December 29, 2021

SEC Notches Biggest SPAC Settlement Yet: $125 Million!

Last week, the SEC announced that electronic vehicle company Nikola had settled the Commission’s fraud proceedings against it for $125 million. The SEC is establishing a fund to distribute penalties to harmed investors. This is the company that is most well-known for its then-CEO tweeting a video of its truck prototype cruising at a high speed. Then, a short-seller published a report claiming that the truck was just rolling down a hill.

According to the 13-page order, the SEC is holding the company responsible for misleading statements by its founder and former CEO & Executive Chair, Trevor Milton. The company got some credit for its agreement to continuing to cooperate with the ongoing litigation against Milton. Here’s the company’s press release about the settlement – which emphasizes that the company neither admits nor denies the SEC’s findings and that it’s seeking reimbursement from Milton for costs & damages.

This “D&O Diary” blog from Kevin LaCroix recaps interesting takeaways from the settlement:

The most attention-grabbing aspect of this settlement is its size. This settlement involves some serious money, which obviously speaks to the seriousness of the allegations. There are several other interesting features of this settlement, as well.

The first is that the SEC alleged not only misrepresentations against Milton, but also alleged misrepresentations by Nikola itself, apart from those attributed to Milton. The second is that the SEC alleged that many of the misrepresentations were made in Tweets and in other social media communications. These allegations are a reminder that social media communications can be the source of securities law liability. In that regard, it is worth highlighting the fact that the among the allegations the SEC made was the allegation that Nikola had insufficient controls or procedures for monitoring Milton’s social media use, which underscores that, given the risk of securities law liability arising from social media use, companies have responsibility to control and manage their executives’ social media communications.

Another feature of this settlement that is interesting to me is that the settlement involves a company that became publicly traded during the same time frame as the alleged misconduct through a merger with a SPAC. The fact that the alleged misrepresentations were made both before and after the SPAC merger highlights the risks involved with communications by companies that are going to go public through a SPAC merger or that have just become public as a result of a SPAC merger. These risks draw attention to a misperception that may be widespread that the rules and best practices that apply in connection with traditional IPOs don’t apply to SPAC transactions; the allegations here underscore the danger with this misperception. The fact that the alleged misrepresentations continued after the merger highlight concerns that at least some companies that go public through a SPAC merger may not be ready for the burdens, responsibilities, and obligations that go with a public listing.

The statement in Nikola’s press release about its intent to try to seek recoupment from Milton for its costs and expenses is also interesting. This effort is a claim against a former director and officer of the company. Though it is a kind of D&O claim, it is not one that the typical D&O insurance policy would cover, as it would represent the prototypical “entity vs. insured” claim for which coverage is precluded under the policy.

By the same token, the $125 million that Nikola has agreed to pay in the settlement likely would not be covered under the company’s D&O insurance policy; most D&O insurance policies exclude from the definition of insured loss “fines, penalties, and matters deemed uninsurable under applicable law.” However, the company’s defense costs (as well those of Milton) potentially could be covered under the company’s D&O insurance program.

One final note about the settlement amount, and that is that the $125 million settlement is by far the largest amount the SEC has recovered in a SPAC-related enforcement action.

Kevin predicts that this may just be the beginning of the SEC flexing its enforcement power against companies that went public via a SPAC. This is in addition to the spate of private securities litigation against post-merger SPACs. In blogs here and here, Kevin wrote about complaints against two other post-SPAC EV manufacturers, just in the past week!

Liz Dunshee