On February 2, 2023, Judge Steven P. Logan of the United States
District of Arizona dismissed a putative class action alleging that
manufacturer of hydrogen-electric vehicles (the
« Company »), the Company’s former CEO (the
« CEO »), and certain of its other senior executives (the
« Individual Defendants ») misled investors about the
Company’s hydrogen fuel cell technology and business prospects
for its electric trucks in violation of Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934 and Rule 10b-5. Borteanu v.
Nikola Corporation et al., No. 20-cv-01797 WL 1472852 (D.
Ariz. Feb. 2, 2023). Although the Court held that plaintiff had
adequately alleged the falsity of certain categories of alleged
misstatements, the Court ruled that plaintiffs failed to plead a
strong inference of scienter as to certain defendants and failed to
plead loss causation generally.

Plaintiff alleged that the Company made several types of
misrepresentations about its business operations, including in SEC
filings signed by the Individual Defendants and in social media
posts made by the CEO. For example, the Company allegedly made
statements in 2020 about its backlog of over 14,000 orders for
electric trucks, which it referred to in filings as representing
over two years of production and more than $10 billion in potential
revenue. Plaintiff alleged that the Company’s reference to the
backlog as a list of « pre-orders » or
« reservations » was misleading because these reservations
were mere expressions of interest to purchase products, cancellable
at any time. Plaintiff also alleged that the Company made several
misrepresentations in its SEC filings that its electric trucks and
hydrogen fuel technology were the center of its business model,
even though it had not yet produced the hydrogen technology and its
trucks were not ready for sale. Further, plaintiff alleged that the
Company made misrepresentations that its development of
« demo » stations accurately represented its capability to
build hydrogen fueling stations even though the « demo »
stations did not actually produce hydrogen but merely stored it.
Finally, plaintiff alleged that the Company’s statements about
the capabilities of two of its electric truck models were
materially misleading because the vehicles were not yet fully
functioning and instead were « little more than a
concept. » Plaintiff alleged that when the falsity of these
misrepresentations came to light through a series of corrective
disclosures, including (among other things) media reports that the
CEO had been indicted on criminal securities fraud charges and that
the SEC had filed a civil action. According to plaintiffs, the
Company’s stock value dropped significantly following the
corrective disclosures, which resulted in substantial losses for
investors.

The Court first addressed the alleged misrepresentations. With
respect to the Company’s « backlog » of orders, the
Court ruled that plaintiffs adequately alleged a misstatement
because the orders were mere expressions of interest that could be
canceled. As to the Company’s statements about its business
model and « demo » stations, the Court ruled that
plaintiffs failed to adequately allege a material misstatement
because the Company had used « frequent cautionary language and
forward-looking terms. » Finally, the Court ruled that
plaintiffs adequately alleged a misstatement related to the
capabilities of the Company’s electric trucks because
reasonable investors could believe these vehicles were in existence
when they were not.

Despite the Court’s ruling that plaintiffs had adequately
alleged certain misstatements, the Court dismissed the claims for
failure to raise a strong inference of scienter with respect to the
Individual Defendants, and for failure to adequately allege loss
causation. The Court noted that the complaint lacked
« specific, individualized facts showing that the Individual
Defendants signed off on the various SEC filings with the requisite
intent of misleading the public as to [the] backlog or as to the
company’s vehicles. » The Court also rejected
plaintiff’s argument that the « core operations »
theory could support scienter against the Individual Defendants
because plaintiff did not allege « what information [the
Individual Defendants] were typically privy to, the extent of their
day-to-day oversight over [the Company’s] operations, or the
specific duties and responsibilities they had. » In dismissing
the claims against the Individual Defendants, the Court noted that
they « may have been negligent or even reckless in signing the
SEC filings, » but that « mere recklessness or negligence
does not satisfy the scienter standard. »

In contrast, with respect to the CEO, the Court held that
plaintiff’s allegations created a strong inference that the CEO
acted with the requisite intent to defraud or mislead when he made
the alleged misstatements. Among other reasons, the Court relied
upon allegations that the Company’s employees warned the CEO
repeatedly that his public statements were not accurate and that,
in light of these inaccuracies, his colleagues at the Company even
attempted to « pre-screen » his social media posts.
Additionally, unlike with the Individual Defendants, the Court
emphasized that plaintiff alleged the CEO was a « hands-on
executive » who « engrossed himself in the details of [the
Company’s] technology and product development process, »
« participated in weekly update meetings » during which he
« received updates on [the Company’s] product development,
technology, and commercial activity directly from [the
Company’s] technical leads, » and « regularly worked
with the [C]ompany’s engineers, as he was often seen huddling
by the computers with them and even working on [one of the
Company’s truck models] itself. »

The Court nevertheless dismissed the claims against the CEO because
plaintiff « failed to allege sufficiently particularized
facts » related to plaintiff’s loss causation theory.
Rather than « identify[ing] the specific misstatements or
omissions that each alleged corrective disclosure revealed the
truth for, » plaintiff simply repeated « the exact same
generalized allegation for all eleven corrective disclosures. »
The Court noted that the  »
[plaintiff’s alleged] misstatements and omissions was
presumably revealed to the public at different times and by
different sources, and each time a particular truth was unveiled,
[the Company’s] stock price presumably dropped and [investors]
suffered distinct economic losses. » According to the Court,
however, plaintiff’s « entirely conclusory and generalized
allegation » with respect to loss causation made it impossible
for the Court « to trace any particular loss » « back
to the very facts about which [the CEO] lied. »

The Court dismissed the complaint but granted leave for plaintiff
to file an amended complaint.

Borteanu v. Nikola Corporation et al.

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