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When electric vehicles sound too good to be true

When electric vehicles sound too good to be true

Last week the fraud lawsuit of Trevor Milton, founder and former CEO of Nikola., an electric vehicle startup started..

The government claims it misled retail investors about Nikola’s technology. He pleaded innocent, but the evidence from the government’s 49-page indictment will be difficult to disprove.

To take an example from the indictment, in 2017, Mr Milton ordered an unserviceable prototype hydrogen-powered semi-truck towed to the top of a hill to shoot a promotional video. Then the brakes were released and the truck rolled down the hill. The door of the truck was taped during shooting to prevent it from falling off, and the batteries were removed to prevent it from catching fire.

But in January 2018, Nikola posted a video on Twitter of the truck appearing to drive effortlessly on a flat road, captioning it: “The Nikola Hydrogen Electric trucks can handle any semi-truck and outperform them in any category; weight, acceleration, stopping, safety and features – all with a range of 500-1,000 miles!”

The government will have to prove not only that Milton lied, but that investors relied on his deception. To complicate matters further, sophisticated investors helped to publicize and promote the company. Based on the evidence in the indictment, they may have known that Mr. Milton was blowing hot air.

But it’s also possible they just didn’t look under Nikola’s hood. Regardless, private investors ultimately bore the brunt of the financial consequences of the alleged fraud. Herein is a lesson on getting into vehicles with so-called socially responsible investors.

Nikola did not list public shares in the usual way, requiring companies to file registration statements and prospectuses with the Securities and Exchange Commission. Company executives must then adhere to a “quiet period” in which executives are not allowed to promote the company until 40 days after the stock has traded. These rules are designed to provide investors with a level playing field.

Instead, Nikola merged with the special acquisition company VectoIQ Acquisition Corp., launched by Cowen Investments, BlackRock and former General Motors executives. These inside investors received millions of shares in VectoIQ and also brought some to the public for $10 each to raise money to acquire another company.

Nikola announced plans to combine with VectoIQ in March 2020 and went public with it. “Nikola’s vision of a zero-emission future and the ability to execute it were key drivers in our decision,” said Stephen Girskymanaging partner of VectoIQ and a former GM executive.

Cowen boasted that “Nikola, with his vision of a zero-emission future in heavy transport, is an example of a company that creates value for all its stakeholders, including society at large.” It’s hard to know if they believed their own puffy.

At the time, Nikola was struggling to carry out his business plan, which Mr. Milton obscured with far-fetched claims. “Until Nikola came on the market, hydrogen cost about $16 per kilogram, US dollars. Now Nikola produces it well under $4 per kilogram,” said Mr. Milton in a podcast. In fact, according to the indictment, Nikola had never produced hydrogen and bought the fuel for $16 per kilogram.

The indictment alleges that Mr. Milton lied to investors in order to increase the value of his shareholding. Perhaps. But other investors could also benefit from his deception. According to the indictment, “certain institutional investors who received Nikola’s stock as part of the SPAC transaction or the PIPE and had access to more complete information about Nikola’s products and technology were able to sell their shares at a significant profit.”

These investors included the partners of VectoIQ, BlackRock and Cowen, Fidelity Management & Research Co. and ValueAct Spring Fund, a socially responsible investment fund. Following the completion of the SPAC merger in June, Nikola’s stock catapulted to $65.90 a share, with a market valuation that surpassed Ford‘s

and Fiat Chrysler.

GM announced on September 8, 2020 that it was taking an 11% stake in Nikola, which CEO Mary Barra announced as an “industry leading disrupter.” Two days later, the short-selling firm Hindenburg Research published a report exposing Mr Milton’s deception. Nikola’s stock price crashed and a few weeks later, Mr. Milton from the company. The stock is now trading at about $5 a share.

The story of the alleged fraud of Mr. Milton, in a way, mirrors that of Elizabeth Holmes, who founded the Silicon Valley blood-testing startup Theranos. When her technology failed to live up to its hype, it hid its shortcomings. But while the victims of Mrs. Holmes’ fraud were sophisticated investors with deep pockets, in Nikola’s case they were private investors who were fooled by Mr. Milton and his deep-seated backers.

One final note: the alleged deceptions of Mr. Milton are no different from progressive politicians who have sold the country to a future without fossil fuels, based on technologies that don’t exist. Unfortunately, it is not a crime to lie to the American people, no matter how much it costs them.

Journal Editorial Report: How Many Other States Will Sign Up for an Electric-Only Future? Images: AFP via Getty Images Composite: Mark Kelly

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