and to the extent some of it had been made public, Defendants had denied any wrongdoing and assured investors that their prior state­ments were true, preventing the disclosure of the infor­mation from being fully reflected in Nikola’s stock price.

The Nikola opinion is particularly significant because it provides a roadmap for class certification where the defendant company had gone public through a SPAC, which has become a much more prevalent scenario. Although a company that goes public via a SPAC has unique features that may differ from those that go public via traditional IPOs, this decision holds that they are distinctions without a difference when analyzing market efficiency for the purposes of class certification, an important precedent for future investors.