- Last week, a short seller—an investor who bets on gaining from share prices falling—released a report calling electric-vehicle company Nikola is an "intricate fraud," only a week after General Motors announced its partnership with the startup.
- The Securities and Exchange Commission (SEC) and Department of Justice have launched inquiries.
- Ten days after the short seller released its report, the executive chairman and founder of Nikola, Trevor Milton, stepped down from his position.
With the announcement of its Badger pickup in February of this year, Nikola quietly entered the world of personal transportation after spending several years developing its fuel-cell electric semitrucks. Among an ever growing body of alternative-fuel automotive startups, Nikola blended in and didn't attract much attention.
That all changed after the startup went public in early June and saw its stock price skyrocket, partly because of investor excitement about the successes of other alternative-fuel auto companies and particularly Tesla. When Nikola announced that orders for the Badger pickup, its first consumer vehicle, would open at the end of June, the stock price jumped 103 percent. But although that move to go public may have boosted Nikola's profile and the net worth of its (now former) executive chairman, Trevor Milton, it invited a higher level of scrutiny.
Bloomberg had already claimed Nikola had falsely stated, when it showed its One semi-truck in 2016, that it was a working prototype even though it was non-running and missing essential parts. Nikola threatened legal action against Bloomberg at the time.
"History of Discrepancies"
This latest turmoil began after a company called Hindenburg Research released a report on September 10 that called Nikola "an intricate fraud built on dozens of lies." Crucially, though, Hindenburg is a short seller and stands to make money if Nikola's stock falls—which it did after the report was released. The report, using evidence such as private phone calls, texts, and emails, alleged actions such as suggesting that technologies which were not yet functioning were actually running fine, lying about technology capabilities as well as partnerships, and other issues.
Although the credibility of the report has been questioned due to Hindenburg's financial interests—and pointed out by Nikola and Milton on numerous occasions—just a couple of days after the Hindenburg report was released, Bloomberg published a story headlined "Nikola's History of Discrepancies Has Been in Plain Sight." The Bloomberg story didn’t corroborate every allegation in the Hindenburg report, but it did similarly state that Nikola hasn't been straightforward regarding its progress on various projects.
On September 11, a day after the Hindenburg report was released, Nikola issued a short rebuttal of the allegations, saying, "To be clear, this was not a research report and it is not accurate. This was a hit job for short-sale profit driven by greed. We have nothing to hide and we will refute these allegations." On September 14, Nikola released a longer, more specific statement in response to the Hindenburg report. Yet, as Bloomberg reported, some of the responses Nikola had to Hindenburg were "more counterarguments than rebuttals."
Through all of this, Nikola’s stock price has been on a rollercoaster, shooting up or down more than 15 percent on any given day, particularly when a large investor in Nikola announced that it would be selling five million shares, and when Nikola itself announced that it would be issuing more shares. And then news that General Motors was taking a 11 percent stake in Nikola pushed the stock up around 40 percent. Nonetheless, once word began circulating that the Hindenburg report would be released—and then was released—Nikola’s stock fell off its September highs.
GM's Reaction
Regarding the future of GM's deal with Nikola, the automaker has stood by the startup, with CEO Mary Barra saying at an event earlier this week, "The company has worked with a lot of different partners, and we're a very capable team that has done the appropriate diligence." The GM/Nikola deal gives GM $2 billion in equity in Nikola "in exchange for certain in-kind contributions," which means that GM will engineer and build the Badger in both electric and fuel-cell variants. If Nikola does go up in flames, GM—which hasn't exchanged any cash with the startup—doesn't stand to lose much from the deal beyond the bad PR.
Perhaps most crucially to Nikola is that the Hindenburg report has resulted in the SEC opening an investigation, which the Department of Justice quickly joined, as Bloomberg and the Financial Times first reported. The SEC has the power to bring criminal charges, while the DOJ could bring federal criminal charges, but as of now, there is nothing signaling that it will go that far.
Nikola is also being sued by a shareholder for making false and misleading statements about its operations.
This weekend, Milton resigned from Nikola. "The company is in amazing hands, and the executive team is well equipped to lead the company into the future," Milton said in a statement. "I intend to defend myself against false allegations leveled against me by outside detractors."
What this all adds up to is that Nikola is going to receive a considerable amount of scrutiny and that the truth about the company will eventually make its way to the public. The company could go up in flames as a result of this, or it could escape and hopefully look back at this week as the worst one in its history.