We continue our exploration of Santa’s Naughty List this week before Christmas by looking at the compliance failures of Nikola Corporation (Nikola). In a Press Release, the Securities and Exchange Commission (SEC) announced that Nikola, a publicly traded company created through a special purpose acquisition company transaction, has agreed to pay $125 million to settle charges that it defrauded investors by misleading them about its products, technical advancements, and commercial prospects via a Cease and Desist Order (Order). This follows on the heels of an earlier filing against former Nikola founder and Chief Executive Officer (CEO), Trevor R. Milton (Milton), for repeatedly disseminating false and misleading information – typically by speaking directly to investors through social media – about Nikola’s products and technological accomplishments.
Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, said in the Press Release, “As the order finds, Nikola Corporation is responsible both for Milton’s allegedly misleading statements and for other alleged deceptions, all of which falsely portrayed the true state of the company’s business and technology. This misconduct — and the harm it inflicted on retail investors — merits the strong remedies today’s settlement provides.” And boy what misconduct it detailed. This matter should be studied by not only every compliance professional but also every business executive. It also points out one of the basic deficiencies of Special Purpose Acquisition Corporations (SPACs).
Nikola was created via the merger of Legacy Nikola and VectoIQ Acquisition Corp. (VectoIQ), which was formed in 2018 as a SPAC, for the purpose of effecting a business combination with one or more businesses. According to the Order, “VectoIQ and Legacy Nikola entered into a Business Combination Agreement (the “Business Combination Agreement”), as well as certain related agreements, pursuant to which Legacy Nikola would merge with a subsidiary of VectoIQ, with Legacy Nikola remaining as the surviving company and as a wholly-owned subsidiary of VectoIQ. On June 3, 2020, Legacy Nikola and VectoIQ consummated the merger contemplated by the Business Combination Agreement (the “Business Combination”), and VectoIQ changed its name to Nikola Corporation” and on June 4, 2020, Nikola’s common stock and warrants began trading on the Nasdaq Global Select Market.
What got Nikola into such SEC hot water was the mouth or rather modern-day social media postings of Milton. The Order stated, “From approximately March 2020 through September 2020, in his capacity as CEO and later as Executive Chairman of Nikola, Milton made materially false and misleading statements on numerous critical topics related to Nikola’s capabilities, technology, reservations, products, and commercial prospects.” Matt Kelly, writing in Radical Compliance, was a bit more pithy stating, “The problem was that almost every statement Milton made about Nikola’s hydrogen vehicles was, well, hot air.” According to the Order, there were multiple instances where Milton mislead investors and indeed anyone reading social media about the company.
Milton made false and misleading statements about the capabilities of Nikola’s first semi-truck prototype, the Nikola One, saying it was a working model and made a fraudulent video to back it up. He made a series of false and misleading claims about Nikola’s then-current hydrogen production capabilities, its costs to produce hydrogen, and the costs at which it obtained electricity to produce hydrogen profitably. He made false statements claiming that Nikola had engineered and already completed a prototype of an electric pickup truck, the Badger. Milton claimed that a “backlog of interest” in the vehicles were in the form of binding contracts, “the vast majority of the pre-orders were indications of interest that were cancellable at any time,” even going so far as to claim one customer had a binding order for 5,000 vehicles when no such contract existed. Finally, to top off all of Milton’s whoppers, he claimed a partnership with General Motors (GM) would generate over $4 billion in cost saving when there was no such arrangement in place.
I went into some detail in these clearly bogus claims to demonstrate why a Chief Compliance Officer (CCO) needs to have a handle on what their CEO is tweeting and social media-ing out. What steps can a CEO take? Here I will borrow once again from the Coolest Guy in Compliance.

• Take a team approach to reviewing and publishing information about the company, so someone else can put a second set of eyes (The Eyes of Dr. T. J. Eckleburg) on what the CEO says before they hit the send button.
• This approach should be a formal policy and procedure, fully documented so when the SEC comes knocking there will be a record.
• A subject matter expert (SME) review on what statements about the company qualify as material information that should be disclosed in filings to the SEC.
• Your process should also contain a mechanism to correct any misleading or erroneous statements that slip through your fully documented and operating policy and procedure.

If all of this sounds more than vaguely familiar it is because of the imbroglio surrounding Elon Musk and his use of social media. Musk was fined $30 million for his false and misleading tweets and the company was required a legal eagle to vet his tweets. All of this means this a CCO and corporate compliance program should be vigilant for this type of activity. Policies and procedures are mandatory, but they are only the starting point. This is a risk, like all other risks, it must be managed. If you set up policies and procedures but do not follow them, you could find yourself in SEC hot water as both Nikola and Milton have.
Put another way, Nikola got a Christmas present of 125 million lumps of coal. While any decision on Milton may have to wait until 2022, he will most probably be on Santa’s Naughty List for 2022.