Criminal charges of Nikola founder put other space companies aware

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Trevor Melton, founder and former CEO of Nicholas Corp., exits Manhattan federal court after his appearance in New York City, US, July 29, 2021.

Eduardo Munoz | Reuters

Federal officials have used the charges against founder Nicola Trevor Melton to send a warning to Wall Street about two of its most important growth areas: special purpose buyouts and individual investors.

When the indictment was announced, officials warned retail investors against persuading a “fast-talking friend or seller” to invest in a company. They also showed that SPACs are in plain sight. Milton became an overnight billionaire when he went public with a SPAC deal in June 2020. He pleaded not guilty Thursday in a Manhattan courtroom to accusation of defrauding investors by lying about “almost an aspect of the business.”

“This case is about the obligation of corporate officials like Milton to provide complete, truthful and accurate information at all times when discussing their corporate affairs,” Gurbert Grewal, director of implementation for the Securities and Exchange Commission, told reporters. “There is no limit or exception to this obligation. It applies to all public companies, even those that have recently entered public markets, including through SPAC transactions.”

Nikola is one of three electric vehicle startups under investigation by federal agencies for potential misleading investors. Lordstown Motors has confirmed that the Securities and Exchange Commission and the Department of Justice are investigating its business, including the SPAC deal that made the company public last year and its reports of vehicle pre-orders. Canoo confirmed inquiries from the SEC.

Officials involved in the investigation allege that Melton misused the SPAC process by using social and other media to consistently release falsehoods and misinformation about the company directly to retail investors.

They said that Milton was obsessed with retail investors and their role in keeping Nikola’s stock price high. This included tracking the number of users of Robinhood, the popular social stock app, who own Nikola shares.

“In carrying out his fraudulent scheme, Milton exploited features of the SPAC structure that differ from a traditional initial public offering or initial public offering,” said US Attorney Audrey Strauss.

Defense attorney Brad Bundy said in an email Thursday that Milton was “wrongly charged after a false and incompetent investigation,” and that justice will not be served until he is acquitted.

SEC and SPACs

The warnings to SPACs come in the wake of increased SEC scrutiny of such companies, which emerged last year as an increasingly popular way for companies to go public.

Strauss said SPAC differs from traditional IPOs in that it does not undergo a quiet period before the start of public trading. It said that allowed Milton to speak freely about the company on social media throughout the process of its initial public offering through a reverse merger with VectoIQ in June 2020.

“During that period, Milton brazenly and repeatedly made false and misleading claims about the status of Nikola’s technology,” Strauss said. “Milton told lies to generate popular demand for Nikola’s stock.”

SPACs are publicly traded companies that do not have any real assets other than cash. They are formed as investment vehicles with the sole purpose of raising funds and then creating and incorporating a private company.

Grewal, who started with the Securities and Exchange Commission last month after serving as a New Jersey attorney general, said the case shows that corporate officials “can’t say what they want on social media, without regard to federal securities laws.”

After an internal investigation, Nicola said in February he had discovered that Milton had made several inaccurate statements from 2016 through the company’s initial public offering that misled investors.

Warning to retail investors

Federal authorities have warned investors about overvalued stocks.

“Trust your intuition and check the details before engaging in any kind of investment,” said Philip Bartlett, the inspector in charge of the New York division of the United States Postal Inspection Service. “If it’s not okay, it’s probably a scam.”

The comments followed comments by SEC Chairman Gary Gensler, who said in May that the agency devotes significant resources to addressing emerging issues in SPACs and new ideas and recommendations about SPACs and how to appropriately protect retail investors.

The massive popularity of SPACs last year also attracted a slew of new Wall Street celebrities to join the bandwagon. The Securities and Exchange Commission earlier warned of those deals backed by public figures, urging investors to think twice before jumping in.

Correction: Canoo confirmed that it is being investigated by the Securities and Exchange Commission. An earlier version mischaracterized the agency’s authority.

– CNBC’s Yun Li contributed to this story.

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