February 27, 2024

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The founder of an EV startup could be sentenced to prison in a fraud case

The founder of an EV startup could be sentenced to prison in a fraud case

The founder of an electric truck company is expected to face a lengthy prison term when he is sentenced Monday in a fraud case that highlights the financial carnage left behind by a group of electric vehicle startups and their promoters.

A federal judge in Manhattan will sentence Trevor Melton, founder and former CEO of trucking company Nikola, after a jury convicted him last year of securities fraud and two counts of wire fraud. Mr Milton has been accused of increasing the value of Nikola shares by making extravagant claims about the company.

Milton told investors that Nikola had prototypes for zero-emission long-haul trucks, had billions of dollars in orders placed, and was producing low-cost hydrogen fuel. Prosecutors, who asked the judge to impose an 11-year prison sentence and a $5 million fine, said all of these statements were false. Lawyers for Mr. Milton, who denied the accusations, asked for him to be placed on probation.

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

Inspired by Tesla’s success, investors have poured money into startups like Canoo, Lordstown Motors, and Lucid Motors in recent years. Its backers and executives viewed electric cars as an opportunity to challenge established automakers like Ford Motor Co. and General Motors — and get rich in the process.

With far fewer parts than gasoline cars, electric cars should have been easier to manufacture in theory. But building thousands of cars, establishing brands, and meeting safety standards has turned out to be more difficult and expensive than many startup executives and their backers expected. Some companies have proven to be more adept at filing lawsuits than cars.

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Many electric vehicle startups have listed themselves on the stock exchange by merging with SPACs, allowing the companies to avoid much of the disclosure and regulatory scrutiny that accompanies traditional initial public stock offerings.

Investors who bought these stocks have suffered huge losses. Shares of Nikola, which is still operating but warned investors in November that it could run out of money in the next 12 months, have lost 99 percent of their value since 2020.

A group of investors has benefited – short sellers, who make money by betting that the stock price will fall. Firms that specialize in uncovering overvalued stocks are feasting 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 exposing corporate wrongdoing.

Hindenburg also published a report on Mullen Automotive Last year the company was accused of marketing electric cars imported from China as its own, and claimed it was on the verge of introducing advanced solid-state batteries, a technology that major companies like Toyota are still far from perfecting. Mullen shares, which peaked at more than $3,600 in 2020, recently traded for 13 cents.

“Many of the points on the Hindenburg were inaccurate at the time, and are now out of date, making them all completely inaccurate now,” a Moline spokesman said. In recent news releases, Mullen said it had begun manufacturing electric trucks at a factory in Mississippi.

Another Hindenburg target was Lordstown, an electric truck maker that acquired a former General Motors plant in Ohio with the help of the Trump administration. President Donald J. Trump hosted Lordstown CEO Steve Burns at the event White House in 2020, describing the company’s car as an “amazing concept”.

Mr. Burns resigned after Hindenburg accused him of exaggerating the number of orders for the Lordstown pickup truck. The company filed for bankruptcy protection in June. (In October, an investment vehicle controlled by Mr. Burns bought machinery and other assets in Lordstown.) Lordstown declined to comment.

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

“Under the LandX brand, we intend to build many exciting vehicles and look forward to announcing our full range 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 cars after a decade in the making.

After J Capital Research, another short-seller, published a report on Faraday in 2021, the company admitted that it misled investors when it claimed to have 14,000 reservations that, in reality, were an expression of unpaid interest.

In September, Faraday said in a regulatory filing that “the company’s culture failed to adequately prioritize compliance.” The company also revealed that it is under investigation by the Securities and Exchange Commission and the Department of Justice.

A Faraday spokesperson said in an email that Faraday is cooperating with authorities, adding that the company has “made material 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, vehicle production has proven to be extremely difficult.

Canoo announced $750 million in orders from Walmart and other customers for its electric trucks. A company spokesman said the company was working to increase production at a factory in Oklahoma, but declined to specify when it would begin delivering vehicles in large numbers.

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Cano told investors in November that there was “substantial doubt” it could survive. Although accounting rules require this caveat, Kanoo has raised $380 million to fund its expansion, said Chris Nguyen, a company spokesman.

Investors have become skeptical even of companies that have managed to produce thousands of cars. Shares of Fisker, which has delivered about 3,000 vehicles through the beginning of November, are down 95 percent from their 2021 high. Shares of Lucid, which said it will produce at least 8,000 luxury electric sedans this year, are down 93 percent. Shares of Rivian, the maker of electric pickup trucks and sport utility vehicles that many analysts consider the startup most likely to survive, fell 80%.

Less sophisticated investors often bear the brunt of losses. Mr. Melton “engaged in a sustained scheme to take advantage of individual and non-professional investors,” prosecutors said in a sentencing memorandum. This included posting a video on YouTube of a prototype rolling down a hill, creating the false impression that the company had a working vehicle.

Mr. Melton also lied about his personal history, prosecutors said. He said he dropped out of college to pursue his entrepreneurial dreams despite being kicked out for paying someone to do his academic work.

After selling some of his Nikola shares for $100 million in mid-2020, Mr Milton spent $83.5 million on luxuries such as a plane and property in the Turks and Caicos Islands.

Prosecutors said in the memo that Nikola investors lost more than $660 million, rejecting the claims of a defense-appointed expert who said losses that could be blamed on Mr. Milton were far less and possibly zero.