As Nikola founder Trevor Milton’s fraud trial begins, it is possible to find similarities to Theranos founder Elizabeth Holmes, who is awaiting sentencing on her conviction of defrauding investors. Neither side is looking for a plea deal to avoid a trial, they told U.S. District Judge Edgardo Ramos on Thursday.
Here are five things to consider about Milton’s case.
The prosecution may be seeking to make an example of Milton
The 40-year-old Milton faces two counts of securities fraud and two counts of wire fraud. The maximum penalties if convicted are 20 and 25 years respectively. He has pleaded not guilty and is free on $100 million bail.
The three charges filed in July 2021 followed months of federal investigations of the startup electric truck maker. How much of that followed the 67-question expose by short seller Hindenburg Research is unclear. Nikola itself investigated with an outside law firm and found nine Milton claims to be partially or completely false.
The feds claim Milton fleeced investors by lying about the company’s technology achievements and accomplishments.
The addition of a fourth wire fraud charge in June suggests prosecutors are figuratively throwing the book at Milton.
A real estate deal in which Milton tried to partially purchase a Utah ranch with Nikola stock options formed the basis of the latest charge. The landowner earlier this year sued Milton in a civil action, alleging he hyped the value of the options even as Nikola shares were tanking after the end of a partnership with General Motors due at least in part to the Hindenburg report.
Companies like Nikola that went public via sponsorship by special purpose acquisition companies (SPACs) are the subject of federal probes. None has resulted in a criminal indictment or Securities and Exchange Commission action to date. Nikola itself agreed to pay a $125 million fine to the SEC, money it is trying in mediation to get Milton to reimburse.
Milton’s use of social media as a megaphone is a critical part of the case
Prosecutors allege Milton’s use of the internet, specifically his near omnipresence on Twitter, defrauded investors by amplifying misleading statements regarding Nikola’s product and technology development. Milton regularly scrapped with his critics.
In a pretrial conference last Thursday, Ramos agreed to allow testimony from prosecution witness Dina Mayzlin, associate dean and professor of marketing at the USC Marshall School of Business. She has written on social media influence. Much of Nikola’s stock runup followed Milton’s Twitter, podcasts and with business media.
Milton’s attorneys protested, calling the study of social media influence “junk science.” Ramos asked whether Nikola had become a meme stock — shares of a company that gain a cult-like following online and through social media platforms.
Prosecutors said that some think that is the case, though Nikola’s stock runup after it merged with SPAC VectorIQ preceded the use of the word associated with electronics retailer GameStop and others.
Meme stocks typically are born when investors find a stock with a lot of people betting the price will fall. Investors chasing each other into such stocks create what short squeezes on investors betting the stock price will fall. If the price rises, those investors must cover their positions as the price rises or risk larger losses.
Prosecutors said they will call three or four investors as witnesses. Ramos said he would give the defense leeway in questioning but warned against blaming investors for their losses.
High-profile trials gravitate to the Southern District of New York
Why is the case being tried in New York? Milton found that the famed Southern District of New York, sometimes referred to as the Sovereign District of New York for its nonpartisan independence, gets the cases it wants. It is known for high-profile cases from mob boss John Gotti to home decor and party-planning queen Martha Stewart.
Milton twice tried to get his trial moved to Phoenix, where Nikola is based, or to Utah, where he lives and founded the company. Ramos sided with prosecutors, who said that Nikola’s stock trades on the Nasdaq in Manhattan. Ramos agreed the venue was appropriate.
Nikola allowed to protect itself from its founder
Milton wanted to use internal conversations and emails that he was not part of to bolster his case. Nikola, which has tried to distance itself from Milton since he left the company in September 2020, filed to enter the trial as a third party. Milton’s attorneys said allowing the protective order violated his constitutional rights.
The company challenged the use of conversations that corporate counsel Britton Worthen had with others. And it sought a protective order for certain documents to prevent them from being revealed at trial. Ramos granted both motions.
Milton has become a nemesis of the company, voting his 11% stake in the company — plus other shares he controlled — against a company proposal to increase the number of authorized shares to allow it to raise money for the business.
In addition to paying for Milton’s defense as part of its severance agreement, the company had to pay for a proxy solicitation firm to hunt down shareholders to vote for the proposal. After adjourning the virtual annual meeting three times, Nikola finally secured enough votes to pass the measure on Aug. 2.
Approach of Milton’s defense is a mystery
What defense approach Milton will use is unclear. Motions flew back and forth over the concept of an “advice-of-counsel” defense, essentially Milton blaming his lawyers for not keeping him out of trouble.
“We are not running an advice-of-counsel defense,” one of Milton’s attorneys said Thursday in the final pretrial conference. “We are running a good-faith defense. There’s an email in which the general counsel tells Trevor Milton, ‘Yes, you walked the line.’ Apologies to Johnny Cash.”
When Milton was indicted, his attorneys said his statements were protected by his right of free speech. That may come up again.