EV Truck Startup Nikola Accused of ‘Intricate Fraud’ by Financial Research Firm

The scathing set of allegations from an admitted short-seller comes days after Nikola and GM announced a tie-up.

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EV Truck Startup Nikola Accused of ‘Intricate Fraud’ by Financial Research Firm © EV Truck Startup Nikola Accused of ‘Intricate Fraud’ by Financial Research Firm

Electric truck startup Nikola Corporation made huge waves in June when it went public with a $26.3 billion market valuation, and then again earlier this week when General Motors announced both a major investment and a powertrain partnership with the nascent company. But at least some of that hype came crashing down Thursday, when a report by financial firm Hindenburg Research claimed Nikola and its founder committed numerous acts of fraud in order to propel the company's value to more than $20 billion.

The report by Hindenburg deserves skepticism, as it openly admits to having a short position in Nikola's stocks. Nonetheless, the allegations made are serious ones: it says it has gathered evidence that Nikola's founder, Trevor Milton, intentionally used deceptive tactics in order to manipulate the public opinion of the company. As a result, Hindenburg alleges that the company was able to increase its value by forming partnerships with some of the most well-known players in the auto industry.

The Drive sent detailed questions about Hindenburg Research's allegations to both Nikola and GM. “Nikola has been vetted by some of the world’s most credible companies and investors." a company spokesperson told The Drive via email. "We are on a path to success and will not waver based on a report filled with misleading information attempting to manipulate our stock.”

And despite the report, Nikola and GM both seem to be in full continued support of the recently announced partnership. The Detroit automaking giant says it will continue as planned.

"We are fully confident in the value we will create by working together." a GM spokesperson told The Drive. "We stand by the statements we made in announcing the relationship."

It may be best to wind the clock back to earlier this week. On Tuesday, GM announced that it had formed a strategic partnership with Nikola to "engineer, validate, homologate and build" the Badger, a Nikola-branded all-electric pickup. In fact, despite Nikola working to develop its own battery-electric and fuel cell-based powertrains, GM agreed to engineer the vehicle based on its Ultium battery system and Hydrotec fuel cell technology. In turn, GM would receive an 11 percent stake in Nikola worth $2 billion, as well as 80 percent of the EV credits, and $700 million in expense reimbursements.

Critics began to question GM's involvement in the project, asking why the well-poised automaker (which is already working on its own electric pickup) was producing a vehicle for a startup company using its own technologies rather than technology that the startup had been working towards building for six years. Hindenburg alleges this was GM's way to loosen the grip from investors who were pressuring it to more aggressively target a little bit of that Tesla money by relying on Nikola's branding.

Two days later, Hindenburg released its in-depth report which outlines various claims of fraudulent activities that bought the startup enough credibility to eat at GM's table. The Drive could not independently verify all of those claims at the time of publication. The report is more than 15,000 words, including disclaimers.

Hindenburg's primary claims lay with Nikola's reported inability to deliver on its claimed in-house developed technology. The firm alleges that Nikola used off-the-shelf products from other manufacturers while claiming to have instead produced proprietary technologies and products for its upcoming vehicles. The report goes on to outline how Nikola used this as fuel for its alleged deception, and in turn padded its order books. At the end of Q2 2020, Nikola reportedly had more than 14,600 cancellable reservations for its vehicles.

However, Hindenburg believes that Nikola has greatly exaggerated the number of reservations it currently holds in its books. One particular piece of evidence it presents is a report by Cowen Equity Research showing that U.S. Xpress makes up one-third of all Nikola's open orders, which (despite U.S. Xpress only having $1.3 million cash on hand in Q2 2020) represents an estimated $3.5 billion in sales.

Hindenburg says that exaggeration is a common pattern used by Nikola's chairman and Milton even before the company was established. The firm cites an email allegedly sent by Milton while employed as CEO of dHybrid Systems which misrepresented the value of a $16 million contract with Swift Transportation. Hindenburg presented a screen capture of an email sent to the former CEO of Ryder Systems which erroneous claims that the contract was was for $250 million, a number which was later debunked as part of a legal battle between Swift and dHybrid.

Another piece of evidence presented was from the early days of Nikola Motors when it was simply known as "Bluegentech." At the time, the company focused on natural gas instead of hydrogen and battery electric power storage and claimed to have a proprietary gas turbine system which would be the company's pivotal technology. While reportedly signing contracts representing that the technology had already been developed, emails procured by Hindenburg reveal that Bluegentech was working to purchase the turbines from another company called Brayton Energy.

Milton is called out by Hindenburg yet again after claiming on video that Nikola develops its inverters in-house and that other manufacturers are looking to use the technology. Hindenburg later claimed the inverter featured in the video was from a Portland-based electric propulsion component manufacturer, Cascadia Motion.

But perhaps the most damning claim comes as part of a Bloomberg story that reveals just how flawed the launch of the Nikola One, the startup's first Class 8 semi-truck. At the time, the truck was slated to be powered by a Brayton turbine and compressed natural gas. In December 2016, Nikola live-streamed the unveiling of the One for the first time, declaring it to be powered by a hydrogen fuel cell, stenciling the struck with graphics that read "H₂".

As Bloomberg revealed, the truck itself was reportedly inoperable at the time of the showing. Hindenburg claims that the truck's electronics were actually powered by a cleverly hidden extension cord snaked through the stage and into the cabin behind one of the rear wheels.

In January 2018, Nikola released a video of its semi "in motion." And while technically true, as the truck was moving, it reportedly wasn't moving under its own power. According to a source who provided text messages to Hindenburg, the semi was actually rolling down a hill after being towed to the top of a low-grade hill, and the video filmed or edited in such a way that made the road appear flat. Hindenburg later sent an investigator to the site of filming where the investigator put their Honda Pilot in neutral and allowed it to coast down the same hill. The Pilot reached a top speed of 56 miles per hour and traveled approximately 2.1 miles before coming to a stop.

Nikola eventually went public earlier this year after merging with a Special Purpose Acquisition Company (SPAC). After the June capital raise, its founder quickly found his way onto Forbes's list of richest people, at least on paper. 

Shares eventually stabilized and remained fairly consistent until earlier this week when Nikola and GM announced their partnership for the Badger. By the following day, shares were up as much as 40 percent for Nikola and 10 percent for General Motors. Today, following Hindenburg's report, shares for both companies have nearly reverted to the sale valuation as they were pre-partnership announcement.

Milton quickly called the report a "hit job" against Nikola's stock.

At the time of writing, Milton and the team at Nikola have not yet released any additional statements, but Milton says that the company is working to put together a rebuttal to "combat the lies."

Hindenburg Research specializes in forensic financial reporting, and it has issued revealing and often scathing missives against other companies in the past. In its report today, it says "after extensive research, we have taken a short position in shares of Nikola Corp. This report represents our opinion, and we encourage every reader to do their own due diligence." 

Nikola's valuation this summer came amid a wave of other EV startups scoring skyrocketing valuations through SPACs, essentially publicly-traded shell companies that exist to fund an acquisition of a privately held company. After seeing the success of EV giant Tesla—now valued higher than just about every car company you can think of put together—every VC firm and would-be day trader envisioned capitalizing on an untapped startup that may one day become a market leader. Whether these allegations against Nikola will dampen the SPAC boom or not remains to be seen, but they have already taken their toll on the startup's stock price. 

Still, with GM's recent partnership, the Badger could very well still make it to market, though it's not clear if these plans will change the direction of the company or delay the release of any of its commercial trucks. Nikola plans to begin generating positive revenue in 2021. In the meantime, based on his tweets alone, it's likely that Milton will have much more to say about this soon.

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