Nikola Founder’s Bombshell Fraud Charges May Hold Warning For Tesla’s Elon Musk

Federal prosecutors indicted Nikola Corp. founder Trevor Milton this week for fraudulent statements in public appearances and on social media that misled investors about the market-readiness of the electric truck startup’s products and technology. In doing so, stock regulators also appeared to aim a veiled warning at another, higher-profile tech executive with a history of problematic social media comments: Elon Musk, Tesla’s billionaire CEO.

Milton, 39, adopted an outspoken style to tout Nikola as it transitioned from obscure startup to a Nasdaq-traded company via a 2020 SPAC merger. He echoed Musk’s bombast and promotional techniques for Tesla. In Milton’s case, that’s proven to be an unwise choice. The U.S. Attorney’s Office in Manhattan charged him on July 29 with two counts of securities fraud and one count of wire fraud. Milton pled not guilty to the charges later that day and was freed on $100 million bail. The Securities and Exchange Commission also filed a civil suit against him for securities fraud.

“Corporate officers cannot say whatever they want on social media without regard for the federal securities laws,” Gurbir Grewal, the SEC’s enforcement director said at a press conference on Thursday. “We will hold all those who make materially false and misleading statements accountable, regardless of the communication channels they choose to use.”

Grewal declined to respond directly when asked if the SEC would “take a second look” at past statements Musk has made on Twitter.

“I’m not going to speak beyond the allegations that are in the complaint,” he said. “Regardless of the methods used by corporate officials, we will hold them accountable for materially false statements that they make.”

Despite its volatile history, including brushes with bankruptcy in 2008 and 2017, Tesla has begun to thrive, posting eight consecutive quarters of net income, expanding global sales and becoming the world’s most valuable automaker with a $680 billion market capitalization. The brand’s success has brought a rush of EV startups, including Fisker, Lucid, Rivian and Lordstown Motors, each seeking to raise billions of dollars to get their rival cars and trucks into production.

Yet Musk has also shown a tendency to make overly optimistic or unrealistic statements about Tesla’s business and plans since its earliest days. In 2009 he told early buyers waiting to get a Roadster, the carmaker’s first model, they’d need to pay at least $6,700 more than promised as Tesla couldn’t afford to sell it at the original price of $92,000. 

Most notably, he claimed on Twitter in July 2018 that he’d secured funding to take the company private. He hadn’t. That false statement cost him a $20 million SEC fine and his role as company chairman. In 2019 the SEC accused him of making inaccurate statements about Tesla’s production goals on Twitter. 

In that case, a federal court determined that Tesla needed to vet Musk’s company-related tweets before he posted them. It remains unclear whether that is happening. Last year, Musk showed his ongoing disdain for securities regulators, tweeting “SEC, three letter acronym, middle word is Elon’s.”

This week’s warning from stock regulators probably doesn’t indicate a re-examination of Musk’s past comments, said John Coffee, a professor of business law at Columbia University. “The SEC will probably only sue Musk for future statements, not past ones.” 

Tesla didn’t respond to a request for comment.

“Corporate officers cannot say whatever they want on social media without regard for the federal securities laws.”

Milton’s claims about Nikola were certainly outrageous. Among others included in the indictment, he falsely stated in 2016 that a non-functioning hydrogen truck prototype was driveable; he oversaw the release of a misleading video of a prototype truck that was just rolling down a hill, not operating under its own power; he’d said the company was already producing hydrogen fuel when it wasn’t; and tweeted that the Badger pickup would include a built-in drinking fountain with water produced from its hydrogen fuel cell system. 

“Milton lied about nearly every aspect of his business,” Manhattan U.S. Attorney Audrey Strauss said on Thursday.

“I do not think Musk has approached the reckless absurdity of Milton with his statements about producing hydrogen and rolling a non-functional truck downhill,” said Coffee.  

Separately, Musk is contending with an investor lawsuit in Delaware that alleges he made misleading statements to justify Tesla’s 2016 purchase of solar panel installer SolarCity. To promote that deal, he arranged an event at Universal Studios in Hollywood to promote solar roof tiles that would become a major business for Tesla as a result of the acquisition. That hasn’t happened, and the solar roof tiles shown at the event were non-functional prototypes that adorned prop houses on the studio lot. The plaintiff’s attorneys want him to personally reimburse the company for the estimated $2.2 billion Tesla paid for the company. 

The legal action against Milton, who faces massive fines and potential jail time if found to be guilty of the charges, could eliminate lucrative gains he made from taking Nikola public. Already the value of his stake in the company has dropped from $8.7 billion at its height, in June 2020, to under $1 billion at the end of trading Thursday, Forbes estimates. 

His legal woes this week also coincided with two curious comments from Musk.

During a call to discuss Tesla’s record quarterly profit and sales on July 26 with analysts and investors, he said it might be one of his last.  “I will no longer be default doing earnings calls. I’ll still do the annual shareholder meeting but I think going forward I won’t most likely be on earnings calls unless there is really something important that I need to say.” 

Then on July 30, Musk tweeted a sentiment he’s voiced in the past. “I don’t want to be CEO of anything.”