TheCorporateCounsel.net

Late last month, the roof came crashing down on Nikola Corporation’s founder & former CEO Trevor Milton, when his indictment for securities fraud was announced by the U.S. Attorney for the SDNY & the SEC announced an enforcement action against him arising out of the same alleged conduct.  The former CEO is alleged to have repeatedly misled investors about the status of the company’s electric vehicles & technology.

Both the SEC & SDNY claim that this guy engaged in a pretty massive fraud, and in situations involving a complete train wreck like this one, it’s usually hard to draw a lot of helpful insights for other public companies aside from “don’t do massive frauds.”  However, this Locke Lord blog says that this case is an exception, and provides some valuable lessons for other public companies. This excerpt says that one of those lessons is that every word that comes out of a corporate officer’s mouth carries with it the potential for liability:

The actions against Milton are a reminder that public statements by corporate officers in relatively informal settings, outside of SEC filings, can be used as a basis for Rule 10b-5 sanctions. A company’s lawyers may scrutinize annual and quarterly reports to ensure that they contain appropriate cautionary statements. In contrast, private tweets, other social media postings and statements in podcasts or interviews are often made without compliance in mind.

In Milton’s case, he encouraged investors to follow him on Twitter to get “accurate information” about Nikola “faster than anywhere else.” In practice, he used Twitter to announce corporate initiatives that he had not vetted internally, to answer investor questions with misleading or outright false information, and even to double down on prior false statements.

Moreover, according to the allegations, Milton responded to other senior executives’ expressions of concern about his social media presence and his public statements by asserting that these other executives “did not understand current capital market dynamics or what he was trying to accomplish with retail investors, and that he needed to be on social media to put out good news about Nikola to support its stock price.” Retail investor frenzy driven by social media and retail-oriented trading platforms such as Robinhood does not give companies a pass from the application of the securities laws. The SEC has emphasized that it will monitor these situations for manipulation or other misconduct.

The blog also says that the case also provides a reminder of the importance of strong board oversight, as well as the importance of the “tone at the top” and a strong compliance culture.

– John Jenkins